Company Quick10K Filing
Quick10K
Guess?
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.82 80 $1,510
10-Q 2019-05-04 Quarter: 2019-05-04
10-K 2019-02-02 Annual: 2019-02-02
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2019-06-13 Shareholder Vote
8-K 2019-06-06 Earnings, Exhibits
8-K 2019-04-30 Officers, Other Events
8-K 2019-04-23 Enter Agreement, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-04-22 Enter Agreement, Regulation FD, Other Events, Exhibits
8-K 2019-03-20 Earnings, Exhibits
8-K 2019-02-20 Officers
8-K 2019-01-25 Officers, Regulation FD, Exhibits
8-K 2019-01-25 Officers, Regulation FD, Exhibits
8-K 2018-11-28 Earnings, Exhibits
8-K 2018-10-29 Officers, Exhibits
8-K 2018-08-29 Earnings, Exhibits
8-K 2018-06-19 Shareholder Vote
8-K 2018-06-11 Officers, Other Events
8-K 2018-05-30 Earnings, Exhibits
8-K 2018-03-21 Earnings, Exhibits
8-K 2018-03-12 Regulation FD
8-K 2018-03-09 Officers
8-K 2018-02-20 Officers, Regulation FD, Exhibits
8-K 2018-02-09 Other Events, Exhibits
8-K 2018-01-31 Other Events
JD JD.com 39,810
CTAS Cintas 23,160
CORT Corcept Therapeutics 1,310
TCMD Tactile Systems Technology 1,090
RLGY Realogy Holdings 981
TTI Tetra Technologies 270
FBIZ First Business Financial Services 210
PNTR Pointer Telocation 123
WVFC WVS Financial 33
VRIAC Voya Retirement Insurance & Annuity 0
GES 2019-05-04
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 ges-20190504x10qxex311.htm
EX-31.2 ges-20190504x10qxex312.htm
EX-32.1 ges-20190504x10qxex321.htm
EX-32.2 ges-20190504x10qxex322.htm

Guess? Earnings 2019-05-04

GES 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10q-20190504xges.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 4, 2019
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
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
1444 South Alameda Street
 
Los Angeles, California
90021
(Address of principal executive offices)
(Zip Code)
(213) 765-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
 
 
 
 
 
Common Stock, par value $0.01 per share
 
GES
 
New York Stock Exchange
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 x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
 
 
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 x
As of June 7, 2019, the registrant had 71,642,373 shares of Common Stock, $.01 par value per share, outstanding.
 



GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
May 4, 2019
 
Feb 2, 2019
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
112,933

 
$
210,460

Accounts receivable, net
250,521

 
321,995

Inventories
478,223

 
468,897

Other current assets
76,308

 
87,343

Total current assets
917,985

 
1,088,695

Property and equipment, net
308,136

 
315,558

Goodwill
36,522

 
37,072

Other intangible assets, net
6,282

 
6,934

Deferred tax assets
57,627

 
57,224

Restricted cash
523

 
535

Operating lease right-of-use assets
921,084

 

Other assets
133,601

 
143,187

 
$
2,381,760

 
$
1,649,205

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of borrowings and finance lease obligations
$
49,141

 
$
4,315

Accounts payable
206,738

 
286,657

Accrued expenses and other current liabilities
172,811

 
252,392

Current portion of operating lease liabilities
217,110

 

Total current liabilities
645,800

 
543,364

Convertible senior notes, net
239,394

 

Long-term debt and finance lease obligations, net
34,573

 
35,012

Deferred rent and lease incentives

 
84,893

Long-term operating lease liabilities
764,202

 

Other long-term liabilities
127,939

 
127,438

 
1,811,908

 
790,707

Redeemable noncontrolling interests
4,774

 
4,853

 
 
 
 
Commitments and contingencies (Note 13)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding

 

Common stock, $.01 par value. Authorized 150,000,000 shares; issued 143,041,960 and 142,707,300 shares, outstanding 71,672,866 and 81,379,660 shares, as of May 4, 2019 and February 2, 2019, respectively
717

 
814

Paid-in capital
480,865

 
523,331

Retained earnings
1,036,386

 
1,077,747

Accumulated other comprehensive loss
(132,706
)
 
(126,179
)
Treasury stock, 71,369,094 and 61,327,640 shares as of May 4, 2019 and February 2, 2019, respectively
(837,705
)
 
(638,486
)
Guess?, Inc. stockholders’ equity
547,557

 
837,227

Nonredeemable noncontrolling interests
17,521

 
16,418

Total stockholders’ equity
565,078

 
853,645

 
$
2,381,760

 
$
1,649,205

 
See accompanying notes to condensed consolidated financial statements.

