10-K 1 ges-2017128x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-K
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 28, 2017
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                        to                         
Commission File Number 1-11893
 
 
 
GUESS?, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
95-3679695
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
1444 South Alameda Street
Los Angeles, California 90021
(213) 765-3100
 (Address, including zip code, and telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
 
Name of Each Exchange on Which Registered
common stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer ý
Accelerated filer o
 
 
 Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of the close of business on July 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $889,840,383 based upon the closing price of $14.72 on the New York Stock Exchange composite tape on such date. For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant. Such exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
As of the close of business on March 20, 2017, the registrant had 82,761,611 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III herein.
 



TABLE OF CONTENTS
Item
 
Description
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K, including documents incorporated by reference herein, we make “forward-looking” statements, which are not historical facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be in our other reports filed under the Securities Exchange Act of 1934, as amended, in our press releases and in other documents. In addition, from time-to-time, we, through our management, may make oral forward-looking statements. These statements relate to expectations, analyses and other information based on current plans, forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our goals, future prospects, global cost reduction and profitability efforts, capital allocation plans, cash needs and current business strategies and strategic initiatives. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “outlook,” “pending,” “plan,” “predict,” “project,” “strategy,” “will,” “would,” and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements or assumptions relating to: our expected results of operations; the accuracy of data relating to, and anticipated levels of, future inventory and gross margins; anticipated cash requirements and sources; cost containment efforts; estimated charges; plans regarding store openings, closings, remodels and lease negotiations; plans regarding business growth, international expansion and capital allocation; plans regarding supply chain efficiencies and global planning and allocation; e-commerce, digital and omni-channel initiatives; business seasonality; results and risks of current and future litigation; industry trends; consumer demands and preferences; competition; currency fluctuations and related impacts; estimated tax rates, results of tax audits and other regulatory proceedings; raw material and other inflationary cost pressures; consumer confidence; and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such differences include those discussed under “Part I, Item 1A. Risk Factors” contained herein.


ii


PART I
ITEM 1.    Business.
General
Unless the context indicates otherwise, the terms “we,” “us,” “our” or the “Company” in this Form 10-K refer to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world’s leading lifestyle collections of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. Our apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and Gc. The lines include full collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. We also selectively grant licenses to manufacture and distribute a broad range of products that complement our apparel lines, including eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories.
Our products are sold through direct-to-consumer, wholesale and licensing distribution channels. Our core customer is a style-conscious consumer primarily between the ages of 20 and 35. These consumers are part of a highly desirable demographic group that we believe, historically, has had significant disposable income. We also appeal to customers outside this group through specialty product lines that include MARCIANO, a more sophisticated fashion line targeted to women and men, and GUESS Kids, targeted to boys and girls ages 6 to 12.
We were founded in 1981 and currently operate as a Delaware corporation.
The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. All references herein to “fiscal 2017,” “fiscal 2016” and “fiscal 2015” represent the results of the 52-week fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015, respectively. References to “fiscal 2018” represent the 53-week fiscal year ending February 3, 2018.
Business Strengths
We believe we have several business strengths that set us apart from our competition, including:
Brand Equity.    The GUESS? brand is an integral part of our business, a significant strategic asset and a primary source of sustainable competitive advantage. The GUESS? brand communicates a distinctive image that is fun, fashionable and sexy. We have developed and maintained this image worldwide through our consistent emphasis on innovative and distinctive product designs and through our award-winning advertising, under the creative leadership and vision of Paul Marciano, our Executive Chairman of the Board and Chief Creative Officer. Brand loyalty, name awareness, perceived quality, strong brand images, public relations, publicity, promotional events and trademarks all contribute to the reputation and integrity of the GUESS? brand.
Global Diversification.    The global success of the GUESS? brand has reduced our reliance on any particular geographic region. This geographic diversification provides broad opportunities for growth, even during regional economic slowdowns. The percentage of our revenue generated from outside of the U.S. has grown from approximately 32% of our total revenues for the year ended December 31, 2005 to approximately 62% of our total revenues for the year ended January 28, 2017. As of January 28, 2017, the Company directly operated 945 retail stores in the Americas, Europe and Asia. The Company’s licensees and distributors operated 735 additional retail stores worldwide. As of January 28, 2017, the Company and its licensees and distributors operated in 101 countries worldwide. We continue to evaluate the different businesses in our global portfolio, directing capital investments to those with more profit potential. For instance, we plan to allocate sufficient resources to fuel future growth in Asia, particularly in mainland China, where we see significant opportunities. In addition, we plan to target overall growth in other markets such as Russia, Turkey and Northern Europe where we believe the GUESS? brand is underpenetrated.
Multiple Store Concepts.    We and our network of licensee partners sell our products around the world primarily through six different store concepts, namely our GUESS? full-price retail stores, our GUESS? factory outlet stores, our GUESS? Accessories stores, our G by GUESS stores, our MARCIANO stores and our GUESS? Kids


1


stores. We also have a small number of underwear, Gc watch and footwear concept stores. This allows us to target the various demographics in each region through dedicated store concepts that market each brand or concept specifically to the desired customer population. Having multiple store concepts also allows us to target our newer brands and concepts in different markets than our flagship GUESS? store concept. For instance, we have mall locations for G by GUESS stores where we would not ordinarily operate any of our full-price GUESS? stores.
Multiple Distribution Channels.    We use direct-to-consumer, wholesale and licensing distribution channels to sell our products. This allows us to maintain a critical balance as our operating results do not depend solely on the performance of any single channel. The use of multiple channels also allows us to adapt quickly to changes in the distribution environment in any particular region.
Direct-to-Consumer.    Our direct-to-consumer network is omni-channel, made up of both directly operated brick-and-mortar retail stores as well as integrated e-commerce sites that create a seamless shopping experience for our customers with shared product inventories.
Directly operated retail stores and concessions.    As of January 28, 2017, we directly operated 339 stores in the U.S., 111 stores in Canada and a total of 495 stores outside of the U.S. and Canada. We also directly operated an additional 254 smaller-sized concessions mainly in Asia and Europe. Distribution through our directly operated retail stores and concessions allows us to influence the merchandising and presentation of our products, enhance our brand image, build brand equity and test new product design concepts. As part of our omni-channel initiative, U.S. and Canadian retail store sales may be fulfilled from one of our numerous retail store locations or from our distribution centers.
e-Commerce.    As of January 28, 2017, we operated retail websites in the U.S., Canada, Mexico, Europe, South Korea and China. Our websites act as virtual storefronts that both sell our products and promote our brands. Designed as customer shopping centers, these sites showcase our products in an easy-to-navigate format, allowing customers to see and purchase our collections of apparel and accessories. These virtual stores have not only expanded our direct-to-consumer distribution channel, but they have also improved customer relations and are fun and entertaining alternative-shopping environments. Our U.S. and Canadian online sites contain “find the right fit” product recommendations and integration with our customer relationship management (“CRM”) system and loyalty programs. Omni-channel initiatives that we have already deployed in the U.S. and Canada include “reserve online, pick-up in stores” and “order from store” as well as mobile optimized commerce sites and smartphone applications. In the U.S. and Canada, e-commerce orders may be fulfilled from our distribution centers, or from our retail stores, or both. We have begun to deploy similar omni-channel strategies in certain international markets, leveraging our existing technology and experience. We have e-commerce available to 55 countries and in nine languages around the world.
Wholesale Distribution.   We sell through both domestic and international wholesale distribution channels as well as licensee operated retail stores and concessions.
Wholesale. In North America, our wholesale customers consist primarily of better department stores, including Macy’s, Liverpool and The Bay, and select specialty retailers and upscale boutiques, which have the image and merchandising expertise that we require for the effective presentation of our products. In Europe, our products are sold in stores ranging from large, well known department stores like El Corte Inglès, Galeries Lafayette and Printemps to small upscale multi-brand boutiques. Because our European wholesale business is more fragmented, we generally rely on a large number of smaller regional distributors and agents to distribute our products. Through our foreign subsidiaries and our network of international distributors, our products are also available in major cities throughout Africa, Asia, Australia, the Middle East and Central and South America.
Licensee stores and concessions.    As of January 28, 2017, our licensees and distributors operated 735 stores worldwide, plus 192 smaller-sized licensee operated concessions located mainly in Asia. This licensed retail store and concession approach allows us to expand our international operations with a lower level of capital investment while still closely monitoring store designs and merchandise programs in order to protect the integrity of the GUESS? brand.


2


Licensing Operations.    The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. Our international licenses and distribution agreements allow for the sale of GUESS? branded products in better department stores and upscale specialty retail stores. We currently have various domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories; and include licenses for the distribution and manufacture of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Business Segments
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Europe, Asia, Americas Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before restructuring charges, if any. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal.
The following table presents our net revenue and earnings (loss) from operations by segment for the last three fiscal years (dollars in thousands):
 
Year Ended
 
Year Ended
 
Year Ended

Jan 28, 2017

Jan 30, 2016

Jan 31, 2015
Net revenue:
 

 

 

 

 

 
Americas Retail
$
935,479


42.4
%

$
981,942


44.5
%

$
1,032,601


42.7
%
Europe
791,673


35.8


727,144


33.0


825,136


34.1

Asia
250,363


11.3


241,571


11.0


281,090


11.6

Americas Wholesale
141,019


6.4


149,797


6.8


167,707


7.0

Net revenue from product sales
2,118,534


95.9


2,100,454


95.3


2,306,534


95.4

Licensing
90,834


4.1


103,857


4.7


111,139


4.6

Total net revenue
$
2,209,368


100.0
%

$
2,204,311


100.0
%

$
2,417,673


100.0
%
Earnings (loss) from operations:
 

 


 

 

 

 
Americas Retail
$
(56,757
)

(249.9
%)

$
16,222


13.3
%

$
(13,734
)

(10.9
%)
Europe
57,044


251.2


55,438


45.7


66,231


52.6

Asia
(2,492
)

(11.0
)

10,448


8.6


8,013


6.4

Americas Wholesale
22,489


99.0


27,525


22.7


34,173


27.1

Licensing
80,365


353.9


92,172


76.0


101,288


80.4

Corporate Overhead
(71,858
)

(316.4
)

(80,455
)

(66.3
)

(70,059
)

(55.6
)
Restructuring Charges
(6,083
)
 
(26.8
)
 

 

 

 

Total earnings from operations
$
22,708


100.0
%

$
121,350


100.0
%

$
125,912


100.0
%


3


Additional segment information, together with certain geographical information, is included in Note 17 to the Consolidated Financial Statements contained herein.
Americas Retail Segment
In our Americas Retail segment, we sell our products through a network of directly operated retail and factory outlet stores and e-commerce sites in the Americas.
Below is a summary of store statistics for directly operated retail stores in the U.S. and Canada, followed by details regarding each of our store concepts.
 
Jan 28,
2017
 
Jan 30,
2016
 
Jan 31,
2015
GUESS? Factory Outlet Stores:
 
 
 
 
 
U.S. 
128

 
126

 
118

Canada
28

 
26

 
25

 
156

 
152

 
143

GUESS? Factory Accessories Stores:
 
 
 
 
 
U.S. 
23

 
23

 
26

Canada
4

 
5

 
4

 
27


28


30

GUESS? Retail Stores:
 
 
 
 
 
U.S. 
92

 
101

 
116

Canada
55

 
54

 
56

 
147

 
155

 
172

GUESS? Retail Accessories Stores:
 
 
 
 
 
U.S. 
5

 
5

 
6

Canada
6

 
10

 
12

 
11

 
15

 
18

G by GUESS Stores:
 
 
 
 
 
U.S. 
71

 
64

 
72

Canada
2

 

 

 
73

 
64

 
72

MARCIANO Stores:
 
 
 
 
 
U.S. 
20

 
23

 
26

Canada
16

 
18

 
20

 
36

 
41

 
46

 
 
 
 
 
 
Total U.S. 
339


342


364

Total Canada
111


113


117

Total
450

 
455

 
481

Square footage at fiscal year end
2,198,000

 
2,211,000

 
2,301,000

GUESS? Factory Outlet Stores.     Our U.S. and Canada GUESS? factory outlet stores are located primarily in outlet malls generally operating outside the shopping radius of our wholesale customers and our full-price retail stores. These stores sell selected styles of men’s and women’s GUESS? apparel and accessories at lower price points in addition to certain G by GUESS merchandise in select locations. As of January 28, 2017, these stores occupied approximately 932,000 square feet and ranged in size from approximately 2,000 to 11,500 square feet, with most stores between 4,500 and 7,000 square feet. In fiscal 2017, we opened seven new factory stores and we closed three stores.
GUESS? Factory Accessories Stores. Our U.S. and Canada GUESS? factory accessories stores sell GUESS? and MARCIANO labeled accessory products and are located primarily in outlet malls. As of January 28, 2017, these stores occupied approximately 58,000 square feet and ranged in size from approximately 1,000 to 4,000 square feet, with most stores between 2,000 and 2,500 square feet. In fiscal 2017, we closed one GUESS? factory store.


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GUESS? Retail Stores.     Our full-price U.S. and Canada GUESS? retail stores carry a full assortment of men’s and women’s GUESS? merchandise (and women’s MARCIANO merchandise in select locations), including most of our licensed product categories. As of January 28, 2017, these stores occupied approximately 729,000 square feet and ranged in size from approximately 1,500 to 13,500 square feet, with most stores between 3,500 and 5,500 square feet. In fiscal 2017, we opened three new retail stores and we closed 11 stores.
GUESS? Retail Accessories Stores.     Our U.S. and Canada GUESS? retail accessories stores sell GUESS? and MARCIANO labeled accessory products. This concept enables us to utilize a smaller store floor space, dedicated to our full range of accessory products, that can co-exist in the same malls as our other concepts. As of January 28, 2017, these stores occupied approximately 21,000 square feet and ranged in size from approximately 1,500 to 2,500 square feet, with most stores at 2,000 square feet. In fiscal 2017, we closed four GUESS? retail accessories stores.
G by GUESS Stores.     Our G by GUESS store concept targets a market demographic that shops price points below our GUESS? retail stores and carries apparel for both men and women and a full line of accessories and footwear. G by GUESS stores have a fresh feel, directed toward a full customer experience, with fashion-forward merchandise. As of January 28, 2017, these stores occupied approximately 354,000 square feet and ranged in size from approximately 2,500 to 7,000 square feet, with most stores between 4,500 and 5,000 square feet. In fiscal 2017, we opened nine new G by GUESS stores.
MARCIANO Stores.     Our MARCIANO stores in the U.S. and Canada offer a fashion-forward women’s collection designed for the stylish, trend-setting woman. These stores have higher price points than our traditional GUESS? stores and appeal to a slightly older, more sophisticated customer. As of January 28, 2017, these stores occupied approximately 104,000 square feet and ranged in size from approximately 2,000 to 6,500 square feet, with most stores between 2,500 and 3,000 square feet. In fiscal 2017, we closed five MARCIANO stores.
In addition to the stores described above, as of January 28, 2017, we also directly operated 42 stores and 30 concessions in Mexico and nine stores in Brazil through our majority-owned joint ventures. As of January 28, 2017, the total 51 directly operated stores were comprised of 35 full-priced GUESS? retail stores, 12 GUESS? factory outlet stores and four GUESS? retail accessories stores.
e-Commerce.     Our Americas Retail segment also includes our retail websites in the U.S., Canada and Mexico, including www.guess.com, www.gbyguess.com, www.guessbymarciano.com, www.marciano.com, www.guessfactory.com, www.guesskids.com, www.guess.ca, www.gbyguess.ca, www.guessbymarciano.ca, www.guessfactory.ca and www.guess.mx. These websites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. They also provide fashion information and a mechanism for customer feedback while promoting customer loyalty and enhancing our brand identity through interactive content online and through smartphone applications. In the U.S. and Canada, our websites and mobile sites are integrated with our CRM system and loyalty programs. In the U.S. and Canada, e-commerce orders may be fulfilled from our distribution centers, or from our retail stores, or both.
Europe Segment
In our Europe segment, we sell our products through direct-to-consumer and wholesale channels, primarily throughout Europe and the Middle East.
European Direct-to-Consumer.     Our European direct-to-consumer network is comprised of brick-and-mortar retail stores and concessions and e-commerce sites.
Retail stores and concessions. Our European retail stores and concessions are comprised of a mix of directly operated and licensee operated GUESS? and MARCIANO retail and outlet stores, GUESS? Accessories retail and outlet stores, GUESS? Kids stores, Gc stores, GUESS? Footwear stores and G by GUESS stores. For the year ended January 28, 2017, we and our partners opened 65 new stores and closed 30 stores in Europe and the Middle East, ending the year with 629 stores, 336 of which we operated directly and 293 of which were operated by licensees. This store count does not include 31 smaller-sized concessions in Europe. During fiscal 2017, we also acquired ten stores from


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certain of our European licensees. Our store locations vary country by country depending on the type of locations available. Our typical full-price GUESS? stores generally average 2,350 square feet, MARCIANO stores average approximately 1,550 square feet and GUESS? Accessories stores average approximately 950 square feet. Certain of our European stores require initial investments in the form of key money to secure prime store locations. These amounts are paid to landlords or existing lessees in certain circumstances.
e-Commerce. In Europe, similar to the Americas, our e-commerce sites operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. We currently offer interactive content online and via mobile, and are planning to expand to smartphone applications and integrate with CRM systems and loyalty programs in the coming year.
European Wholesale Distribution.     Our European wholesale business generally relies on a large number of smaller regional distributors and agents to distribute our products primarily to smaller independent multi-brand boutiques. Our products are also sold directly to large, well known department stores like El Corte Inglès, Galeries Lafayette and Printemps. Overall, we have thousands of customers with no single customer representing more than 1% of our consolidated net revenue. The type of customer varies from region to region depending on both the prominence of the GUESS? brand in each region and the dominance of a particular type of retail channel in each region. In countries where the brand is well known, we operate through showrooms where agents and distributors can view our line and place orders. We currently have showrooms in key cities such as Barcelona, Dusseldorf, Lugano, Munich and Paris. In countries where the brand is less prominent, we may use one large distributor for the entire region. Revenues from sales to our licensee operated stores (see European Direct-to-Consumer above) are recognized as wholesale sales within our European wholesale operations. We sell both our apparel and certain accessories products under our GUESS? and MARCIANO brand concepts through our wholesale channel, operating primarily through two seasons, Spring/Summer and Fall/Winter. Generally our Spring/Summer sales campaign is from April to September with the related shipments occurring primarily from November to April. The Fall/Winter sales campaign is from November to April with the related shipments occurring primarily from May to October. The Company may take advantage of early-season demand and potential reorders by offering a pre-collection assortment which ships at the beginning of each season. Customers retain the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs.
Asia Segment
In our Asia segment, we sell our products through direct-to-consumer and wholesale channels throughout Asia. Our direct-to-consumer channel is comprised of brick-and-mortar retail stores and concessions and e-commerce sites. Our Asia retail stores and concessions include both licensee and directly operated stores, including GUESS?, GUESS? Kids, GUESS? Accessories, GUESS? Underwear, Gc and GUESS? Footwear stores. For the year ended January 28, 2017, we and our partners opened 73 new stores and closed 59 stores in Asia, ending the year with 504 stores, 108 of which we operated directly and 396 of which were operated by licensees or distributors. During fiscal 2017, we also acquired 18 stores from certain of our Asian licensees. This store count does not include 384 smaller-sized apparel and accessory concessions. Concessions are widely used in Asia and generally represent directly managed areas within a department store setting. We also have e-commerce sites throughout Asia which operate as virtual storefronts that, combined with our retail stores, provide a seamless shopping experience to the consumer to sell our products and promote our brands. Our Asia wholesale customer base is comprised primarily of a small number of selected distributors with which we have contractual distribution arrangements and licensee operated stores and concessions.
Americas Wholesale Segment
In our Americas Wholesale segment, we sell our products through wholesale channels throughout the Americas and to third party distributors based in Central and South America. Our Americas Wholesale business generally experiences stronger performance from July through November. Our Americas Wholesale customers consist primarily of better department stores, select specialty retailers, upscale boutiques as well as select off-price retailers. As of January 28, 2017, our products were sold to consumers through 992 major doors in the U.S. and Canada as well as through our customer’s e-commerce sites. This compares to 810 major doors at January 30, 2016. These locations


6


include 495 shop-in-shops, a designated selling area within a department store that offers a wide array of our products and incorporates GUESS? signage and fixture designs. These shop-in-shops, managed by the department stores, allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s, men’s or kids’ apparel. As of January 28, 2017, we also had two stores and one smaller-sized concession in the U.S. which were operated by certain of our licensees.
Our Americas Wholesale merchandising strategy is to focus on trend-right products supported by key fashion basics. We have sales representatives in New York, Los Angeles, Toronto, Montreal, Mexico City and Vancouver who coordinate with customers to determine the inventory level and product mix that should be carried in each store. Additionally, we use merchandise coordinators who work with the stores to ensure that our products are displayed appropriately. During fiscal 2017, our two largest wholesale customers accounted for a total of approximately 2.7% of our consolidated net revenue.
Licensing Segment
Our Licensing segment includes the worldwide licensing operations of the Company. The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. We currently have various domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, fragrance, jewelry and other fashion accessories; and include licenses for the distribution and manufacture of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, Central America, North America and South America.
Our trademark license agreements customarily provide for a multi-year initial term ranging from three to ten years, with a possible option to renew prior to expiration for an additional multi-year period. The typical license agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. In addition, several of our key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments. Generally, licensees are required to spend a percentage of the net sales of licensed products for advertising and promotion of the licensed products and in many cases we place the ads on behalf of the licensee and are reimbursed. In addition, to protect and increase the value of our trademarks, our license agreements include strict quality control and manufacturing standards. Our licensing personnel in the U.S., Europe and Asia meet regularly with licensees to ensure consistency with our overall merchandising and design strategies in order to protect the GUESS? trademarks and brand. As part of this process, our licensing department reviews in advance GUESS? third party licensed products, advertising and promotional materials.
We strategically reposition our existing licensing portfolio by monitoring and evaluating the performance of our licensees worldwide. For instance, between 2005 and 2013, we acquired several of our European apparel licensees. As a result, we now directly manage our adult and children’s apparel businesses in Europe. In addition, during fiscal 2017, we acquired stores and concessions from various international licensees. From time-to-time, the Company has and may continue to acquire certain retail store locations and/or concessions from its licensees.
Strategic Partnerships
We evaluate opportunities for strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall strategic initiatives and/or will take advantage of economies of scale. Similarly, when existing investments and alliances no longer align with strategic initiatives or as other circumstances warrant, we will evaluate various exit opportunities.
During fiscal 2017, we acquired the remaining 40% interest in our now wholly-owned subsidiary, Guess Sud SAS (“Guess Sud”), which is based in France. During fiscal 2017, we also sold our minority interest equity holding in a privately-held boutique apparel company. During fiscal 2016, we entered into a majority-owned joint venture in Russia to accelerate our expansion in this country. During fiscal 2014, we entered into a majority-owned joint venture which oversees the development of our retail and wholesale channels in Brazil. During fiscal 2013, we entered into a majority-owned joint venture in Portugal with a licensee partner to further expand in this region. In fiscal 2010, we entered into a majority-owned joint venture in the Canary Islands with licensee partners to open new free standing retail stores in this region. In 2006, we entered into a majority-owned joint venture to oversee the revitalization and expansion of our retail and wholesale channels in Mexico.


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Design
GUESS?, G by GUESS and MARCIANO apparel products are designed by their own separate in-house design teams located in the U.S., Switzerland and South Korea. The U.S. and Switzerland teams collaborate to share ideas for products that can be sold throughout our global markets and are inspired by our GUESS? heritage. Our design teams seek to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. They travel throughout the world in order to monitor fashion trends and discover new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. We also maintain a fashion library consisting of vintage and contemporary garments as another source of creative concepts. In addition, our design teams work closely with members of our sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
Global Sourcing and Supply Chain
We source products through numerous suppliers, many of whom have established long-term relationships with us. We seek to achieve efficient and timely delivery of our products, combining global and local sourcing. Almost all of our products are acquired as package purchases where we design and source product and the vendor delivers the finished product.
We are executing on the following supply chain initiatives to drive improvements in product costs: (i) developing a sourcing network in new territories that can offer better costs; (ii) consolidating and building strategic partnerships with high-quality suppliers to gain scale efficiencies; and (iii) implementing a fabric platforming process to develop and utilize common fabrics across multiple styles. We believe that our balanced global supply chain, with deep vendor partnerships, provides us with a competitive advantage where we have the flexibility to respond to increased demand throughout the world. Our sourcing strategy provides us with the opportunity to leverage costs and improve speed-to-market.
As an ongoing strategic initiative, we leave a larger portion of our buys open prior to each season to improve the efficiency of our speed-to-market by allowing us to design and produce closer to market delivery. This allows us to better react to emerging fashion trends in the market. We are also working to shorten our lead times through partnering with our suppliers, exercising agility in the production process and continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends. Additionally, offering an assortment of global products continues to be an area of focus. As a global brand, we maintain skilled sourcing teams in North America, Europe and Asia.
We are committed to sourcing our products in a responsible manner, respecting both the countries in which we conduct business and the business partners that produce our products. As a part of this commitment, we have implemented a global social compliance program that applies to our business partners. Although local customs vary in different regions of the world, we believe that the issues of business ethics, human rights, health, safety and environmental stewardship transcend geographical boundaries.
To support and ensure our social compliance, we communicate our expectations to our partners throughout our global supply chain and conduct compliance audits. If deficiencies are discovered, personnel in each region are empowered to work with the respective business partner to take a corrective course of action. Additionally, the goal of this process is to educate individuals, build strategic relationships and improve business practices over the long-term.
Advertising and Marketing
Our advertising, public relations and marketing strategy is designed to promote a consistent high impact image which endures regardless of changing consumer trends. While our advertising promotes products, the primary emphasis is on brand image.
Since our inception, Paul Marciano, our Executive Chairman of the Board and Chief Creative Officer, has had principal responsibility for the GUESS? brand image and creative vision. Under the direction of Mr. Marciano, our Los Angeles-based advertising department is responsible for overseeing all worldwide advertising. Throughout our history, we have maintained a high degree of consistency in our advertisements by using similar themes and images, including our signature black and white print advertisements and iconic logos.


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We deploy a variety of media focused on national and international contemporary fashion/beauty, lifestyle and celebrity outlets. In recent years, we have also expanded our efforts into influencer marketing, digital advertising with leading fashion and lifestyle websites and advertising on social media platforms including Facebook, Instagram, Twitter, Pinterest, Reddit, Snapchat and global search engines. Our smartphone application provides a unique mobile media experience by combining fashion, e-commerce, personalized product recommendations, targeted promotions and social loyalty rewards to drive mobile brand engagement.
We also require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing. By retaining control over our advertising programs, we are able to maintain the integrity of our brands while realizing substantial cost savings compared to outside agencies.
We will continue to regularly assess and implement marketing initiatives that we believe will build brand equity and grow our business by investing in marketing programs to build awareness and drive customer traffic to our stores, websites and smartphone application. We plan to further strengthen communications with customers through an emphasis on digital marketing, and through our websites, loyalty programs, direct catalog and marketing mailings. We also plan to strengthen communities on various social media platforms, which enable us to provide timely information in an entertaining fashion to consumers about our history, products, special events, promotions and store locations, and allow us to receive and respond directly to customer feedback.
As part of these initiatives, we currently have loyalty programs in North America, Europe and Asia with millions of members covering all of our brands. These programs reward our members who earn points for purchases that can be redeemed on future purchases either in our stores or online. During fiscal 2017, the individual brand programs became one universal program called “Guess List” which added value by allowing members to earn points and redeem their awards from any of our brands. In addition to earnings rewards with the program, our loyalty members receive other benefits including invitations to special VIP events in our stores, double points during their birthday month and access to seasonal savings. We also use these programs to promote new products to our customers which in turn increases traffic in the stores and online. We believe that the loyalty programs generate substantial repeat business that might otherwise go to competing brands. We continue to enhance our loyalty program offerings and strategically market to this large and growing customer base.
Quality Control
Our quality control program is designed to ensure that products meet our high quality standards. We test the quality of our raw materials prior to production and inspect prototypes of each product before production runs commence. We also perform random in-line quality control checks during and after production before the garments leave the contractor. Final random inspections occur when the garments are received in our distribution centers. We believe that our policy of inspecting our products is important to maintain the quality, consistency and reputation of our products.
Logistics
We utilize distribution centers at strategically located sites. The Company’s U.S. distribution center is based in Louisville, Kentucky. Distribution of our products in Canada is handled primarily from Company operated distribution centers in Montreal, Quebec. At our distribution facilities in the U.S. and Canada, we use fully integrated and automated distribution systems. The bar code scanning of merchandise and distribution cartons, together with radio frequency communications, provide timely, controlled, accurate and instantaneous updates to our distribution information systems. Distribution of our products in Europe is handled primarily through a third party distribution center in Piacenza, Italy. Additionally, we utilize several third party operated distribution warehouses that service the Asia region.
Competition
The apparel industry is highly competitive and fragmented and is subject to rapidly changing consumer demands and preferences. We believe that our success depends in large part upon our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the GUESS? brand. We compete with numerous apparel retailers, manufacturers and distributors, both domestically and internationally, as well as several well-known designers. Our licensed apparel and accessories also compete with


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a substantial number of well-known brands. Although the level and nature of competition differ among our product categories and geographic regions, we believe that we differentiate ourselves from our competitors by offering a global lifestyle brand on the basis of our global brand image and wide product assortment comprising both apparel and accessories. We also believe that our geographic diversification, multiple distribution channels and multiple store concepts help to set us apart from our competition.
Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position and support our strategic objectives and we continue to invest in and update computer hardware, network infrastructure, system applications and cyber security. Our computer information systems consist of a full range of financial, distribution, merchandising, point-of-sales, customer relationship management, supply chain, digital platform, enterprise resource planning and other systems. During fiscal 2017, key initiatives included digital platform improvement and stabilization, the further development of mobile-based initiatives to support both our wholesale and direct-to-consumer businesses, various multi-channel initiatives and continued enhancements of our product lifecycle management system to facilitate vendor collaboration and increase the efficiency of the supply chain. In addition, we continue to enhance our systems to align with our global IT standards, accommodate future growth and provide operational efficiencies.
Trademarks
We own numerous trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and Gc. As of January 28, 2017, we had approximately 4,600 U.S. and internationally registered trademarks or trademark applications pending with the trademark offices in approximately 184 countries around the world, including the U.S. From time-to-time, we adopt new trademarks in connection with the marketing of our product lines. We consider our trademarks to have significant value in the marketing of our products and act aggressively to register and protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have staff devoted to the monitoring and aggressive protection of our trademarks worldwide.
Wholesale Backlog
We generally receive orders for fashion apparel three to six months prior to the time the products are delivered to our customers’ stores. The backlog of wholesale orders at any given time is affected by various factors, including seasonality, cancellations, the scheduling of market weeks, the timing of the receipt of orders and the timing of the shipment of orders and may include orders for multiple seasons. Accordingly, a comparison of backlogs of wholesale orders from period-to-period is not necessarily meaningful and may not be indicative of eventual actual shipments.
U.S. and Canada Backlog.    Our U.S. and Canadian wholesale backlog as of March 20, 2017, consisting primarily of orders for fashion apparel, was $37.4 million in constant currency, compared to $48.7 million at March 21, 2016, a decrease of 23.1%. We estimate that if we were to normalize the orders for the scheduling of market weeks, the current backlog would have decreased by 6.5% compared to the prior year.
Europe Backlog.    As of March 19, 2017, the European wholesale backlog was €213.1 million, compared to €198.3 million at March 21, 2016, an increase of 7.5%. The backlog as of March 19, 2017 is primarily comprised of sales orders for the Spring/Summer 2017 and Fall/Winter 2017 seasons.
Employees
As of February 2017, we had approximately 14,300 associates, both full and part-time, consisting of approximately 7,300 in the U.S. and 7,000 in foreign countries. The number of our employees fluctuates during the year based on seasonal needs. In some international markets, local laws provide for employee representation by organizations similar to unions and some of our international employees are covered by trade-sponsored or governmental bargaining arrangements. We consider our relationship with our associates to be good.
Environmental and Other Sustainability Matters
We and our licensing partners and suppliers are subject to federal, state, local and foreign laws, regulations and ordinances that govern activities or operations that may have adverse environmental effects (such as emissions