1


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Product sales
$
517,873

 
$
501,505

Net royalties
18,818

 
19,784

Net revenue
536,691

 
521,289

Cost of product sales
354,742

 
347,351

Gross profit
181,949

 
173,938

Selling, general and administrative expenses
204,645

 
198,219

Asset impairment charges
1,775

 
759

Net gains on lease terminations

 
(152
)
Loss from operations
(24,471
)
 
(24,888
)
Other income (expense):
 

 
 

Interest expense
(1,259
)
 
(739
)
Interest income
361

 
977

Other income (expense), net
2,071

 
(2,614
)
 
1,173

 
(2,376
)
 
 
 
 
Loss before income tax benefit
(23,298
)
 
(27,264
)
Income tax benefit
(2,717
)
 
(6,277
)
Net loss
(20,581
)
 
(20,987
)
Net earnings attributable to noncontrolling interests
793

 
234

Net loss attributable to Guess?, Inc.
$
(21,374
)
 
$
(21,221
)
 
 
 
 
Net loss per common share attributable to common stockholders (Note 3):
Basic
$
(0.27
)
 
$
(0.27
)
Diluted
$
(0.27
)
 
$
(0.27
)
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 3):
Basic
79,925

 
79,901

Diluted
79,925

 
79,901


See accompanying notes to condensed consolidated financial statements.


2


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Net loss
$
(20,581
)
 
$
(20,987
)
Other comprehensive income (loss) (“OCI”):
 

 
 

Foreign currency translation adjustment
 
 
 
Gains (losses) arising during the period
(12,067
)
 
(24,572
)
Derivative financial instruments designated as cash flow hedges
 

 
 

Gains arising during the period
4,436

 
7,492

Less income tax effect
(572
)
 
(1,024
)
Reclassification to net loss for (gains) losses realized
(276
)
 
1,879

Less income tax effect
95

 
(263
)
Defined benefit plans
 

 
 

Foreign currency and other adjustments
107

 
343

Less income tax effect
(11
)
 
(32
)
Net actuarial loss amortization
111

 
152

Prior service credit amortization
(10
)
 
(7
)
Less income tax effect
(11
)
 
(20
)
Total comprehensive loss
(28,779
)
 
(37,039
)
Less comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

Net earnings
793

 
234

Foreign currency translation adjustment
310

 
(324
)
Amounts attributable to noncontrolling interests
1,103

 
(90
)
Comprehensive loss attributable to Guess?, Inc.
$
(29,882
)
 
$
(36,949
)

See accompanying notes to condensed consolidated financial statements.


3


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Cash flows from operating activities:
 

 
 

Net loss
$
(20,581
)
 
$
(20,987
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization of property and equipment
17,680

 
15,706

Amortization of other long-term and intangible assets
918

 
793

Amortization of debt discount
213

 

Amortization of debt issuance costs
41

 

Share-based compensation expense
4,468

 
3,958

Unrealized forward contract gains
(34
)
 
(2,584
)
Net loss on disposition of property and equipment and long-term assets
2,250

 
615

Other items, net
82

 
6,810

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
68,482

 
46,957

Inventories
(13,676
)
 
(32,700
)
Prepaid expenses and other assets
(11,681
)
 
(14,024
)
Operating lease assets and liabilities, net
89

 

Accounts payable and accrued expenses
(145,077
)
 
(77,518
)
Other long-term liabilities
325

 
5,398

Net cash used in operating activities
(96,501
)
 
(67,576
)
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(17,865
)
 
(19,004
)
Changes in other assets
521

 

Acquisition of businesses, net of cash acquired

 
(104
)
Net cash settlement of forward contracts
162

 
(941
)
Purchases of investments

 
(828
)
Net cash used in investing activities
(17,182
)
 
(20,877
)
Cash flows from financing activities:
 

 
 

Proceeds from short-term borrowings
78,892

 

Repayments of short-term borrowings
(33,599
)
 

Proceeds from issuance of convertible senior notes
300,000

 

Proceeds from issuance of warrants
28,080

 

Purchase of convertible note hedges
(60,990
)
 