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to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes). We are also subject to laws, regulations and ordinances that impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of our operations and those of our licensing partners and suppliers routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. We have not incurred, and do not expect to incur, any significant expenditures or liabilities for environmental matters. As a result, we believe that our environmental obligations will not have a material adverse effect on our consolidated financial condition or results of operations.
During fiscal 2016, we published our first corporate sustainability report to mark the formal start of our sustainability program. This report covers important issues such as labor and human rights, employee engagement, respect for the environment, energy use and greenhouse gas emissions. These issues have always been important to the Company and will be of increasing importance as we actively monitor, work to improve upon and publicly report on these areas.
Website Access to Our Periodic SEC Reports
Our investor website can be found at http://investors.guess.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act, are available at our investor website, free of charge, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the charters of our Board of Directors’ Audit, Compensation and Nominating and Governance Committees, as well as the Board of Directors’ Governance Guidelines and our Code of Ethics are posted on our investor website. We may from time-to-time provide important disclosures to our investors, including amendments or waivers to our Code of Ethics, by posting them on our investor website, as permitted by SEC rules. Printed copies of these documents may also be obtained by writing or telephoning us at: Guess?, Inc., 1444 South Alameda Street, Los Angeles, California 90021, Attention: Investor Relations, (213) 765-5578.
We have included our Internet website addresses throughout this filing as textual references only. The information contained within these websites is not incorporated into this Annual Report on Form 10-K.
ITEM 1A.    Risk Factors.
You should carefully consider the following factors and other information in this Annual Report on Form 10-K. Additional risks which we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us. Please also see “Important Factors Regarding Forward-Looking Statements” on page (ii).
Demand for our merchandise may decrease and the appeal of our brand image may diminish if we fail to identify and rapidly respond to consumers’ fashion tastes.
The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our brand image and our profitability are heavily dependent upon both the priority our target customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. Current fashion tastes place significant emphasis on a fashionable look. In the past, this emphasis has increased and decreased through fashion cycles. If we fail to anticipate, identify or react appropriately, or in a timely manner, to fashion trends, we could experience reduced consumer acceptance of our products and a diminished brand image. These factors could result in higher wholesale markdowns, lower average unit retail prices, lower product margins and decreased sales volumes for our products and could have a material adverse effect on our results of operations and financial condition.
The apparel industry is highly competitive, and we may face difficulties competing successfully in the future.
We operate in a highly competitive and fragmented industry with low barriers to entry. We compete with many apparel manufacturers and distributors, both domestically and internationally, as well as many well-known designers. We compete with many other retailers (both brick and mortar and e-commerce sites), including department stores, some of whom are our major wholesale customers. Our licensed apparel and accessories compete with many well-known brands. Within each of our geographic markets, we also face significant competition from global and regional branded apparel companies, as well as retailers that market apparel under their own labels. These and other competitors


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pose significant challenges to our market share in our existing major domestic and foreign markets and to our ability to successfully develop new markets. Some of our competitors have competitive advantages over us, including greater financial and marketing resources, higher wage rates, lower prices, more desirable store locations, greater online and e-commerce presence and faster speed-to-market. In addition, our larger competitors may be better equipped than us to adapt to changing conditions that affect the competitive market and newer competitors may be viewed as more desirable by fashion conscious consumers. Also, in most countries, the industry’s low barriers to entry allow the introduction of new products or new competitors at a fast pace. In other countries, high import duties may favor locally produced products. Any of these competition-related factors could result in reductions in sales or prices of our products and could have a material adverse effect on our results of operations and financial condition.
Slowing customer traffic in malls or outlet centers, particularly in North America, could significantly reduce our sales, increase pressure on our margins and leave us with excess inventory.
Unfavorable economic conditions, changing shopping patterns, including significant increases in e-commerce sales, changing demographic patterns and other factors have adversely affected customer traffic in mall and outlet centers, particularly in North America. This, in turn, has resulted in significant pricing pressures and a highly promotional retail environment in the apparel sector. A continuation or worsening of these trends could negatively impact our sales, increase pressure on our margins, leave us with excess inventory, cause a decline in profits and negatively impact our U.S. cash balance and liquidity.
Poor or uncertain economic conditions, and the resulting negative impact on consumer confidence and spending, have had and could in the future have an adverse effect on our business, prospects, operating results, financial condition and cash flows.
The apparel industry is cyclical in nature and is particularly affected by adverse trends in the general economy. Purchases of apparel and related merchandise are generally discretionary and therefore tend to decline during periods of economic uncertainty and recession, but may also decline at other times. Over the last several years, volatile economic conditions and uncertain market conditions in many markets around the world have resulted in cautious consumer spending. For example, a number of European countries experienced difficult economic conditions, including sovereign debt issues that negatively impacted the capital markets. These conditions resulted in reduced consumer confidence and spending in many countries in Europe, particularly Southern Europe. While these conditions have recently improved, if conditions in Europe, or other economic regions in which we do business, worsen or fail to further improve, there will likely be a negative impact on our business, prospects, operating results, financial condition and cash flows.
In addition to the factors contributing to the current economic environment, there are a number of other factors that could contribute to reduced levels of consumer spending, such as increases in interest rates, currency fluctuations, inflation, unemployment, consumer debt levels, inclement weather, taxation rates, net worth reductions based on market declines or uncertainty, energy prices and austerity measures. Similarly, natural disasters, labor unrest, actual or potential terrorist acts, geopolitical unrest and other conflicts can also create significant instability and uncertainty in the world, causing consumers to defer purchases and travel, or prevent our suppliers and service providers from providing required services or materials to us. These or other factors could materially and adversely affect our business, prospects, operating results, financial condition and cash flows. Uncertainty surrounding potential U.S. policies related to immigration, global trade, taxation and other matters could amplify many of these risks and potential impacts.
Difficulties in the credit markets could have a negative impact on our customers, suppliers and business partners, which, in turn could materially and adversely affect our results of operations and liquidity.
The impact of difficult credit conditions on our customers, business partners, suppliers, insurance providers and financial institutions with which we do business cannot be predicted and may be quite severe. The inability of our manufacturers to ship our products could impair our ability to meet delivery date requirements. A disruption in the ability of our significant customers, distributors or licensees to access liquidity could cause serious disruptions or an overall deterioration of their businesses. A disruption in the ability of a large group of our smaller customers to access liquidity could have similar adverse effects, particularly in our important multi-brand wholesale channel in Southern Europe, where many customers tend to be relatively small and not well capitalized. These conditions could lead to significant reductions in future orders of our products and the inability or failure on our customers’ part


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to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity.
Similarly, a failure on the part of our insurance providers to meet their obligations for claims made by us could have a material adverse effect on our results of operations and liquidity. Continued market difficulties or additional deterioration could jeopardize our ability to rely on those financial institutions that are parties to our various bank facilities and foreign exchange contracts. We could be exposed to a loss if the counterparty fails to meet its obligations upon our exercise of foreign exchange contracts. In addition, instability or other distress in the financial markets could impair the ability of one or more of the banks participating in our credit agreements from honoring its commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
Domestic and foreign currency fluctuations could adversely impact our financial condition, results of operations and earnings.
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the euro, Canadian dollar, Korean won and Mexican peso), currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts. These amounts could be materially affected by the strengthening of the U.S. dollar, negatively impacting our results of operations, earnings and our ability to generate revenue growth. Furthermore, our products are typically sourced in U.S. dollars. As a result, the cost of these products may be affected by changes in the value of the applicable local currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Our future financial results could be significantly affected by not only the value of the U.S. dollar in relation to the foreign currencies in which we conduct business, but also the speed at which these fluctuations occur. For instance, during fiscal 2017, the average U.S. dollar rate was stronger against the Canadian dollar, the Korean won, the Mexican peso and the Russian rouble and weaker against the euro compared to the average rate in fiscal 2016. This had an overall negative impact on the translation of our international revenues and earnings from operations during fiscal 2017 compared to the prior year. If the U.S. dollar remains strong or further strengthens relative to the respective fiscal 2017 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results as well as our international cash and other balance sheet items during fiscal 2018, particularly in Canada, Europe and Mexico.
Although we hedge certain exposures to changes in foreign currency exchange rates, we cannot assure that foreign currency fluctuations will not have a material adverse effect on our financial condition or results of operations. Furthermore, since some of our hedging activities are designed to reduce volatility of fluctuating exchange rates, they not only reduce the negative impact of a stronger U.S. dollar, but they also reduce the positive impact of a weaker U.S. dollar. In addition, while our foreign currency hedges are designed to reduce volatility over the forward contract period, these contracts can create volatility during the period. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
Fluctuations in the price or availability of quality raw materials and commodities could increase costs and negatively impact profitability.
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, currency fluctuations, crop yields, weather patterns, supply conditions, government regulations, labor conditions, energy costs, transportation or freight costs, economic climate, market speculation and other unpredictable factors. Negative trends in any of these conditions or our inability to appropriately project fabric requirements in the future could increase costs and negatively impact profitability.
We are subject to periodic litigation and other regulatory proceedings, which could result in unexpected obligations, as well as the diversion of time and resources.
We are involved from time-to-time in various U.S. and foreign lawsuits and regulatory proceedings relating to our business, including purported class action lawsuits and intellectual property claims. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such new or existing proceedings. Should management’s evaluation of any such claims or proceedings or the likelihood of any future claims or proceedings prove incorrect, our exposure could materially exceed expectations, adversely impacting our business, financial condition and results of operations. In addition, any significant litigation or


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regulatory matters, regardless of the merits, could divert management’s attention from our operations and result in substantial legal fees. See also “Item 3. Legal Proceedings” for further discussion of our legal matters.
We could find that we are carrying excess inventories if we fail to shorten lead-times or anticipate consumer demand, if our international vendors do not supply quality products on a timely basis, if our merchandising strategies fail or if we do not open new and remodel existing stores on schedule.
Although we have shortened lead-times for the design, production and development of a portion of our product lines, we expect to continue to place orders with our vendors for most of our products a season or more in advance. If we are not successful in our efforts to continue to shorten lead-times or if we fail to correctly anticipate fashion trends or consumer demand, we could end up carrying excess inventories. Even if we effectively shorten lead-times and correctly anticipate consumer fashion trends and demand, our vendors could fail to supply the quality products and materials we require at the time we need them. Moreover, we could fail to effectively market or merchandise these products once we receive them. In addition, we could fail to open new or remodeled stores on schedule, and inventory purchases made in anticipation of such store openings could remain unsold. Any of the above factors could cause us to experience excess inventories, which may result in inventory write-downs and more markdowns, which in turn could have a material adverse effect on our results of operations and financial condition.
Our success depends on the strength of our relationships with our suppliers and manufacturers.
We do not own or operate any production facilities, and we depend on independent factories to supply our fabrics and to manufacture our products to our specifications. We do not have long-term contracts with any suppliers or manufacturers, and our business is dependent on our partnerships with our vendors. If manufacturing costs were to rise significantly, our product margins and results of operations could be negatively affected. In addition, very few of our vendors manufacture our products exclusively. As a result, we compete with other companies for the production capacity of independent contractors. If our vendors fail to ship our fabrics or products on time or to meet our quality standards or are unable to fill our orders, we might not be able to deliver products to our retail stores and wholesale customers on time or at all.
Moreover, our suppliers have at times been unable to deliver finished products in a timely fashion. This has led, from time-to-time, to an increase in our inventory, creating potential markdowns and a resulting decrease in our profitability. As there are a finite number of skilled manufacturers that meet our requirements, it could take significant time to identify and qualify suitable alternatives, which could result in our missing retailing seasons or our wholesale customers canceling orders, refusing to accept deliveries or requiring that we lower selling prices. Since we prefer not to return merchandise to our manufacturers, we could also have a considerable amount of unsold merchandise. Any of these problems could harm our financial condition and results of operations.
Our Americas Wholesale business is highly concentrated. If any of our large customers decrease their purchases of our products or experience financial difficulties, our results of operations and financial condition could be adversely affected.
In fiscal 2017, our two largest wholesale customers accounted for a total of approximately 2.7% of our consolidated net revenue. No other single customer or group of related customers in any of our segments accounted for more than 1.0% of our consolidated net revenue in fiscal 2017. Continued consolidation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our products and our licensees’ products. Also, as we expand the number of our retail stores, we run the risk that our wholesale customers will perceive that we are increasingly competing directly with them, which may lead them to reduce or terminate purchases of our products. In addition, in recent years there has been a significant increase in the number of designer brands seeking placement in department stores, which makes any one brand potentially less attractive to department stores. If any one of our major wholesale customers decides to decrease purchases from us, to stop carrying GUESS? products or to carry our products only on terms less favorable to us, our sales and profitability could significantly decrease. Similarly, some retailers have recently experienced significant financial difficulties, which in some cases have resulted in bankruptcy, liquidation and store closures. Financial difficulties of one of our major customers could result in reduced business and higher credit risk with respect to that customer. Any of these circumstances could ultimately have a material adverse effect on our results of operations and financial condition.


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Our inability to protect our reputation could have a material adverse effect on our brand.
Our ability to maintain our reputation is critical to our brand. Our reputation could be jeopardized if we or our third party providers fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure by us or our third party providers to comply with ethical, social, product, labor, health and safety or environmental standards could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. With the increased proliferation of social media, public perception about our products, our stores or our brand, whether justified or not, could significantly impair our reputation, involve us in litigation, damage our brand and have a material adverse effect on our business. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations and financial condition, as well as require additional resources to rebuild our reputation.
Since we do not control our licensees’ actions and we depend on our licensees for a substantial portion of our earnings from operations, their conduct could harm our business.
We license to others the rights to produce and market certain products that are sold with our trademarks. While we retain significant control over our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial control over their businesses. If the quality, focus, image or distribution of our licensed products diminish, consumer acceptance of and demand for the GUESS? brands and products could decline. This could materially and adversely affect our business and results of operations. In fiscal 2017, approximately 85% of our net royalties were derived from our top five licensed product lines. A decrease in customer demand for any of these product lines could have a material adverse effect on our results of operations and financial condition. Although we believe that in most circumstances we could replace existing licensees if necessary, our inability to do so effectively or for any period of time could adversely affect our revenues and results of operations.
We depend on our intellectual property, and our methods of protecting it may not be adequate.
Our success and competitive position depend significantly upon our trademarks and other proprietary rights. We take steps to establish and protect our trademarks worldwide. Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming, and we may be unable to adequately protect our intellectual property or to determine the extent of any unauthorized use, particularly in those foreign countries where the laws do not protect proprietary rights as fully as in the U.S. We also place significant value on our trade dress and the overall appearance and image of our products. However, we cannot assure you that we can prevent imitation of our products by others or prevent others from seeking to block sales of GUESS? products for purported violations of their trademarks and proprietary rights. We also cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of GUESS?, that our proprietary rights would be upheld if challenged or that we would, in that event, not be prevented from using our trademarks, any of which could have a material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others. Even if we are successful in such actions, the costs we incur could have a material adverse effect on us.
If we fail to successfully execute growth initiatives, including acquisitions and alliances, our business and results of operations could be harmed.
We regularly evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives. Our historical acquisitions include our former European jeanswear licensee in 2005, our former European licensee of children’s apparel in 2008 and our former European licensee of MARCIANO apparel in 2012. In addition, we have entered into joint venture relationships with partners in Brazil, the Canary Islands, Mexico, Portugal and Russia and have been directly operating our South Korea and China businesses since 2007, our international jewelry business since 2010 and our Japan business starting in 2013.
These efforts place increased demands on our managerial, operational and administrative resources that could prevent or delay the successful opening of new stores and the identification of suitable licensee partners, adversely impact the performance of our existing stores and adversely impact our overall results of operations. In addition, acquired businesses and additional store openings may not provide us with increased business opportunities, or result


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in the growth that we anticipate, particularly during economic downturns. Furthermore, integrating acquired operations (including operations from existing licensees or joint venture partners) is a complex, time-consuming and expensive process. Failing to acquire and successfully integrate complementary businesses, or failing to achieve the business synergies or other anticipated benefits of acquisitions or joint ventures, could materially adversely affect our business and results of operations.
We may be unsuccessful in implementing our plans to open and operate new stores, which could harm our business and negatively affect our results of operations.
New store openings have historically been an important part of the growth of our business. To open and operate new stores successfully, we must:
identify desirable locations, the availability of which is out of our control;
negotiate acceptable lease terms, including desired tenant improvement allowances;
efficiently build and equip the new stores;
source sufficient levels of inventory to meet the needs of the new stores;
hire, train and retain competent store personnel;
successfully integrate the new stores into our existing systems and operations; and
satisfy the fashion preferences of customers in the new geographic areas.
Any of these challenges could delay our store openings, prevent us from completing our store opening plans or hinder the operations of stores we do open. These challenges could be even more pronounced in foreign markets, including markets where we have identified opportunities for store growth such as China, Russia and Turkey, due to unfamiliar local regulations, business conditions and other factors. Once open, we cannot be sure that our new stores will be profitable. Such things as unfavorable economic and business conditions and changing consumer preferences could also interfere with our store opening plans.
Failure to successfully develop and manage new store design concepts could adversely affect our results of operations.
The introduction and growth or maintenance of new store design concepts as part of our overall growth and productivity strategies could strain our financial and management resources and is subject to a number of other risks, including customer acceptance, product differentiation, competition and maintaining desirable locations. These risks may be compounded during the current difficult economic climate or any future economic downturn. There can be no assurance that new store designs will achieve or maintain sales and profitability levels that justify the required investments. If we are unable to successfully develop new store designs, or if consumers are not receptive to the products, design layout, or visual merchandising, our results of operations and financial results could be adversely affected. In addition, the failure of new store designs to achieve acceptable results could lead to unplanned store closures and/or impairment and other charges, which could adversely affect our results of operations and ability to grow.
We may not fully realize expected cost savings and/or operating efficiencies related to restructuring plans or other cost-saving initiatives.
In fiscal 2017, we implemented a global cost reduction and restructuring plan to better align our global cost and organizational structure with our current strategic initiatives. This plan included the consolidation and streamlining of our business processes and a reduction in our global workforce and other expenses. We have forecasted cost savings from this plan, supply chain and other initiatives, based on a number of assumptions and expectations which, if achieved, would improve our profitability and cash flows from operating activities. However, there can be no assurance that the expected results will be achieved. These and any future spend reductions, if any, may negatively impact our other initiatives or our efforts to grow our business, which may negatively impact our future results of operations and increase the burden on existing management, systems and resources. In addition, these cost savings may be negated or offset by unexpected or increased costs and poorer performance in other areas of the business.


16


Changes in subjective assumptions, estimates and judgments by management related to complex tax matters, including those resulting from regulatory reviews, could adversely affect our financial results.
We are subject to routine tax audits on various tax matters around the world in the ordinary course of business (including income tax, business tax, customs duties and Value Added Tax (“VAT”) matters). We regularly assess the adequacy of our uncertain tax positions and other reserves, which requires a significant amount of judgment. Although we accrue for uncertain tax positions and other reserves, the results of regulatory audits and negotiations with taxing and customs authorities may be in excess of our accruals, resulting in the payment of additional taxes, duties, penalties and interest. See Note 11 to the Consolidated Financial Statements for further discussion of our tax matters, including reserves for uncertain tax positions.
From time-to-time, we make VAT and other tax-related refund claims with various foreign tax authorities that are audited by those authorities for compliance. Failure by these foreign governments to approve or ultimately pay these claims could have a material adverse effect on our results of operations and liquidity.
Changes in tax laws, significant shifts in the relative source of our earnings, or other unanticipated tax liabilities could adversely affect our effective income tax rate and profitability and may result in volatility in our financial results.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We record tax expense based on our estimate of future payments, which include reserves for uncertain tax positions in multiple tax jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of other factors, including: changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, the resolution of uncertain tax positions, changes in our operating structure, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. We and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe that these transactions reflect arm’s length terms and that the proper transfer pricing documentation is in place, these transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates. In addition, the relative level of earnings in the various taxing jurisdictions to which our earnings are subject can also create volatility in our effective income tax rate. Any one of these factors could adversely impact our income tax rate and our profitability and could create ongoing variability in our quarterly or annual tax rates.
Potential changes to U.S. tax or trade policies impacting multi-national companies could materially affect our financial condition and results of operations.
During fiscal 2017, we sourced most of our finished products with partners and suppliers outside the U.S. and we continued to design and purchase fabrics globally. In addition, over time we have increased our sales of product outside of the U.S. In fiscal 2017, approximately 62% of our consolidated net revenue was generated by sales from outside of the U.S. We anticipate that these international revenues will continue to grow as a percentage of our total business over time. The current political landscape has introduced greater uncertainty with respect to future tax and trade regulations for U.S. companies like ours with significant business and sourcing operations outside the U.S.
For instance, tax reform has recently been identified as a key priority in the U.S. A variety of tax proposals that would significantly impact U.S. taxation for multinational corporations have been developed, including proposals around a border adjustment tax, changes to repatriation, reductions in the U.S. corporate tax rate, introduction of a capital expense deduction and elimination of the interest deduction. We cannot predict whether or not any of these tax reform proposals will ultimately be adopted and, until the details are known, the extent of any impact on our tax expense. The impact of certain proposals, if enacted, on our tax expense and profitability could be material, and we may not be able to fully offset any such incremental tax increase through product price increases or otherwise.
Similarly, there have been recent discussions concerning possible changes to U.S. participation in or the renegotiation of certain international trade agreements. We cannot predict whether, and to what extent, there may be changes to such international trade agreements or whether quotas, duties, tariffs, exchange controls or other restrictions will be changed or imposed by the U.S. or by other countries. If we or our vendors or product licensees are unable to obtain raw materials or finished goods from the countries where we or they wish to purchase them, either because of such regulatory changes or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.


17


Our business is global in scope and can be impacted by factors beyond our control.
As a result of our large and growing international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control. Such factors that could harm our results of operations and financial condition include, among other things:
political instability or acts of terrorism, which disrupt trade with the countries where we operate or in which our contractors, suppliers or customers are located;
recessions in foreign economies;
inflationary pressures and volatility in foreign economies;
reduced global demand resulting in the closing of manufacturing facilities;
challenges in managing broadly dispersed foreign operations;
local business practices that do not conform to legal or ethical guidelines;
adoption of additional or revised quotas, restrictions or regulations relating to imports or exports;
additional or increased customs duties, tariffs, taxes and other charges on imports or exports;
anti-American sentiment in foreign countries where we operate resulting from actual or proposed changes to U.S. immigration and travel policies or other factors;
delays in receipts due to our distribution centers as a result of labor unrest, increasing security requirements or other factors at U.S. or other ports;
significant fluctuations in the value of the dollar against foreign currencies;
increased difficulty in protecting our intellectual property rights in foreign jurisdictions;
social, labor, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in, or distribute our products from, these international markets;
restrictions on the transfer of funds between the U.S. and foreign jurisdictions;
our ability and the ability of our international licensees, distributors and joint venture partners to locate and continue to open desirable new retail locations; and
natural disasters in areas in which our contractors, suppliers, or customers are located.
Further, our international presence means that we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as the laws of the foreign countries in which we operate, including data privacy laws. If any of our international operations, or our employees or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Violation of laws or regulations, or changes to existing laws or regulations could adversely affect our business, reputation and results of operations.
We are subject to numerous laws and regulations at the state, federal and international levels, including, but not limited to, the areas of health care, taxes, transportation and logistics, data privacy, the environment, trade, conflict minerals, product safety, employment and labor, advertising and pricing practices, consumer protection, e-commerce, anti-competition, anti-corruption and intellectual property. Compliance with these numerous laws and regulations is complicated, time consuming and expensive. In addition, the laws may be inconsistent from jurisdiction to jurisdiction and are subject to change from time to time, sometimes unexpectedly. Failure to comply or to effectively anticipate changes in such laws or regulations could have a material adverse effect on our business, reputation and results of operations.
Violation of labor, environmental and other laws and practices by our licensees or suppliers could harm our business.
We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines, code of conduct and monitoring programs promote ethical business practices and compliance with laws, we do not control our licensees or suppliers or their labor, environmental, safety or other business practices. The violation of labor, environmental, safety or other laws by any of our licensees or suppliers, or divergence of a licensee’s or supplier’s business practices or social responsibility standards from ours or from those generally accepted as ethical in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm the value of our trademarks, damage our reputation or expose us to potential liability for their wrongdoings.


18


Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.
The efficient operation of our business is very dependent on our computer and information systems. In particular, we rely heavily on our merchandise management and ERP systems used to track sales and inventory and manage our supply chain. In addition, we have e-commerce and other Internet websites worldwide. Given the complexity of our business and the significant number of transactions that we engage in on an annual basis, it is imperative that we maintain constant operation of our computer hardware and software systems. Despite our preventative efforts, our systems are vulnerable from time-to-time to damage or interruption from, among other things, ineffective upgrades or support from third party vendors, difficulties in replacing or integrating new systems, security breaches, computer viruses, natural disasters and power outages. Any such problems or interruptions could result in incorrect information being supplied to management, inefficient ordering and replenishment of products, loss of orders (including e-commerce orders), significant expenditures, disruption of our operations, inability to produce accurate financial statements, and other adverse impacts to our business.
A data privacy breach could damage our reputation and customer relationships, expose us to litigation risk and adversely affect our business.
As part of our normal operations, we collect, process, transmit and where appropriate, retain certain sensitive and confidential employee and customer information, including credit card information. There is significant concern by consumers and employees over the security of personal information, consumer identity theft and user privacy. Despite the security measures we have in place, our facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. As a result of recent security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment has become more uncertain. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, could severely damage our reputation and our customer relationships, harm sales, expose us to risks of litigation and liability and result in a material adverse effect on our business, financial condition and results of operations. Consequently, we may incur significant costs related to prevention and to comply with laws regarding the protection and unauthorized disclosure of personal information.
A significant disruption at any of our distribution facilities could have a material adverse impact on our sales and operating results.
Our U.S. business relies primarily on a single distribution center located in Louisville, Kentucky to receive, store and distribute merchandise to all of our U.S. stores, wholesale customers and e-commerce customers. Distribution of our products in Canada is handled primarily from two distribution centers in Montreal, Quebec. Distribution of our products in Europe is handled primarily through a single third party distribution center in Piacenza, Italy. Additionally, we utilize several third party operated distribution warehouses that service the Asia region. Any significant interruption in the operation of any of our distribution centers due to natural disasters, weather conditions, accidents, system failures, capacity issues, labor issues, relationships with our third party warehouse operators or landlords, failure to successfully open or transition to new facilities and/or new providers, or other unforeseen causes could have a material adverse effect on our ability to replace inventory and fill orders (including e-commerce orders), negatively impacting our sales, operating results and customer relations.
Failure to deliver merchandise timely to our distribution facilities and to our stores and wholesale customers could lead to disruptions to our business.
The efficient operation of our global retail and wholesale businesses depends on the timely importation and customs clearance, as well as receipt of merchandise to and from our regional distribution centers. We receive merchandise at our distribution facilities and deliver merchandise to our stores and wholesale customers using independent third parties who import as well as transport goods. The independent third parties and other entities which they rely on have employees which may be represented by labor unions. Disruptions in the delivery of merchandise caused by importation delays or work stoppages by employees or contractors of any of these or other third parties could delay the timely receipt of merchandise. There can be no assurance that such stoppages, delays or disruptions will not occur in the future. Any failure by a third party to respond adequately to our distribution needs could disrupt our operations and negatively impact our financial condition or results of operations.


19


Abnormally harsh or unseasonable weather conditions could have a material adverse impact on our sales, inventory levels and operating results.
Extreme weather conditions in areas in which our retail stores and wholesale doors are located, particularly in markets where we have a concentration of locations, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results of operations could be affected by natural events in the locations in which we or our customers or suppliers operate.
Our corporate headquarters, as well as other key operational locations, including retail, distribution and warehousing facilities, are located in areas that are subject to natural disasters such as severe weather and geological events that could disrupt our operations. Many of our suppliers and customers also have operations in these locations. The occurrence of such natural events may result in sudden disruptions in business conditions of the local economies affected, as well as of the regional and global economies. Such disruptions could result in decreased demand for our products and disruptions in our management functions, sales channels and manufacturing and distribution networks, which could have a material adverse effect on our business, financial condition and results of operations.
Our Chairman Emeritus and our Executive Chairman and Chief Creative Officer own a significant percentage of our common stock. Their interests may differ from the interests of our other stockholders.
Maurice Marciano, our Chairman Emeritus and Board member, and Paul Marciano, our Executive Chairman, Chief Creative Officer and Board member, collectively beneficially own approximately 29% of our outstanding shares of common stock. The sale or prospect of the sale of a substantial number of these shares could have an adverse impact on the market price of our common stock. Moreover, these individuals may have different interests than our other stockholders and, accordingly, they may direct the operations of our business in a manner contrary to the interests of our other stockholders. As long as these individuals own a significant percentage of our common stock, they may effectively be able to:
elect our directors;
amend or prevent amendment of our Restated Certificate of Incorporation or Bylaws;
effect or prevent a merger, sale and/or purchase of assets or other corporate transactions; and
control the outcome of any other matter submitted to our stockholders for vote.
Their stock ownership, together with the anti-takeover effects of certain provisions of applicable Delaware law and our Restated Certificate of Incorporation and Bylaws, may discourage acquisition bids or allow the Marcianos to delay or prevent a change in control that may be favored by our other stockholders, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our common stock price.
Our failure to retain our existing senior management team or to retain or attract other key personnel could adversely affect our business.
Our business requires disciplined execution at all levels of our organization in order to ensure the timely delivery of desirable merchandise in appropriate quantities to our stores and other customers. This execution requires experienced and talented management in various areas of our business including: advertising, design, finance, merchandising, operations, and production. Our success depends upon the personal efforts and abilities of our senior management, particularly Victor Herrero, our Chief Executive Officer, Paul Marciano, our Executive Chairman and Chief Creative Officer, and other key personnel. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of these or other key personnel and failure to effectively identify and attract suitable successors could materially harm our business.


20


Fluctuations in quarterly performance including comparable store sales, sales per square foot, operating margins, timing of wholesale orders, royalty net revenue or other factors could have a material adverse effect on our earnings and our stock price.
Our quarterly results of operations for each of our business segments have fluctuated in the past and can be expected to fluctuate in the future. Further, if our international retail store expansion plans or anticipated closure of retail stores and other productivity initiatives in the Americas fail to meet our expected results, our overhead and other related expansion costs would increase without an offsetting increase in sales and net revenue. This could have a material adverse effect on our results of operations and financial condition, including but not limited to future impairments of store assets or goodwill.
Our net revenue and operating results have historically been lower in the first half of our fiscal year due to general seasonal trends in the apparel and retail industries. Our comparable store sales, quarterly results of operations and stock price can also be affected by a variety of other factors, including:
shifts in consumer tastes and fashion trends;
the timing of new store openings and the relative proportion of new stores to mature stores;
the timing and effectiveness of planned store closures in North America;
calendar shifts of holiday or seasonal periods;
the timing of seasonal wholesale shipments;
the effectiveness of our inventory management;
changes in our merchandise mix;
changes in our mix of revenues by segment;
the timing of promotional events;
actions by competitors;
weather conditions;
changes in the business environment;
inflationary changes in prices and costs;
changes in the payment of future cash dividends;
changes in currency exchange rates;
population trends;
changes in patterns of commerce such as the expansion of e-commerce;
the level of pre-operating expenses associated with new stores; and
volatility in securities’ markets which could impact the value of our investments in non-operating assets.
An unfavorable change in any of the above factors could have a material adverse effect on our results of operations and our stock price.
ITEM 1B.    Unresolved Staff Comments.
None.