Convertible debt issuance costs
(4,246
)
 

Purchase of equity forward contracts
(68,000
)
 

Repayment of finance lease obligations and borrowings
(586
)
 
(538
)
Dividends paid
(18,642
)
 
(18,246
)
Issuance of common stock, net of tax withholdings on vesting of stock awards
(622
)
 
4,120

Purchase of treasury stock
(201,564
)
 
(23,620
)
Net cash provided by (used in) financing activities
18,723

 
(38,284
)
Effect of exchange rates on cash, cash equivalents and restricted cash
(2,579
)
 
(8,221
)
Net change in cash, cash equivalents and restricted cash
(97,539
)
 
(134,958
)
Cash, cash equivalents and restricted cash at the beginning of the year
210,995

 
367,682

Cash, cash equivalents and restricted cash at the end of the period
$
113,456

 
$
232,724

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
566

 
$
211

Income taxes paid, net of refunds
$
(232
)
 
$
8,403

 
 
 
 
Non-cash investing and financing activity:
 
 
 
Assets acquired under finance lease obligations
$
665

 
$

 
See accompanying notes to condensed consolidated financial statements.

4



GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)

 
For the three months ended May 4, 2019
 
Guess?, Inc. Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Shares
 
Amount
 
Nonredeemable
Noncontrolling
Interests
 
Total
Balance at February 2, 2019
81,379,660

 
$
814

 
$
523,331

 
$
1,077,747

 
$
(126,179
)
 
61,327,640

 
$
(638,486
)
 
$
16,418

 
$
853,645

Cumulative adjustment from adoption of new accounting guidance

 

 

 
(1,684
)
 
1,981

 

 

 

 
297

Net earnings (loss)

 

 

 
(21,374
)
 

 

 

 
793

 
(20,581
)
Foreign currency translation adjustment

 

 

 

 
(12,377
)
 

 

 
310

 
(12,067
)
Gain on derivative financial instruments designated as cash flow hedges

 

 

 

 
3,683

 

 

 

 
3,683

Actuarial valuation and prior service credit amortization and foreign currency and other adjustments on defined benefit plans

 

 

 

 
186

 

 

 

 
186

Issuance of common stock under stock compensation plans including tax effect
545,881

 
5

 
(3,042
)
 

 

 
(211,221
)
 
2,225

 

 
(812
)
Issuance of stock under Employee Stock Purchase Plan
11,377

 
1

 
69

 

 

 
(11,377
)
 
120

 

 
190

Share-based compensation

 

 
4,440

 
28

 

 

 

 

 
4,468

Dividends

 

 

 
(18,331
)
 

 

 

 

 
(18,331
)
Share repurchases
(10,264,052
)
 
(103
)
 
103

 

 

 
10,264,052

 
(201,564
)
 

 
(201,564
)
Equity component value of convertible note issuance, net

 

 
42,324

 

 

 

 

 

 
42,324

Sale of common stock warrant

 

 
28,080

 

 

 

 

 

 
28,080

Purchase of convertible note hedge

 

 
(46,440
)
 

 

 

 

 

 
(46,440
)
Equity forward contract issuance

 

 
(68,000
)
 

 

 

 

 

 
(68,000
)
Balance at May 4, 2019
71,672,866

 
$
717

 
$
480,865

 
$
1,036,386

 
$
(132,706
)
 
71,369,094

 
$
(837,705
)
 
$
17,521

 
$
565,078


5


 
For the three months ended May 5, 2018
 
Guess?, Inc. Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Paid-in
Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Shares
 
Amount
 
Nonredeemable
Noncontrolling
Interests
 
Total
Balance at February 3, 2018
81,371,118

 
$
813

 
$
498,249

 
$
1,132,173

 
$
(93,062
)
 
60,252,569

 
$
(621,354
)
 
$
16,656

 
$
933,475

Cumulative adjustment from adoption of new accounting guidance

 

 

 
5,829

 

 

 

 

 
5,829

Net earnings (loss)

 

 

 
(21,221
)
 

 

 

 
234

 
(20,987
)
Foreign currency translation adjustment

 

 

 

 
(24,248
)
 

 

 
(324
)
 
(24,572
)
Gain on derivative financial instruments designated as cash flow hedges

 

 

 

 
8,084

 

 

 

 
8,084

Actuarial valuation and prior service credit amortization and foreign currency and other adjustments on defined benefit plans

 

 

 

 
436

 

 

 

 
436

Issuance of common stock under stock compensation plans including tax effect
689,341

 
8

 
3,882

 

 

 

 

 

 
3,890

Issuance of stock under Employee Stock Purchase Plan
15,313

 

 
71

 

 

 
(15,313
)
 
159

 

 
230

Share-based compensation

 

 
3,949

 
9

 

 

 

 

 
3,958

Dividends

 

 

 
(18,499
)
 

 

 

 

 
(18,499
)
Share repurchases
(1,118,808
)
 
(11
)
 
11

 

 

 
1,118,808

 
(17,587
)
 

 
(17,587
)
Balance at May 5, 2018
80,956,964

 
$
810

 
$
506,162

 
$
1,098,291

 
$
(108,790
)
 
61,356,064

 
$
(638,782
)
 
$
16,566

 
$
874,257


See accompanying notes to condensed consolidated financial statements.


6


GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 4, 2019
(unaudited) 
(1)
Basis of Presentation and New Accounting Guidance
Description of the Business
Guess?, Inc. (the “Company” or “GUESS?”) designs, markets, distributes and licenses a leading lifestyle collection of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS? owned stores, to a network of wholesale accounts that includes better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of retail store licensees and wholesale distributors.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of May 4, 2019 and February 2, 2019, the condensed consolidated statements of loss, comprehensive loss and cash flows for the three months ended May 4, 2019 and May 5, 2018. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended May 4, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.
The three months ended May 4, 2019 had the same number of days as the three months ended May 5, 2018. All references herein to “fiscal 2020,” “fiscal 2019” and “fiscal 2018” represent the results of the 52-week fiscal year ending February 1, 2020, the 52-week fiscal year ended February 2, 2019 and the 53-week fiscal year ended February 3, 2018, respectively. 
Reclassifications
The Company has made certain reclassifications to prior period amounts to conform to the current period presentation within the accompanying notes to the condensed consolidated financial statements.
Revenue Recognition
The Company recognizes the majority of its revenue from its direct-to-consumer (brick-and-mortar retail stores and concessions as well as e-commerce) and wholesale distribution channels at a point in time when it satisfies a performance obligation and transfers control of the product to the respective customer.
The Company also recognizes royalty revenue from its trademark license agreements. The Company’s trademark license agreements represent symbolic licenses that are dependent on the Company’s continued support over the term of the license agreement. The amount of revenue that is recognized from the licensing arrangements is based on sales-based royalty and advertising fund contributions as well as specific fixed payments, where applicable. The Company’s trademark license agreements customarily provide for a multi-year initial term ranging from three to ten years, and may contain options to renew prior to expiration for an additional multi-year period. The unrecognized portion of upfront payments is included in deferred royalties in accrued expenses and other long-term liabilities depending on the short or long-term nature of the payments to be recognized. As of May 4, 2019, the Company had $6.3 million and $14.1 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively. This compares