21


ITEM 2.    Properties.
As of January 28, 2017, all of our principal facilities were leased with the exception of our U.S. distribution center based in Louisville, Kentucky and our administrative office based in Florence, Italy. Certain information concerning our principal facilities is set forth below:
Location
 
Use
 
Approximate
Area in
Square Feet
 
 
 
 
 
Los Angeles, California
 
Principal executive and administrative offices, design facilities, sales offices, warehouse facilities, and sourcing used by our Americas Wholesale, Americas Retail and Corporate and Licensing support groups
 
341,700

Louisville, Kentucky
 
Distribution and warehousing facility used by our Americas Wholesale and Americas Retail segments
 
506,000

New York, New York
 
Administrative and sales offices, public relations, and showrooms used by our Americas Wholesale segment
 
13,400

Montreal/Toronto/Vancouver, Canada
 
Administrative offices, showrooms and warehouse facilities used by our Americas Wholesale and Americas Retail segments
 
203,100

São Paulo, Brazil
 
Administrative office and showroom used by our Americas Wholesale and Americas Retail segments
 
4,000

Paris, France
 
Administrative office and showroom used by our Europe segment
 
21,100

Dusseldorf/Munich, Germany
 
Administrative office and showrooms used by our Europe segment
 
14,800

Florence, Italy
 
Administrative office used by our Europe segment
 
114,800

Warsaw, Poland
 
Administrative office and showrooms used by our Europe segment
 
12,400

Lisbon, Portugal
 
Showroom used by our Europe segment
 
6,000

Moscow, Russia
 
Administrative office and showroom used by our Europe segment
 
6,500

Lugano/Stabio, Switzerland
 
Administrative, sales and marketing offices, design facilities and showrooms used by our Europe segment
 
120,700

Barcelona, Spain
 
Administrative office and showroom used by our Europe segment
 
8,600

Shanghai, China
 
Administrative offices used by our Asia segment
 
17,800

Kowloon, Hong Kong
 
Administrative and sales office, showroom and licensing coordination facilities used primarily by our Asia segment
 
13,100

Seoul, South Korea
 
Administrative and sales offices, design facilities and showrooms used by our Asia segment
 
45,100

Tokyo, Japan
 
Administrative and sales offices and showroom used by our Asia segment
 
5,100

Our corporate, wholesale and retail headquarters and certain warehouse facilities are located in Los Angeles, California, consisting of four buildings totaling approximately 341,700 square feet. These facilities are leased by us from limited partnerships in which the sole partners are trusts controlled by and for the benefit of Maurice Marciano and Paul Marciano (the “Principal Stockholders”) and their families pursuant to a lease that expires in July 2020. The total lease payments related to these facilities are approximately $0.3 million per month with aggregate minimum lease commitments totaling approximately $10.9 million as of January 28, 2017.
In addition, the Company, through a wholly-owned Canadian subsidiary, leases warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with the Principal Stockholders. The lease expires in


22


December 2017 and has a Company option to extend for an additional year. The monthly lease payment is $42,000 Canadian (US$31,900) with aggregate minimum lease commitments through the term of the lease totaling approximately $0.5 million Canadian (US$0.4 million) as of January 28, 2017.
The Company, through a French subsidiary, leases a showroom and office space located in Paris, France from an entity that is owned in part by an affiliate of the Principal Stockholders. The lease expires in May 2020. The aggregate minimum lease commitments through the term of the lease totaled approximately €2.8 million (US$3.0 million) as of January 28, 2017.
See Note 13 to the Consolidated Financial Statements for further information regarding related party transactions.
Our U.S. distribution center is a fully automated facility based in Louisville, Kentucky. During the fourth quarter of fiscal 2016, the Company purchased this facility for approximately $28.8 million. In February 2016, the Company entered into a ten-year $21.5 million real estate secured loan to partially finance this purchase.
Distribution of our products in Canada is handled primarily from two leased facilities based in Montreal, Quebec. Distribution of our products in Europe is handled primarily through a single third party distribution center in Piacenza, Italy. Additionally, we utilize several third party operated distribution warehouses that service the Asia region.
We lease our showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under non-cancelable operating lease agreements expiring on various dates through November 2036. These facilities, located mainly in North America but with a growing presence in Europe and Asia, had aggregate real estate minimum lease commitments as of January 28, 2017 totaling approximately $933.1 million, excluding related party commitments.
The terms of our store and concession leases, excluding renewal options and kick-out clauses, as of January 28, 2017, expire as follows:
 
 
Number of Stores and Concessions
Years Lease Terms Expire
 
U.S. and
Canada
 
Europe
 
Asia
 
Mexico and
Brazil
Fiscal 2018-2020
 
202

 
117

 
256

 
68

Fiscal 2021-2023
 
125

 
122

 
37

 
13

Fiscal 2024-2026
 
104

 
62

 
4

 

Fiscal 2027-2029
 
19

 
57

 
4

 

Thereafter
 

 
9

 

 

 
 
450

 
367

 
301

 
81

We believe our existing facilities are well maintained, in good operating condition and are adequate to support our present level of operations. See Note 14 to the Consolidated Financial Statements for further information regarding current lease obligations.
ITEM 3.    Legal Proceedings.
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $26 million and an accounting of profits of $99 million, the final ruling provided for monetary damages of $2.3 million against the Company and $2.3 million against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor


23


of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of three of the plaintiff’s Italian and four of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014, the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter is now in a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately $80,000. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling two of the plaintiff’s community trademark registrations and one of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling.
On August 25, 2006, Franchez Isaguirre, a former employee of the Company, filed a complaint in the Superior Court of California, County of Los Angeles alleging violations by the Company of California wage and hour laws. The complaint was subsequently amended, adding a second former employee as an additional named party. The plaintiffs purported to represent a class of similarly situated employees in California who allegedly had been injured by not being provided adequate meal and rest breaks. The complaint sought unspecified compensatory damages, statutory penalties, attorney’s fees and injunctive and declaratory relief. On June 9, 2009, the Court certified the class but immediately stayed the case pending the resolution of a separate California Supreme Court case on the standards of class treatment for meal and rest break claims. Following the Supreme Court ruling, the Superior Court denied the Company’s motions to decertify the class and to narrow the class in January 2013 and June 2013, respectively. The Company subsequently petitioned to have the Court’s decision not to narrow the class definition reviewed. That petition was ultimately denied by the California Supreme Court in April 2014. In July 2015, the parties entered into a Memorandum of Understanding to settle the matter for $5.25 million, subject to certain limited offsets. The Court issued a final order and judgment approving the settlement in February 2016.
The Company has received customs tax assessment notices from the Italian Customs Agency regarding its customs tax audit of one of the Company’s European subsidiaries for the period from July 2010 through December 2012. Such assessments totaled €9.8 million ($10.5 million), including potential penalties and interest. The Company strongly disagrees with the positions that the Italian Customs Agency has taken and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). In May 2015, the MFDTC issued a judgment in favor of the Company in relation to the first set of appeals (covering the period through September 2010) and canceled the related assessments totaling €1.7 million ($1.8 million). In November 2015, the Italian Customs Agency notified the Company of its intent to appeal this first MFDTC judgment. During fiscal 2017, the Appeals Court ruled in favor of the Company and rejected the appeal by the Italian Customs Agency on the first MFDTC judgment. During fiscal 2017, the MFDTC also issued judgments in favor of the Company in relation to the second through seventh set of appeals (covering the period from October 2010 through December 2012) and canceled the related assessments totaling €8.1 million ($8.7 million). Subsequently, the Italian Customs Agency has appealed the majority of these favorable MFDTC judgments. While these MFDTC judgments have been favorable to the Company, there can be no assurances that the Italian Customs Agency will not be successful in its remaining appeals. It also continues to be possible that the Company will receive similar or even larger assessments for periods subsequent to December 2012 or other claims or charges related to the matter in the future.
Although the Company believes that it has a strong position and will continue to vigorously defend each of the remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material impact on the Company’s financial position or results of operations.
The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolutions of which are not expected to have a material adverse effect on the Company’s financial position or results of operations.


24


ITEM 4.    Mine Safety Disclosures.
Not applicable.


25


PART II
ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Since August 8, 1996, the Company’s common stock has been listed on the New York Stock Exchange under the symbol ‘GES.’ The following table sets forth, for the periods indicated, the high and low sales prices per common share of the Company’s common stock, and the dividends paid with respect thereto:
 
Market Price
 
Dividends
Declared and
Paid
 
High
 
Low
 
Fiscal year ended January 30, 2016
 
 
 
 
 
First Quarter Ended May 2, 2015
$
19.58

 
$
16.74

 
$
0.225

Second Quarter Ended August 1, 2015
23.29

 
17.54

 
0.225

Third Quarter Ended October 31, 2015
23.06

 
19.85

 
0.225

Fourth Quarter Ended January 30, 2016
21.91

 
17.21

 
0.225

 
 
 
 
 
 
Fiscal year ended January 28, 2017
 
 
 
 
 
First Quarter Ended April 30, 2016
$
22.50

 
$
16.70

 
$
0.225

Second Quarter Ended July 30, 2016
18.28

 
14.23

 
0.225

Third Quarter Ended October 29, 2016
18.20

 
13.38

 
0.225

Fourth Quarter Ended January 28, 2017
16.39

 
11.95

 
0.225

On March 20, 2017, the closing sales price per share of the Company’s common stock, as reported on the New York Stock Exchange Composite Tape, was $11.13. On March 20, 2017 there were 240 holders of record of the Company’s common stock.
Prior to the initiation of a quarterly dividend on February 12, 2007, the Company had not declared any dividends on our common stock since our initial public offering in 1996. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity. On March 15, 2017, the Company announced a regular quarterly cash dividend of $0.225 per share on the Company’s common stock.


26


Performance Graph
The Stock Price Performance Graph below compares the cumulative stockholder return of the Company with that of the S&P 500 Index (a broad equity market index) and the S&P 1500 Apparel Retail Index (a published industry index) over the five fiscal year period beginning January 28, 2012. The return on investment is calculated based on an investment of $100 on January 28, 2012, with dividends, if any, reinvested. Past performance is not necessarily indicative of future performance.

COMPARISON OF FIVE YEAR TOTAL RETURN
AMONG GUESS?, INC.,
S&P 500 INDEX AND S&P 1500 APPAREL RETAIL INDEX
guessfiveyearreturnchart2017.jpg
Period Ending
Company/Market/Peer Group
 
1/28/2012
 
2/2/2013
 
2/1/2014
 
1/31/2015
 
1/30/2016
 
1/28/2017
Guess?, Inc. 
 
$
100.00

 
$
100.64

 
$
106.38

 
$
74.01

 
$
76.50

 
$
53.81

S&P 1500 Apparel Retail Index
 
$
100.00

 
$
129.45

 
$
146.35

 
$
176.01

 
$
183.32

 
$
178.62

S&P 500 Index
 
$
100.00

 
$
117.61

 
$
141.49

 
$
161.61

 
$
160.54

 
$
194.04



27


Share Repurchase Program
The Company’s share repurchases during each fiscal month of the fourth quarter of fiscal 2017 were as follows:
Period
Total Number of Shares Purchased
 
Average Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number
(or Approximate Dollar Value)
of Shares That May
Yet Be Purchased
Under the Plans
or Programs
October 30, 2016 to November 26, 2016
 
 
 
 
 
 
 
Repurchase program (1)

 

 

 
$
451,783,109

Employee transactions (2)
3,882

 
$
14.42

 

 
 

November 27, 2016 to December 31, 2016
 
 
 
 
 
 
 
Repurchase program (1)

 

 

 
$
451,783,109

Employee transactions (2)
109

 
$
12.78

 

 
 

January 1, 2017 to January 28, 2017
 
 
 
 
 
 
 
Repurchase program (1)
289,968

 
$
12.15

 
289,968

 
$
448,258,803

Employee transactions (2)
87,280

 
$
12.17

 

 
 

Total
 
 
 
 
 
 
 
Repurchase program (1)
289,968

 
$
12.15

 
289,968

 
 

Employee transactions (2)
91,271

 
$
12.27

 

 
 

________________________________________________________________________
(1)
On June 26, 2012, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock. Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice.
(2)
Consists of shares surrendered to, or withheld by, the Company in satisfaction of employee tax withholding obligations that occur upon vesting of restricted stock awards/units granted under the Company’s 2004 Equity Incentive Plan, as amended.


28


ITEM 6.    Selected Financial Data.
The selected financial data set forth below has been derived from the audited Consolidated Financial Statements of the Company and the related notes thereto. The following selected financial data should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes contained herein and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information regarding accounting changes, acquisitions and other items affecting comparability.
 
Year Ended (1)
 
Jan 28,
2017

Jan 30,
2016

Jan 31,
2015

Feb 1,
2014
 
Feb 2,
2013
 
(in thousands, except per share data)
Statements of income data:
 

 

 

 

 
Net revenue
$
2,209,368

 
$
2,204,311

 
$
2,417,673

 
$
2,569,786

 
$
2,658,605

Earnings from operations (2) (3)
22,708

 
121,350

 
125,912

 
222,587

 
274,525

Income tax expense (4)
28,212

 
42,464

 
45,824

 
75,248

 
99,128

Net earnings attributable to Guess?, Inc. (2) (3) (4) (5) 
22,761

 
81,851

 
94,570

 
153,434

 
178,744

Net earnings per common share attributable to common stockholders (2) (3) (4) (5):
 
 
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.97

 
$
1.11

 
$
1.81

 
$
2.06

Diluted
$
0.27

 
$
0.96

 
$
1.11

 
$
1.80

 
$
2.05

Dividends declared per common share
$
0.90

 
$
0.90

 
$
0.90

 
$
0.80

 
$
2.00

Weighted average common shares outstanding—basic
83,666

 
84,264

 
84,604

 
84,271

 
86,262

Weighted average common shares outstanding—diluted
83,829

 
84,525

 
84,837

 
84,522

 
86,540


Jan 28,
2017
 
Jan 30,
2016
 
Jan 31,
2015
 
Feb 1,
2014
 
Feb 2,
2013
Balance sheet data:
 

 

 

 

 
Working capital (6)
$
698,559

 
$
709,193


$
790,333

 
$
821,661

 
$
701,206

Total assets
1,534,485

 
1,538,748


1,601,405

 
1,764,431

 
1,713,506

Borrowings and capital lease, excluding current installments
23,482

 
2,318


6,165

 
7,580

 
8,314

Stockholders’ equity
980,994

 
1,031,293


1,089,446

 
1,169,986

 
1,100,868

________________________________________________________________________
(1)
The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. The results for fiscal 2013 included the impact of an additional week which occurred during the fourth quarter ended February 2, 2013.
(2)
During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Asset impairment charges recognized were approximately $34.4 million in fiscal 2017, $2.3 million in fiscal 2016, $24.8 million in fiscal 2015, $8.8 million in fiscal 2014 and $10.1 million in fiscal 2013, respectively. Refer to Note 5 to the Consolidated Financial Statements for further detail.
(3)
During fiscal 2017, the Company incurred restructuring charges of $6.1 million. During fiscal 2014, the Company incurred restructuring charges of $12.4 million. Refer to Note 9 to the Consolidated Financial Statements for further detail.
(4)
During fiscal 2017, the Company recorded valuation reserves of $6.8 million resulting from jurisdictions where there have been cumulative net operating losses, limiting the Company’s ability to consider other subjective evidence to continue to recognize the existing deferred tax assets. During fiscal 2017, the Company also recorded an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of its global cost reduction and restructuring plan. During fiscal 2013, the Company settled a tax audit dispute in Italy, resulting in a charge of $12.8


29


million in the fourth quarter of fiscal 2013 in excess of amounts previously reserved, which was partially offset by unrelated tax benefits of $4.0 million. Refer to Note 11 to the Consolidated Financial Statements for further detail.
(5)
During fiscal 2017, the Company sold its minority interest equity holding in a privately-held boutique apparel company for net proceeds of approximately $34.8 million, which resulted in a gain of approximately $22.3 million which was recorded in other income.
(6)
In November 2015, authoritative guidance was issued which simplifies the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as long-term on the balance sheet. The Company adopted this guidance during the fourth quarter of fiscal 2016 and has applied it retrospectively to all periods presented herein.
ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Unless the context indicates otherwise, when we refer to “we,” “us,” “our” or the “Company” in this Form 10-K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
Business Segments
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Europe, Asia, Americas Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before restructuring charges, if any. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in Note 17 to the Consolidated Financial Statements.
Products
We derive our net revenue from the sale of GUESS?, G by GUESS, GUESS Kids and MARCIANO apparel and our licensees’ products through our worldwide network of retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the euro, Canadian dollar, Korean won and Mexican peso), currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts.
In addition, some of our transactions that occur primarily in Europe, Canada, South Korea and Mexico are denominated in U.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings, largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus the U.S. dollar at the time U.S. dollar denominated inventory is purchased relative to the purchases of the comparable period, our product margins could be unfavorably impacted if the relative sales prices do not change. Such exchange rate fluctuations had a negative impact on our product margins in Europe and Canada during fiscal 2017 compared to the prior year.
During fiscal 2017, the average U.S. dollar rate was stronger against the Canadian dollar, the Korean won, the Mexican peso and the Russian rouble and weaker against the euro compared to the average rate in fiscal 2016. This had an overall negative impact on the translation of our international revenues and earnings from operations during fiscal 2017 compared to the prior year.