7


to $6.4 million and $15.5 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively, at February 2, 2019. During the three months ended May 4, 2019 and May 5, 2018, the Company recognized $3.1 million and $3.3 million in net royalties related to the amortization of the deferred royalties, respectively.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
New Accounting Guidance
Changes in Accounting Policies
In February 2016, the FASB issued a comprehensive new lease standard which superseded previous lease guidance. The standard requires a lessee to recognize an asset related to the right to use the underlying asset and a liability that approximates the present value of the lease payments over the term of contracts that qualify as leases under the new guidance. The standard also requires expanded disclosures surrounding leases. The Company adopted this guidance as of February 3, 2019 using the modified retrospective approach and recorded a cumulative adjustment to increase retained earnings by approximately $0.3 million, net taxes, with no restatement of prior periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carry forward historical lease classification. As of the adoption date, the Company recorded operating lease right-of-use assets and operating lease liabilities of approximately $1.0 billion. The standard did not materially impact the Company’s condensed consolidated statements of loss or cash flows. Refer to Note 2 for the Company’s expanded disclosures on leases.
In August 2017, the FASB issued authoritative guidance to better align the results of hedge accounting with an entity’s risk management activities. This guidance eliminated the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting and generally requires that the entire change in the fair value of such instruments ultimately be presented in the same line as the respective hedge item. As a result, there is no interest component recognized for the ineffective portion of instruments that qualify for hedge accounting, but rather all changes in the fair value of such instruments are included in other comprehensive income (loss). The guidance also reduced the overall complexity of the hedge accounting model, including broadening the scope of risks eligible to qualify for hedge accounting, easing documentation and effectiveness assessment requirements, modifying the treatment of components excluded from the assessment of hedge effectiveness and updating disclosure requirements. In October 2018, the FASB clarified the new hedge accounting guidance by allowing the Secured Overnight Financing Rate to be eligible as a U.S. benchmark interest rate for purposes of applying hedge accounting. The Company adopted this guidance as of February 3, 2019. The adoption of this guidance resulted in a decrease in retained earnings and a decrease in accumulated other comprehensive loss of approximately $2.0 million. Approximately $1.4 million of this gain will be recognized in cost of product sales during fiscal 2020, on a pre-tax basis.
Recently Issued Accounting Guidance
In June 2016, the FASB issued authoritative guidance related to the measurement of credit losses on financial instruments. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2018, which was the Company’s first quarter of fiscal 2020. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued authoritative guidance to simplify the testing for goodwill impairment by removing step two from the goodwill testing. Under current guidance, if the fair value of a reporting unit is lower than its carrying amount (step one), an entity would calculate an impairment charge by comparing the implied fair value of goodwill with its carrying amount (step two). The implied fair value of goodwill was calculated by deducting the fair value of the assets and liabilities of the respective reporting unit from the reporting unit’s fair value as determined under step one. This guidance instead provides that an impairment charge should be recognized based on the difference between a reporting unit’s fair value and its carrying value. This guidance also does not

8


require a qualitative test to be performed on reporting units with zero or negative carrying amounts. However, entities need to disclose any reporting units with zero or negative carrying amounts that have goodwill and the amount of goodwill allocated to each. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements on fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its related disclosures.
In August 2018, the FASB issued authoritative guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years beginning after December 15, 2020, which will be the Company’s first quarter of fiscal 2022, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its related disclosures.
In August 2018, the FASB issued authoritative guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, which will be the Company’s first quarter of fiscal 2021, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.
(2)    Lease Accounting
The Company primarily leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through January 2039. The Company also leases some of its equipment as well as computer hardware and software under operating and finance lease agreements expiring on various dates through May 2027.
The Company determines whether an arrangement is a lease at inception of the agreement and reassesses that conclusion if the agreement is modified. The term of the Company’s leases represents the non-cancelable period of the lease, including any rent-free periods and any options to renew, extend or terminate the lease that the Company is reasonably certain to exercise. The Company determines the term of each lease at lease commencement and revisits that term in subsequent periods if a triggering event occurs which would require reassessment.
Leases with an initial contractual term in excess of 12 months are accounted for as either an operating or finance lease based on certain criteria. Under this new guidance, leases the Company previously referred to as “capital leases” are now referred to as “finance leases.” In connection with the adoption of the new lease standard, the Company elected to apply the group of practical expedients which allows the Company to carry forward its identification of existing contracts that are or contain leases, its historical lease classification and its initial direct costs for existing leases. The Company has also elected to recognize leases with an initial term of 12 months or less on a straight-line basis without recognizing a right-to-use asset or operating lease liability.
The Company’s lease agreements primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such

9


lease payments. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 23%, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately 33% of annual sales volume. Some of these leases require the Company to make periodic payments for insurance, property taxes, sales promotion and common area maintenance charges. The Company has elected the practical expedient to not separate non-lease components from lease components in the measurement of liabilities for its real estate leases. Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to the Company. Lease right-of-use assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable lease liability or lease right-of-use asset. Lease right-of-use assets are amortized over the life of the lease and tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $26 million for leases where the Company has not yet taken possession of the underlying asset as of May 4, 2019. As such, the related operating lease right-of-use assets and operating lease liabilities have not been recognized in the Company’s condensed consolidated balance sheet as of May 4, 2019.
As of May 4, 2019, the components of leases and lease costs are as follows (in thousands):
 
Balance Sheet Location
May 4, 2019
Assets
 
 
Operating
Operating lease right-of-use assets
$
921,084

Finance
Property and equipment, net
15,197

Total lease assets
$
936,281

 
 
 
Liabilities
 
 
Current:
 
 
Operating
Current portion of operating lease liabilities
$
217,110

Finance
Current portion of borrowings and finance lease obligations
1,976

Noncurrent:
 