30


If the U.S. dollar remains strong or further strengthens relative to the respective fiscal 2017 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results as well as our international cash and other balance sheet items during fiscal 2018, particularly in Canada, Europe and Mexico.
The Company enters into derivative financial instruments to offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Strategy
The Company continues to remain focused on its five top strategic initiatives aimed at driving shareholder value, including: (i) elevating the quality of our sales organization and merchandising strategy to match the quality of our product and marketing; (ii) building a major business in Asia by unlocking the potential of the GUESS? brand in the region; (iii) creating a culture of purpose and accountability throughout the entire Company by implementing a more centralized organizational structure that reinforces our focus on sales and profitability; (iv) improving our cost structure (including supply chain and overhead); and (v) stabilizing and revitalizing our wholesale business. The following provides further details on the progress of these initiatives:
Sales Organization and Merchandising Strategy. We are executing on our plan to elevate the quality of our sales organization and merchandising strategy which includes: (1) elevating the product knowledge of our sales force; (2) building a more strategic and operational online organization in order to increase millennials’ engagement with our brand through digital marketing and social media; (3) taking steps such as investing in key stores and developing stronger replenishment, visual, stockroom and cost-control standards in order to improve our overall field and store structure; (4) implementing a more effective yearly retail calendar to better enable each store to fully capture local opportunities; (5) using feedback from our sales force to improve our collections and increase the number and effectiveness of our SKU’s; and (6) implementing a global pricing system with greater clarity and simplicity.
Building our Asia Business. We believe there continues to be significant potential in this region, particularly in mainland China, and plan to continue to allocate sufficient resources to fuel future growth.
Transforming our Company’s Culture. In order to generate global synergies, major decisions (including supply chain, technology, finance, stock allocation and communications) are becoming more centralized in the Company’s management team in Los Angeles. This centralized approach reinforces our focus on sales and profitability and fosters an environment of accountability and execution measured through key performance metrics.
Improving our Cost Structure. We plan to continue improving our cost structure by identifying synergies among departments and strengthening our supply chain. We are executing on the following supply chain initiatives to drive improvements in product costs: (i) developing a sourcing network in new territories that can offer better costs; (ii) consolidating and building strategic partnerships with high-quality suppliers to gain scale efficiencies; and (iii) implementing a fabric platforming process to develop and utilize common fabrics across multiple styles. We are also working to shorten our lead times through partnering with our suppliers, exercising agility in the production process and continuously searching for new suppliers and sourcing opportunities in reaction to the latest trends.
During fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges of $6.1 million and a related estimated exit tax charge of approximately $1.9 million (or $5.8 million after considering a $2.2 million tax benefit as a result of the restructuring charges) during fiscal 2017. The Company does not expect significant future cash-based severance charges to be incurred as the actions under this plan were substantially completed during fiscal 2017.
Stabilizing our Wholesale Business. We are partnering with our wholesale customers to emphasize a retail-oriented mindset and encourage the adoption of best practices, including high quality visual merchandising, frequent rotation of products and maximization of inventory turns.


31


Capital Allocation
The Company plans to allocate capital, including capital expenditures and working capital investments, to fund the growth of its retail and e-commerce businesses in Europe and Asia, while reducing its allocation of capital to its retail business in the Americas. During fiscal 2018, we plan to close 60 stores in the U.S. and Canada and limit future store openings. Additionally, we plan to continue to invest capital in technology to improve our global structure and support our long-term growth plans. The Company’s investments in capital for the full fiscal year 2018 are planned between $85 million and $95 million. During fiscal 2018, we also expect that working capital will grow in Europe and Asia, while contracting in the Americas.
Comparable Store Sales
The Company reports National Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results.
Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly operated concessions as well as merchandise that is reserved online but paid for and picked-up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked-up from a different retail store.
Store sales are considered comparable after the store has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full months. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full months and exclude any related revenue from shipping fees.
Definitions and calculations of comparable store sales used by the Company may differ from similarly titled measures reported by other companies.
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 72.2% to $22.8 million, or diluted earnings of $0.27 per common share, for fiscal 2017, compared to net earnings attributable to Guess?, Inc. of $81.9 million, or diluted earnings of $0.96 per common share, for fiscal 2016.
During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain from the sale of a minority interest investment of $22.3 million (or a combined $14.5 million after considering the net $12.5 million tax benefit resulting from the asset impairment charges, restructuring charges and the sale of the minority interest investment), or an unfavorable $0.17 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $37.2 million and adjusted diluted earnings were $0.44 per common share for fiscal 2017. During fiscal 2016, the Company also recognized asset impairment charges of $2.3 million (or $1.5 million after considering the related tax benefit of $0.8 million), or an unfavorable $0.02 per share impact. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. were $83.4 million and adjusted diluted earnings were $0.98 per common share for fiscal 2016. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”


32


Highlights of the Company’s performance for fiscal 2017 compared to the prior year are presented below, followed by a more comprehensive discussion under “Results of Operations”:
Operations
Total net revenue increased 0.2% to $2.21 billion for fiscal 2017, compared to $2.20 billion in the prior year. In constant currency, net revenue increased by 1.0%.
Gross margin (gross profit as a percentage of total net revenue) decreased 200 basis points to 33.7% for fiscal 2017, from 35.7% in the prior year.
Selling, general and administrative (“SG&A”) expenses as a percentage of total net revenue (“SG&A rate”) increased 70 basis points to 30.8% for fiscal 2017, compared to 30.1% in the prior year. SG&A expenses increased 2.7% to $681.9 million for fiscal 2017, compared to $663.8 million in the prior year.
During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, compared to $2.3 million in the prior year.
The Company incurred $6.1 million in restructuring charges during fiscal 2017.
Operating margin decreased 450 basis points to 1.0% for fiscal 2017, from 5.5% in the prior year. Higher asset impairment charges recorded during fiscal 2017 unfavorably impacted operating margin by 150 basis points compared to the prior year. Restructuring charges negatively impacted operating margin by 30 basis points in fiscal 2017. Earnings from operations decreased 81.3% to $22.7 million for fiscal 2017, from $121.4 million in the prior year.
Other income, net (including interest income and expense), totaled $30.9 million for fiscal 2017, compared to $5.9 million in the prior year. During fiscal 2017, the Company recorded a gain of $22.3 million in other income, net related to the sale of a minority interest investment.
The effective income tax rate increased 19.2% to 52.6% for fiscal 2017, compared to 33.4% in the prior year. The Company’s effective tax rate for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million and an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of the global cost reduction and restructuring plan. These items negatively impacted the Company’s effective tax rate by 16.3% in fiscal 2017.
Key Balance Sheet Accounts
The Company had $396.1 million in cash and cash equivalents as of January 28, 2017, compared to $445.5 million at January 30, 2016.
The Company invested $3.5 million to repurchase 289,968 of its common shares during fiscal 2017. During fiscal 2016, the Company invested $44.0 million to repurchase 2,000,000 of its common shares.
The Company purchased the facility that houses its U.S. distribution center for approximately $28.8 million during fiscal 2016. During fiscal 2017, the Company entered into a ten-year $21.5 million real estate secured loan to partially finance this purchase.
Accounts receivable, which consists of trade receivables relating primarily to the Company’s wholesale business in Europe and, to a lesser extent, to its wholesale businesses in the Americas and Asia, royalty receivables relating to its licensing operations and certain other receivables, increased by $3.1 million, or 1.4%, to $225.5 million as of January 28, 2017, compared to $222.4 million at January 30, 2016. On a constant currency basis, accounts receivable increased by $5.5 million, or 2.5%.
Inventory increased by $55.7 million, or 17.9%, to $367.4 million as of January 28, 2017, compared to $311.7 million at January 30, 2016. On a constant currency basis, inventory increased by $55.9 million, or 17.9%.


33


Global Store Count
In fiscal 2017, together with our partners, we opened 165 new stores worldwide, consisting of 73 stores in Asia, 65 stores in Europe and the Middle East, 13 stores in the U.S., seven stores in Canada and seven stores in Central and South America. Together with our partners, we closed 124 stores worldwide, consisting of 59 stores in Asia, 30 stores in Europe and the Middle East, 15 stores in the U.S., 11 stores in Central and South America and nine stores in Canada.
We ended fiscal 2017 with 1,680 stores worldwide, comprised as follows:
Region
 
Total Stores
 
Directly
Operated Stores
 
Licensee Stores
United States
 
341

 
339

 
2

Canada
 
111

 
111

 

Central and South America
 
95

 
51

 
44

Total Americas
 
547

 
501

 
46

Europe and the Middle East
 
629

 
336

 
293

Asia
 
504

 
108

 
396

Total
 
1,680

 
945

 
735

This store count does not include 446 concessions located primarily in South Korea and Greater China, which have been excluded because of their smaller store size in relation to our standard international store size. Of the total 1,680 stores, 1,320 were GUESS? stores, 215 were GUESS? Accessories stores, 74 were G by GUESS stores and 71 were MARCIANO stores.
Results of Operations
The following table sets forth actual operating results for the fiscal years 2017, 2016 and 2015 as a percentage of net revenue:
 
Year Ended
 
Jan 28,
2017
 
Jan 30,
2016
 
Jan 31,
2015
Product sales
95.9
 %
 
95.3
 %
 
95.4
 %
Net royalties
4.1

 
4.7

 
4.6

Net revenue
100.0

 
100.0

 
100.0

Cost of product sales
66.3

 
64.3

 
64.1

Gross profit
33.7

 
35.7

 
35.9

Selling, general and administrative expenses
30.8

 
30.1

 
29.7

Asset impairment charges
1.6

 
0.1

 
1.0

Restructuring charges
0.3

 

 

Earnings from operations
1.0

 
5.5

 
5.2

Interest expense
(0.1
)
 
(0.0
)
 
(0.1
)
Interest income
0.1

 
0.0

 
0.1

Other income, net
1.4

 
0.3

 
0.7

Earnings before income tax expense
2.4

 
5.8

 
5.9

Income tax expense
1.3

 
2.0

 
1.9

Net earnings
1.1

 
3.8

 
4.0

Net earnings attributable to noncontrolling interests
0.1

 
0.1

 
0.1

Net earnings attributable to Guess?, Inc. 
1.0
 %
 
3.7
 %
 
3.9
 %


34


Fiscal 2017 Compared to Fiscal 2016
Consolidated Results
Net Revenue.   Net revenue increased by $5.1 million, or 0.2%, to $2.21 billion for fiscal 2017, compared to $2.20 billion in fiscal 2016. In constant currency, net revenue increased by 1.0% as currency translation fluctuations relating to our foreign operations unfavorably impacted net revenue by $17.2 million compared to the prior year.
Gross Margin.   Gross margin decreased 200 basis points to 33.7% for fiscal 2017, from 35.7% in fiscal 2016, of which 120 basis points was due to lower overall product margins and 80 basis points was due to a higher occupancy rate. The lower overall product margins were due primarily to more markdowns in Americas Retail. The higher occupancy rate was driven primarily by the negative impact on the Company’s fixed cost structure resulting from negative comparable store sales in Americas Retail.
Gross Profit.   Gross profit decreased by $42.4 million, or 5.4%, to $745.0 million for fiscal 2017, from $787.4 million in fiscal 2016. The decrease in gross profit, which included the unfavorable impact of currency translation, was due primarily to lower overall product margins and higher occupancy costs resulting from retail expansion in our international markets. Currency translation fluctuations relating to our foreign operations unfavorably impacted gross profit by $6.5 million.
The Company includes inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including rent and depreciation, and a portion of the Company’s distribution costs related to its retail business in cost of product sales. The Company’s gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company, generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like the Company, include retail store occupancy costs in cost of product sales.
SG&A Rate. The Company’s SG&A rate increased 70 basis points to 30.8% for fiscal 2017, compared to 30.1% in fiscal 2016, due primarily to the unfavorable impact from segment mix, partially offset by lower performance-based compensation costs.
SG&A Expenses. SG&A expenses increased by $18.1 million, or 2.7%, to $681.9 million for fiscal 2017, compared to $663.8 million in fiscal 2016. The increase, which included the favorable impact of currency translation, was driven by higher investments to support our expansion, partially offset by lower current-year performance-based compensation costs and prior-year charges for legal matters of $7.0 million. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by $3.6 million.
Asset Impairment Charges. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, compared to $2.3 million in the prior year. The higher asset impairment charges during fiscal 2017 related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. Currency translation fluctuations relating to our foreign operations unfavorably impacted asset impairment charges by $0.5 million.
Restructuring Charges. During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. These actions resulted in restructuring charges of $6.1 million incurred during fiscal 2017.
Operating Margin. Operating margin decreased 450 basis points to 1.0% for fiscal 2017, from 5.5% in fiscal 2016. Higher asset impairment charges recorded during fiscal 2017 unfavorably impacted operating margin by 150 basis points compared to the prior year. Restructuring charges negatively impacted operating margin by 30 basis points in fiscal 2017. Currency exchange rate fluctuations negatively impacted operating margin by approximately 70 basis points.


35


Earnings from Operations. Earnings from operations decreased by $98.6 million, or 81.3%, to $22.7 million for fiscal 2017, from $121.4 million in fiscal 2016. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $3.6 million.
Interest Expense, Net.   Interest expense, net was minimal for fiscal 2017, compared to $0.9 million in fiscal 2016 and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges.
Other Income, Net.   Other income, net was $30.9 million for fiscal 2017, compared to $6.8 million in fiscal 2016. Other income, net in fiscal 2017 consisted primarily of a realized gain of $22.3 million from the sale of a minority interest investment. Other income, net in fiscal 2016 consisted primarily of net realized and unrealized mark-to-market revaluation gains on foreign exchange currency contracts and realized gains on the sale of other assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances.
Income Tax Expense.  Income tax expense for fiscal 2017 was $28.2 million, or a 52.6% effective tax rate, compared to $42.5 million, or a 33.4% effective tax rate, in fiscal 2016. The increase in the effective income tax rate was due primarily to more losses incurred in certain foreign jurisdictions where the Company has valuation allowances, partially offset by the favorable impact of a lower tax rate on the gain from the sale of a minority interest investment during fiscal 2017 compared to the prior year. The Company’s effective tax rate for fiscal 2017 included the impact of a valuation allowance established on certain deferred tax assets of $6.8 million, a portion of which were generated from asset impairment charges recorded during fiscal 2017, and an estimated exit tax charge of $1.9 million related to the Company’s reorganization in Europe as a result of the global cost reduction and restructuring plan. These items negatively impacted the Company’s effective tax rate by 16.3% in fiscal 2017.
Net Earnings Attributable to Noncontrolling Interests.   Net earnings attributable to noncontrolling interests for fiscal 2017 was $2.6 million, net of taxes, compared to $3.0 million, net of taxes, in fiscal 2016.
Net Earnings Attributable to Guess?, Inc.   Net earnings attributable to Guess?, Inc. decreased by $59.1 million, or 72.2%, to $22.8 million for fiscal 2017, from $81.9 million in fiscal 2016. Diluted earnings per share decreased to $0.27 per share for fiscal 2017, from $0.96 per share in fiscal 2016. During fiscal 2017, the Company recognized asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain from the sale of a minority interest investment of $22.3 million (or a combined $14.5 million after considering the net $12.5 million tax benefit resulting from the asset impairment charges, restructuring charges and the sale of the minority interest investment), or an unfavorable $0.17 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were $37.2 million and adjusted diluted earnings were $0.44 per common share for fiscal 2017. We estimate that the negative impact from currency fluctuations on diluted earnings per common share for fiscal 2017 was approximately $0.13 per share. During fiscal 2016, the Company also recognized asset impairment charges of $2.3 million (or $1.5 million after considering the related tax benefit of $0.8 million), or an unfavorable $0.02 per share impact. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. were $83.4 million and adjusted diluted earnings were $0.98 per common share for fiscal 2016. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”


36


Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for the last two fiscal years (dollars in thousands):
 
Fiscal 2017
 
Fiscal 2016
 
Change
 
% Change
Net revenue:
 
 
 
 
 
 
 
Americas Retail
$
935,479

 
$
981,942

 
$
(46,463
)
 
(4.7
%)
Europe
791,673

 
727,144

 
64,529

 
8.9

Asia
250,363

 
241,571

 
8,792

 
3.6

Americas Wholesale
141,019

 
149,797

 
(8,778
)
 
(5.9
)
Licensing
90,834

 
103,857

 
(13,023
)
 
(12.5
)
Total net revenue
$
2,209,368

 
$
2,204,311

 
$
5,057

 
0.2
%
Earnings (loss) from operations:
 
 
 
 
 
 

Americas Retail (1)
$
(56,757
)
 
$
16,222

 
$
(72,979
)
 
(449.9
%)
Europe (1)
57,044

 
55,438

 
1,606

 
2.9

Asia (1)
(2,492
)
 
10,448

 
(12,940
)
 
(123.9
)
Americas Wholesale
22,489

 
27,525

 
(5,036
)
 
(18.3
)
Licensing
80,365

 
92,172

 
(11,807
)
 
(12.8
)
Corporate Overhead
(71,858
)
 
(80,455
)
 
8,597

 
(10.7
)
Restructuring Charges
(6,083
)
 

 
(6,083
)
 
 
Total earnings from operations
$
22,708

 
$
121,350

 
$
(98,642
)
 
(81.3
%)
Operating margins:
 
 
 
 
 
 
 
Americas Retail (1)
(6.1
%)
 
1.7
%
 
 
 
 
Europe (1)
7.2
%
 
7.6
%
 
 
 
 
Asia (1)
(1.0
%)
 
4.3
%
 
 
 
 
Americas Wholesale
15.9
%
 
18.4
%
 
 
 
 
Licensing
88.5
%
 
88.7
%
 
 
 
 
Total Company
1.0
%
 
5.5
%
 
 
 
 
_______________________________________________________________________
(1)
During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. During fiscal 2017, the Company recorded asset impairment charges related to its Americas Retail, Europe and Asia segments of $33.9 million, $0.2 million and $0.3 million, respectively. During fiscal 2016, the Company recorded asset impairment charges related to its Americas Retail, Europe and Asia segments of $1.6 million, $0.6 million and $0.1 million, respectively.
Americas Retail
Net revenue from our Americas Retail segment decreased by $46.5 million, or 4.7%, to $935.5 million for fiscal 2017, from $981.9 million in fiscal 2016. In constant currency, net revenue decreased by 4.1% compared to the prior year, driven primarily by the unfavorable impact from negative comparable store sales and net store closures. Comparable store sales (including e-commerce) in the U.S. and Canada decreased 4.9% in U.S. dollars and 4.5% in constant currency, which excludes the unfavorable translation impact from currency fluctuations relating to our Canadian retail stores and e-commerce sites. E-commerce sales increased by $2.9 million, or 3.2%, to $92.4 million for fiscal 2017, compared to $89.5 million in fiscal 2016. The inclusion of our e-commerce sales improved the comparable store sale percentage by 0.8% in U.S. dollars and 0.9% in constant currency. The store base for the U.S. and Canada decreased by an average of 11 net stores in fiscal 2017 compared to the prior year, resulting in a 0.8% net decrease in average square footage. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites unfavorably impacted net revenue by $6.4 million.
Operating margin decreased 780 basis points to negative 6.1% for fiscal 2017, from 1.7% in fiscal 2016. Higher asset impairment charges recorded during fiscal 2017 negatively impacted the operating margin for the Company’s Americas Retail segment by 360 basis points compared to the prior year. Excluding the impact of the asset impairment charges, operating margin for the Company’s Americas Retail segment decreased by 420 basis points compared to the prior year, due to lower gross margins and a higher SG&A rate. The lower gross margins were driven primarily


37


by more markdowns and the negative impact on the fixed cost structure resulting from negative comparable store sales. The higher SG&A rate was due primarily to the negative impact on the fixed cost structure resulting from negative comparable store sales.
Loss from operations from our Americas Retail segment was $56.8 million for fiscal 2017, compared to earnings from operations of $16.2 million in fiscal 2016. The deterioration reflects the impact on earnings from higher asset impairment charges, negative comparable store sales and lower product margins. During fiscal 2017, the Company recognized asset impairment charges resulting from under-performance and expected store closures in its Americas Retail segment of $33.9 million, compared to $1.6 million in the prior year. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites unfavorably impacted earnings from operations by $0.5 million.
Europe
Net revenue from our Europe segment increased by $64.5 million, or 8.9%, to $791.7 million for fiscal 2017, compared to $727.1 million in fiscal 2016. In constant currency, net revenue increased by 9.2% compared to the prior year, driven primarily by the favorable impact from retail expansion and a percentage increase in the high-single digits for comparable store sales, partially offset by lower shipments in our European wholesale business. As of January 28, 2017, we directly operated 336 stores in Europe compared to 280 stores at January 30, 2016, excluding concessions, which represents a 20.0% increase over the prior year. Currency translation fluctuations relating to our European operations unfavorably impacted net revenue by $2.4 million.
Operating margin decreased 40 basis points to 7.2% for fiscal 2017, from 7.6% in fiscal 2016, due to lower gross margins, partially offset by a lower SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations, partially offset by the favorable impact from positive comparable store sales. The lower SG&A rate was driven by the favorable impact on the fixed cost structure resulting from overall leveraging of expenses.
Earnings from operations from our Europe segment increased by $1.6 million, or 2.9%, to $57.0 million for fiscal 2017, compared to $55.4 million in fiscal 2016. The increase was due to the favorable impact on earnings from higher revenue, partially offset by higher occupancy costs and store selling expenses due to retail expansion. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by $1.2 million.
Asia
Net revenue from our Asia segment increased by $8.8 million, or 3.6%, to $250.4 million for fiscal 2017, compared to $241.6 million in fiscal 2016. In constant currency, net revenue increased by 4.9% compared to the prior year, driven primarily by retail expansion and positive comparable stores in China. As of January 28, 2017, we and our partners operated 504 stores and 384 concessions in Asia, compared to 490 stores and 416 concessions at January 30, 2016. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by $3.1 million.
Operating margin decreased 530 basis points to negative 1.0% for fiscal 2017, from 4.3% in fiscal 2016. The decrease in operating margin was driven primarily by a higher SG&A rate and lower gross margins. The higher SG&A rate was driven primarily by higher expenses resulting from retail expansion in China and country mix. The lower gross margins were driven by higher occupancy costs due to retail expansion in China and the unfavorable impact from country mix.
Loss from operations from our Asia segment was $2.5 million for fiscal 2017, compared to earnings from operations of $10.4 million in fiscal 2016. The deterioration was driven by higher SG&A expenses and occupancy costs due primarily to expansion in China.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreased by $8.8 million, or 5.9%, to $141.0 million for fiscal 2017, from $149.8 million in fiscal 2016. In constant currency, net revenue decreased by 2.4% compared to the prior year, driven primarily by lower shipments in our U.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted net revenue by $5.2 million.


38


Operating margin decreased 250 basis points to 15.9% for fiscal 2017, from 18.4% in fiscal 2016, driven by lower gross margins and a higher SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations on product costs and lower initial markups. The higher SG&A rate was due primarily to overall deleveraging.
Earnings from operations from our Americas Wholesale segment decreased by $5.0 million, or 18.3%, to $22.5 million for fiscal 2017, from $27.5 million in fiscal 2016. The decrease was driven by the negative impact on earnings from lower product margins and lower revenue. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted earnings from operations by $1.6 million.
Licensing
Net royalty revenue from our Licensing segment decreased by $13.0 million, or 12.5%, to $90.8 million for fiscal 2017, from $103.9 million in fiscal 2016. The decrease was driven primarily by overall softness in our licensing business, particularly in our watch and footwear categories.
Earnings from operations from our Licensing segment decreased by $11.8 million, or 12.8%, to $80.4 million for fiscal 2017, from $92.2 million in fiscal 2016. The decrease was driven primarily by the unfavorable impact to earnings from lower revenue.
Corporate Overhead
Unallocated corporate overhead decreased by $8.6 million to $71.9 million for fiscal 2017, from $80.5 million in fiscal 2016. The decrease was driven primarily by lower current-year performance-based compensation costs and prior-year charges for legal matters of $7.0 million.
 
Fiscal 2016 Compared to Fiscal 2015
Consolidated Results
Net Revenue. Net revenue decreased by $213.4 million, or 8.8%, to $2.20 billion for fiscal 2016, from $2.42 billion in fiscal 2015. In constant currency, net revenue decreased by 0.9% as currency translation fluctuations relating to our foreign operations unfavorably impacted net revenue by $190.6 million compared to the prior year.
Gross Margin. Gross margin decreased 20 basis points to 35.7% for fiscal 2016, from 35.9% in fiscal 2015, due primarily to the negative impact from currency exchange rate fluctuations on product costs, partially offset by higher initial mark-ups in our Europe and Americas Retail segments.
Gross Profit. Gross profit decreased by $80.5 million, or 9.3%, to $787.4 million for fiscal 2016, from $867.9 million in fiscal 2015. Currency translation fluctuations relating to our foreign operations unfavorably impacted gross profit by $68.2 million.
SG&A Rate. The Company’s SG&A rate increased 40 basis points to 30.1% for fiscal 2016, compared to 29.7% in fiscal 2015, due primarily to charges related to legal matters during fiscal 2016.
SG&A Expenses. SG&A expenses decreased by $53.4 million, or 7.4%, to $663.8 million for fiscal 2016, from $717.2 million in fiscal 2015. The decrease in SG&A expenses was driven by the favorable impact from currency translation fluctuations of $57.9 million, partially offset by charges related to legal matters of $7.0 million during fiscal 2016.
Asset Impairment Charges. During fiscal 2016, the Company recognized asset impairment charges of $2.3 million, compared to $24.8 million in fiscal 2015. The higher asset impairment charges during fiscal 2015 related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures.
Operating Margin. Operating margin increased 30 basis points to 5.5% for fiscal 2016, compared to 5.2% in fiscal 2015. Currency exchange rate fluctuations negatively impacted operating margin by approximately 140 basis points.


39


Earnings from Operations. Earnings from operations decreased by $4.6 million, or 3.6%, to $121.4 million for fiscal 2016, from $125.9 million in fiscal 2015. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $10.3 million.
Interest Expense, Net. Interest expense, net was $0.9 million for both of fiscal 2016 and fiscal 2015 and includes the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges.
Other Income, Net. Other income, net was $6.8 million for fiscal 2016, compared to $18.0 million in fiscal 2015. Other income, net in fiscal 2016 consisted primarily of net realized and unrealized mark-to-market revaluation gains on foreign exchange currency contracts and realized gains on the sale of other assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances. Other income, net in fiscal 2015 consisted primarily of net unrealized and realized mark-to-market revaluation gains on foreign exchange currency contracts.
Income Tax Expense. Income tax expense for fiscal 2016 was $42.5 million, or a 33.4% effective tax rate, compared to income tax expense of $45.8 million, or a 32.0% effective tax rate, in fiscal 2015. The increase in effective tax rate was due primarily to more losses incurred in certain foreign jurisdictions which we were not able to recognize a benefit due to a full valuation allowance and higher non-deductible compensation costs during fiscal 2016 compared to the prior year.
Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable to noncontrolling interests for fiscal 2016 was $3.0 million, net of taxes, compared to $2.6 million, net of taxes, in fiscal 2015.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased by $12.7 million, or 13.4%, to $81.9 million for fiscal 2016, from $94.6 million in fiscal 2015. Diluted earnings per share decreased to $0.96 per share for fiscal 2016, from $1.11 per share in fiscal 2015. During fiscal 2016, the Company recognized asset impairment charges of $2.3 million (or $1.5 million after considering the related tax benefit of $0.8 million), or an unfavorable $0.02 per share impact. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. were $83.4 million and adjusted diluted earnings were $0.98 per common share for fiscal 2016. We estimate that the negative impact from currency fluctuations on diluted earnings per common share for fiscal 2016 was approximately $0.43 per share. During fiscal 2015, the Company also recognized asset impairment charges of $24.8 million (or $16.2 million after considering the related tax benefit of $8.6 million), or an unfavorable $0.19 per share impact. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. were $110.8 million and adjusted diluted earnings were $1.30 per common share for fiscal 2015. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under “Non-GAAP Measures.”


40


Information by Business Segment
The following table presents our net revenue and earnings (loss) from operations by segment for fiscal 2016 and fiscal 2015 (dollars in thousands):
 
Fiscal 2016
 
Fiscal 2015
 
Change
 
% Change
Net revenue:
 
 
 
 
 
 
 
Americas Retail
$
981,942

 
$
1,032,601

 
$
(50,659
)
 
(4.9
%)
Europe
727,144

 
825,136

 
(97,992
)
 
(11.9
)
Asia
241,571

 
281,090

 
(39,519
)
 
(14.1
)
Americas Wholesale
149,797

 
167,707

 
(17,910
)
 
(10.7
)
Licensing
103,857

 
111,139

 
(7,282
)
 
(6.6
)
Total net revenue
$
2,204,311

 
$
2,417,673

 
$
(213,362
)
 
(8.8
%)
Earnings (loss) from operations:
 
 
 
 
 
 
 
Americas Retail (1)
$
16,222

 
$
(13,734
)
 
$
29,956

 
218.1
%
Europe (1)
55,438

 
66,231

 
(10,793
)
 
(16.3
)
Asia (1)
10,448

 
8,013

 
2,435

 
30.4

Americas Wholesale
27,525

 
34,173

 
(6,648
)
 
(19.5
)
Licensing
92,172

 
101,288

 
(9,116
)
 
(9.0
)
Corporate Overhead
(80,455
)
 
(70,059
)
 
(10,396
)
 
14.8

Total earnings from operations
$
121,350

 
$
125,912

 
$
(4,562
)
 
(3.6
%)
Operating margins:
 
 
 
 
 
 
 
Americas Retail (1)
1.7
%
 
(1.3
%)
 
 
 
 
Europe (1)
7.6
%
 
8.0
%
 
 
 
 
Asia (1)
4.3
%
 
2.9
%
 
 
 
 
Americas Wholesale
18.4
%
 
20.4
%
 
 
 
 
Licensing
88.7
%
 
91.1
%
 
 
 
 
Total Company
5.5
%
 
5.2
%
 
 
 
 
_______________________________________________________________________
(1)
During each of the years presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. During fiscal 2016, the Company recorded asset impairment charges related to its Americas Retail, Europe and Asia segments of $1.6 million, $0.6 million and $0.1 million, respectively. During fiscal 2015, the Company recorded asset impairment charges related to its Americas Retail, Europe and Asia segments of $20.1 million, $3.7 million and $1.0 million, respectively.
Americas Retail
Net revenue from our Americas Retail segment decreased by $50.7 million, or 4.9%, to $981.9 million for fiscal 2016, from $1.03 billion in fiscal 2015. In constant currency, net revenue decreased by 1.6% compared to the prior year, driven primarily by the unfavorable impact from net store closures and negative comparable store sales. The store base for the U.S. and Canada decreased by an average of 26 net stores in fiscal 2016 compared to the prior year, resulting in a 4.1% net decrease in average square footage. Comparable store sales (including e-commerce) in the U.S. and Canada decreased 3.6% in U.S. dollars and 0.6% in constant currency, which excludes the unfavorable translation impact from currency fluctuations relating to our Canadian retail stores and e-commerce sites. E-commerce sales increased by $11.1 million, or 14.2%, to $89.5 million for fiscal 2016, compared to $78.4 million in fiscal 2015. The inclusion of our e-commerce sales improved the comparable store sale percentage by 1.6% in U.S. dollars and constant currency. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites unfavorably impacted net revenue by $34.1 million.
Operating margin increased 300 basis points to 1.7% for fiscal 2016, compared to negative 1.3% in fiscal 2015, due to a lower SG&A rate and higher gross margins. The lower SG&A rate was driven by lower asset impairment charges during fiscal 2016 compared to the prior year. The higher gross margins were due primarily to higher initial mark-ups, partially offset by the unfavorable impact from currency exchange rate fluctuations on product costs in Canada and the negative impact on the fixed cost structure resulting from negative comparable store sales.


41


Earnings from operations from our Americas Retail segment was $16.2 million for fiscal 2016, compared to loss from operations of $13.7 million in fiscal 2015. The improvement reflects the impact on earnings from lower asset impairment charges, lower store occupancy costs and lower store selling expenses.
Europe
Net revenue from our Europe segment decreased by $98.0 million, or 11.9%, to $727.1 million for fiscal 2016, from $825.1 million in fiscal 2015. In constant currency, net revenue increased by 3.8% compared to the prior year, driven primarily by the favorable impact on revenue from net store openings and a percentage increase in the mid-single digits for comparable store sales in our directly operated retail stores versus the prior year, partially offset by lower shipments in our European wholesale business. As of January 30, 2016, we directly operated 280 stores in Europe compared to 265 stores at January 31, 2015, excluding concessions, which represents a 5.7% increase over the prior year. Currency translation fluctuations relating to our European operations unfavorably impacted net revenue by $129.4 million.
Operating margin decreased 40 basis points to 7.6% for fiscal 2016, from 8.0% in fiscal 2015, due to lower gross margins, partially offset by a lower SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations on product costs, partially offset by higher initial mark-ups. The lower SG&A rate was due primarily to the favorable impact on the fixed cost structure resulting from positive comparable store sales.
Earnings from operations from our Europe segment decreased by $10.8 million, or 16.3%, to $55.4 million for fiscal 2016, from $66.2 million in fiscal 2015. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by $7.7 million.
Asia
Net revenue from our Asia segment decreased by $39.5 million, or 14.1%, to $241.6 million for fiscal 2016, from $281.1 million in fiscal 2015. In constant currency, net revenue decreased by 8.9% compared to the prior year, driven primarily by lower revenue in South Korea as we completed the phase out of our G by GUESS product line in the region and negative comparable store sales versus the prior year. As of January 30, 2016, we and our partners operated 490 stores and 416 concessions in Asia, compared to 496 stores and 498 concessions at January 31, 2015. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by $14.5 million.
Operating margin increased 140 basis points to 4.3% for fiscal 2016, compared to 2.9% in fiscal 2015. The increase in operating margin was driven primarily by higher gross margins in our South Korea business as we completed the phase out of our G by GUESS product line in the region.
Earnings from operations from our Asia segment increased by $2.4 million, or 30.4%, to $10.4 million for fiscal 2016, compared to $8.0 million in fiscal 2015. The increase was driven by lower store occupancy costs and lower SG&A expenses as we completed the phase out of our G by GUESS product line in South Korea.
Americas Wholesale
Net revenue from our Americas Wholesale segment decreased by $17.9 million, or 10.7%, to $149.8 million for fiscal 2016, from $167.7 million in fiscal 2015. In constant currency, net revenue decreased by 3.1% compared to the prior year, driven primarily by lower shipments in our U.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted net revenue by $12.7 million.
Operating margin decreased 200 basis points to 18.4% for fiscal 2016, from 20.4% in fiscal 2015, driven by lower gross margins due primarily to lower initial mark-ups.
Earnings from operations from our Americas Wholesale segment decreased by $6.6 million, or 19.5%, to $27.5 million for fiscal 2016, from $34.2 million in fiscal 2015. The decrease was driven by the negative impact on earnings from lower gross margins. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted earnings from operations by $2.5 million.


42


Licensing
Net royalty revenue from our Licensing segment decreased by $7.3 million, or 6.6%, to $103.9 million for fiscal 2016, from $111.1 million in fiscal 2015. The decrease was driven primarily by lower sales in our watch category.
Earnings from operations from our Licensing segment decreased by $9.1 million, or 9.0%, to $92.2 million for fiscal 2016, from $101.3 million in fiscal 2015. The decrease was driven primarily by the unfavorable impact to earnings from lower revenue.
Corporate Overhead
Unallocated corporate overhead increased by $10.4 million to $80.5 million for fiscal 2016, compared to $70.1 million in fiscal 2015. The increase was driven primarily by charges related to legal matters of $7.0 million during fiscal 2016.
Non-GAAP Measures
The Company’s reported financial results are presented in accordance with GAAP. The reported net earnings attributable to Guess?, Inc. and diluted earnings per share in fiscal 2017 reflect the impact of (i) asset impairment charges, (ii) restructuring charges and a related estimated exit tax charge, (iii) a gain related to the sale of a minority interest investment, (iv) the tax effects of these adjustments and (v) a valuation allowance established on certain deferred tax assets. The reported net earnings attributable to Guess?, Inc. and diluted earnings per share in fiscal 2016 and fiscal 2015 also reflect the impact of asset impairment charges and the related tax effect. These items affect the comparability of the Company’s reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of the SEC, to exclude the effect of these items. The Company believes that these “non-GAAP” or “adjusted” financial measures are useful for investors to evaluate the comparability of the Company’s operating results and its future outlook when reviewed in conjunction with the Company’s GAAP financial statements. The non-GAAP measures are provided in addition to, and not as alternatives for, the Company’s reported GAAP results.
The adjusted measures for fiscal 2017 exclude the impact of asset impairment charges of $34.4 million, restructuring charges of $6.1 million, a restructuring related estimated exit tax charge of $1.9 million and a valuation allowance established on certain deferred tax assets of $6.8 million, partially offset by a gain related to the sale of a minority interest investment of $22.3 million. During fiscal 2017, the Company recognized impairment charges related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. During the first quarter of fiscal 2017, the Company implemented a global cost reduction and restructuring plan to better align its global cost and organizational structure with its current strategic initiatives. This plan included the consolidation and streamlining of the Company’s business processes and a reduction in its global workforce and other expenses. During fiscal 2017, the Company recorded a valuation allowance on certain deferred tax assets, a portion of which were generated from asset impairment charges recorded during fiscal 2017. These items resulted in a combined $14.5 million impact (after considering the net $12.5 million tax benefit resulting from the asset impairment charges, restructuring charges and the sale of the minority interest investment), or an unfavorable $0.17 per share impact during fiscal 2017. Net earnings attributable to Guess?, Inc. for fiscal 2017 was $22.8 million and diluted earnings per common share for fiscal 2017 was $0.27. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. for fiscal 2017 was $37.2 million and adjusted diluted earnings per common share for fiscal 2017 was $0.44.
The adjusted measures for fiscal 2016 exclude the impact of asset impairment charges of $2.3 million related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. During fiscal 2016, asset impairment charges resulted in a $1.5 million impact (after considering the related tax benefit of $0.8 million), or an unfavorable $0.02 per share impact. Net earnings attributable to Guess?, Inc. for fiscal 2016 was $81.9 million and diluted earnings per common share for fiscal 2016 was $0.96. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. for fiscal 2016 was $83.4 million and adjusted diluted earnings per common share for fiscal 2016 was $0.98.


43


The adjusted measures for fiscal 2015 also exclude the impact of asset impairment charges of $24.8 million related primarily to the impairment of certain retail locations in North America resulting from under-performance and expected store closures. During fiscal 2015, asset impairment charges resulted in a $16.2 million impact (after considering the related tax benefit of $8.6 million), or an unfavorable $0.19 per share impact. Net earnings attributable to Guess?, Inc. for fiscal 2015 was $94.6 million and diluted earnings per common share for fiscal 2015 was $1.11. Excluding the impact of the asset impairment charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. for fiscal 2015 was $110.8 million and adjusted diluted earnings per common share for fiscal 2015 was $1.30.
Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company’s foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current year balance sheet amount is translated into U.S. dollars at the exchange rate in effect at the comparable prior-year period. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.
In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings per share, the Company estimates gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings at the comparable prior-year rates and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy costs, the expansion and remodeling of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, other existing operations, international growth and potential acquisitions. In addition, in the U.S. we need liquidity to fund share repurchases and payment of dividends to our stockholders. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. During the fiscal year ended January 28, 2017, the Company relied primarily on trade credit, available cash, real estate and other operating leases, proceeds from the real estate secured loan, sale of equity investment, and short-term lines of credit and internally generated funds to finance our operations, the purchase of the Company’s U.S. distribution center during the fourth quarter of fiscal 2016, payment of dividends, share repurchases and expansion. The Company anticipates that we will be able to satisfy our ongoing cash requirements during the next twelve months for working capital, capital expenditures, interest and principal payments on our debt, potential acquisitions and investments, share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances supplemented by borrowings under our existing Credit Facility in the U.S. and Canada as well as bank facilities in Europe, as described below under “—Borrowings.”
As of January 28, 2017, the Company had cash and cash equivalents of $396.1 million, of which approximately $85.3 million was held in the U.S. As of January 28, 2017, we have not provided for U.S. federal and state income taxes on the undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. If in the future we decide to repatriate such earnings, we would incur incremental U.S. federal and state income taxes, reduced by allowable foreign tax credits. However, our intent is to keep these funds indefinitely reinvested outside of the U.S. and our current plans do not indicate a need to repatriate them to fund our U.S. cash requirements. The accumulated undistributed earnings of foreign subsidiaries as of January 28, 2017 and January 30, 2016 was approximately $780 million and $797 million, respectively. Due to the complexities associated with the hypothetical calculation, including the availability of foreign tax credits, it is not practicable to determine the unrecognized deferred tax liability related to the undistributed earnings.


44


Excess cash and cash equivalents, which represent the majority of our outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts. Please see “Part I, Item 1A. Risk Factors” for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
The Company has presented below the cash flow performance comparison of the year ended January 28, 2017, versus the year ended January 30, 2016.
Operating Activities
Net cash provided by operating activities was $71.5 million for the fiscal year ended January 28, 2017, compared to $179.4 million for the fiscal year ended January 30, 2016, or a decrease of $107.9 million. The decrease was driven primarily by the unfavorable impact of changes in working capital and lower net earnings during fiscal 2017 compared to the prior year. The change in working capital was driven primarily by higher inventory related to retail expansion in Europe and Asia as well as timing of receipts during fiscal 2017 compared to the prior year.
Investing Activities
Net cash used in investing activities was $50.0 million for the fiscal year ended January 28, 2017, compared to $73.7 million for the fiscal year ended January 30, 2016. Net cash used in investing activities for the fiscal year ended January 28, 2017 included proceeds from the sale of long-term assets of $43.4 million. Net cash used in investing activities for the fiscal year ended January 30, 2016 included the purchase of the Company’s U.S. distribution center for $28.8 million during the fourth quarter of fiscal 2016. Cash used in investing activities related primarily to capital expenditures incurred on retail expansion and the prior-year purchase of the Company’s U.S. distribution center, partially offset by current-year proceeds from the sale of long-term assets. In addition, the cost of any business acquisitions, the settlement of forward exchange currency contracts and proceeds from the sale of investments are also included in cash flows used in investing activities.
The decrease in cash used in investing activities was driven primarily by current-year proceeds from the sale of long-term assets and the prior-year purchase of the Company’s U.S. distribution center, partially offset by a higher level of spending on retail expansion during the fiscal year ended January 28, 2017 compared to the prior year. During the fiscal year ended January 28, 2017, the Company opened 130 directly operated stores compared to 48 directly operated stores that were opened in the prior year.
Financing Activities
Net cash used in financing activities was $68.8 million for the fiscal year ended January 28, 2017, compared to $127.7 million for the fiscal year ended January 30, 2016. Cash used in financing activities related primarily to the payment of dividends, partially offset by proceeds from borrowings of $21.5 million during the fiscal year ended January 28, 2017. In addition, payments related to capital lease obligations, borrowings and debt issuance costs, purchase of redeemable noncontrolling interest, repurchases of shares of the Company’s common stock, capital distributions to noncontrolling interests and proceeds from capital contributions from noncontrolling interests, issuance of common stock under our equity plans and excess tax benefits from share-based compensation are also included in cash flows used in financing activities.
The decrease in net cash used in financing activities was due primarily to lower repurchases of shares of the Company’s common stock and proceeds from the Company’s ten-year $21.5 million real estate secured loan entered into during the fiscal year ended January 28, 2017 to partially finance the $28.8 million purchase of the Company’s U.S. distribution center during the fourth quarter of fiscal 2016. The Company invested $3.5 million to repurchase 289,968 of its common shares during the fiscal year ended January 28, 2017. During the fiscal year ended January 30, 2016, the Company invested $44.0 million to repurchase 2,000,000 of its common shares.
Effect of Exchange Rates on Cash and Cash Equivalents
During the fiscal year ended January 28, 2017, changes in foreign currency translation rates decreased our reported cash and cash equivalents balance by $2.1 million. This compares to a decrease of $15.9 million in cash and cash equivalents driven by changes in foreign currency translation rates during the fiscal year ended January 30, 2016.


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Working Capital
As of January 28, 2017, the Company had net working capital (including cash and cash equivalents) of $698.6 million, compared to $709.2 million at January 30, 2016. The Company’s primary working capital needs are for accounts receivable and inventory. Accounts receivable increased by $3.1 million, or 1.4%, to $225.5 million as of January 28, 2017, compared to $222.4 million at January 30, 2016. The accounts receivable balance consists of trade receivables relating primarily to the Company’s wholesale business in Europe and, to a lesser extent, to its wholesale businesses in the Americas and Asia, royalty receivables relating to its licensing operations and certain other receivables. On a constant currency basis, accounts receivable increased by $5.5 million, or 2.5%, when compared to January 30, 2016. As of January 28, 2017, approximately 51% of our total net trade receivables and 67% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Inventory increased by $55.7 million, or 17.9%, to $367.4 million as of January 28, 2017, from $311.7 million at January 30, 2016. On a constant currency basis, inventory increased by $55.9 million, or 17.9%, when compared to January 30, 2016, driven primarily by retail expansion in Europe and Asia and timing of receipts compared to the prior year.
Contractual Obligations and Commitments
The following table summarizes the Company’s contractual obligations as of January 28, 2017 and the effects such obligations are expected to have on liquidity and cash flow in future periods (dollars in thousands):
 
Payments due by period
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Contractual Obligations:
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
28,312

 
$
1,277

 
$
4,289

 
$
3,294

 
$
19,452

Operating lease obligations (2)
951,059

 
192,493

 
319,918

 
219,446

 
219,202

Purchase obligations (3)
187,128

 
187,128

 

 

 

Benefit obligations (4)
86,503

 
1,861

 
6,807

 
8,512

 
69,323

Total
$
1,253,002

 
$
382,759

 
$
331,014

 
$
231,252

 
$
307,977

Other commercial commitments (5)
$
2,660

 
$
2,660

 
$

 
$

 
$

________________________________________________________________________
(1)
Includes interest payments.
(2)
Does not include rent based on a percentage of annual sales volume, insurance, taxes and common area maintenance charges. In fiscal 2017, these variable charges totaled $124.6 million.
(3)
Purchase obligations represent open purchase orders for raw materials and merchandise at the end of the fiscal year. These purchase orders can be impacted by various factors, including the scheduling of market weeks, the timing of issuing orders, the timing of the shipment of orders and currency fluctuations.
(4)
Includes expected payments associated with the deferred compensation plan and the Supplemental Executive Retirement Plan through fiscal 2050.
(5)
Consists of documentary and standby letters of credit for workers’ compensation, general liability insurance and certain in-transit inventory.
Excluded from the above contractual obligations table is the noncurrent liability for unrecognized tax benefits, including penalties and interest, of $14.6 million. This liability for unrecognized tax benefits has been excluded because the Company cannot make a reliable estimate of the period in which the liability will be settled, if ever.
Off-Balance Sheet Arrangements
Other than certain obligations and commitments included in the table above, we did not have any material off-balance sheet arrangements as of January 28, 2017.


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Dividends
During the first quarter of fiscal 2008, the Company announced the initiation of a quarterly cash dividend of $0.06 per share of the Company’s common stock. Since that time, the Company has continued to pay a quarterly cash dividend, which has subsequently increased to $0.225 per common share.
On March 15, 2017, the Company announced a regular quarterly cash dividend of $0.225 per share on the Company’s common stock. The cash dividend will be paid on April 13, 2017 to shareholders of record as of the close of business on March 29, 2017.
The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions and U.S. and global liquidity.
Share Repurchases
On June 26, 2012, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock. Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice. During fiscal 2017, the Company repurchased 289,968 shares under the program at an aggregate cost of $3.5 million. During fiscal 2016 the Company repurchased 2,000,000 shares under the program at an aggregate cost of $44.0 million. There were no share repurchases during fiscal 2015. As of January 28, 2017, the Company had remaining authority under the program to purchase $448.3 million of its common stock.
Subsequent to year end, the Company repurchased approximately 1.5 million shares under its share repurchase program at an aggregate cost of $17.8 million.
Capital Expenditures
Gross capital expenditures totaled $90.6 million, before deducting lease incentives of $6.1 million, for the fiscal year ended January 28, 2017. This compares to gross capital expenditures of $83.8 million, before deducting lease incentives of $5.9 million, for the fiscal year ended January 30, 2016. During the fiscal year ended January 30, 2016, gross capital expenditures included the purchase of the Company’s U.S. distribution center for approximately $28.8 million.
The Company plans to allocate capital, including capital expenditures and working capital investments, to fund the growth of its retail and e-commerce businesses in Europe and Asia, while reducing its allocation of capital to its retail business in the Americas. Additionally, we plan to continue to invest capital in technology to improve our global structure and support our long-term growth plans. The Company’s investments in capital for the full fiscal year 2018 are planned between $85 million and $95 million. During fiscal 2018, we also expect that working capital will grow in Europe and Asia, while contracting in the Americas.
We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives.
Borrowings
Credit Facilities
On June 23, 2015, the Company entered into a five-year senior secured asset-based revolving credit facility with Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $150 million, including a Canadian sub-facility up to $50 million, subject to a borrowing base. Based on applicable accounts receivable, inventory and eligible cash balances as of January 28, 2017, the Company could have borrowed up to $146 million under the Credit Facility. The Credit Facility has an option to expand the borrowing capacity by up to $150 million subject to certain terms and conditions, including the willingness of existing or new lenders to assume such increased amount. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits, and may be used for working capital and other general corporate purposes.


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All obligations under the Credit Facility are unconditionally guaranteed by the Company and the Company’s existing and future domestic and Canadian subsidiaries, subject to certain exceptions, and are secured by a first priority lien on substantially all of the assets of the Company and such domestic and Canadian subsidiaries, as applicable.
Direct borrowings under the Credit Facility made by the Company and its domestic subsidiaries shall bear interest at the U.S. base rate plus an applicable margin (varying from 0.25%