 
Operating
Long-term operating lease liabilities
764,202

Finance
Long-term debt and finance lease obligations, net
14,591

Total lease liabilities
$
997,879



10


 
Income Statement Location
Three Months Ended May 4, 2019
Operating lease costs1
Cost of product sales
$
58,816

Operating lease costs1
Selling, general and administrative expenses
5,264

Finance lease costs
 
 
Amortization of leased assets2
Cost of product sales
43

Amortization of leased assets2
Selling, general and administrative expenses
543

Interest on lease liabilities
Interest expense
287

Variable lease costs1
Cost of product sales
24,825

Variable lease costs1
Selling, general and administrative expenses
827

Short-term lease costs1
Selling, general and administrative expenses
212

Total lease costs
$
90,817

__________________________________
Notes:
1  
Rental expense for all property and equipment operating leases during the three months ended May 5, 2018 aggregated $72.2 million, including percentage rent of $16.4 million. During the three months ended May 5, 2018, the Company also recognized insurance, taxes, sales promotion and common area maintenance charges totaling $14.9 million related to its operating leases.

2  
Amortization of leased assets related to finance leases are included in depreciation expense in the Company’s condensed consolidated statements of loss.

Maturities of the Company’s operating and finance lease liabilities as of May 4, 2019 are as follows (in thousands):
Maturity of Lease Liabilities
Operating Leases
 
Finance Leases
 
Total
2020 1
$
191,782

 
$
2,309

 
$
194,091

2021
196,564

 
2,819

 
199,383

2022
182,630

 
3,074

 
185,704

2023
151,931

 
2,752

 
154,683

2024
126,256

 
2,620

 
128,876

After 2024
238,400

 
7,625

 
246,025

Total lease payments
1,087,563

 
21,199

 
1,108,762

Less: Interest
106,251

 
4,632

 
110,883

Present value of lease liabilities
$
981,312

 
$
16,567

 
$
997,879

__________________________________
Notes:
1 
Represents the maturity of lease liabilities for the remainder of fiscal 2020 and does not include payments made during the three months ended May 4, 2019.
Other supplemental information as of May 4, 2019 is as follows (dollars in thousands):
Lease Term and Discount Rate
May 4, 2019
Weighted-average remaining lease term (years)
 
Operating leases
6.0 years

Finance leases
7.3 years

Weighted-average discount rate
 
Operating leases
3.6
%
Finance leases
7.2
%


11


Supplemental Cash Flow Information
Three Months Ended May 4, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
62,082

New operating right-of-use assets obtained in exchange for lease liabilities
68,804


(3)
Loss per Share
Basic earnings (loss) per share represents net earnings (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. The Company considers any restricted stock units with forfeitable dividend rights that are issued and outstanding, but considered contingently returnable if certain service conditions are not met, as common equivalent shares outstanding. These restricted stock units are excluded from the weighted average number of common shares outstanding and basic earnings (loss) per share calculation until the respective service conditions have been met. Diluted earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period, and the dilutive impact of the Company’s convertible senior notes, related warrants and equity forward contract related to its accelerated share repurchase agreement, as applicable.
The Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in shares. As a result, upon conversion of the convertible senior notes, only the amounts in excess of the principal amount are considered in diluted earnings per share under the treasury stock method, if applicable. In April 2019, the Company entered into an equity forward contract related to its accelerated share repurchase agreement. Based on the terms of the equity forward contract, the Company may be required to issue shares upon settlement if the Company’s stock price rises above a certain threshold during the agreement period. The Company has included the dilutive impact from any shares it may be obligated to issue in the computation of diluted earnings per share using the contingently issuable share guidance, as applicable. See Note 10 and Note 4 for more information regarding the Company’s convertible senior notes and its accelerated share repurchase agreement.
The potentially dilutive impact of common equivalent shares outstanding is not included in the computation of diluted net loss per share as the impact of the shares would be antidilutive due to the net loss incurred for periods presented. Nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, distributed and undistributed earnings attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted earnings (loss) per common share. However, net losses are not allocated to nonvested restricted stockholders because they are not contractually obligated to share in the losses of the Company.
In addition, the Company has granted certain nonvested stock units that are subject to certain performance-based or market-based vesting conditions as well as continued service requirements through the respective vesting periods. These nonvested stock units are included in the computation of diluted net earnings per common share attributable to common stockholders only to the extent that the underlying performance-based or market-based vesting conditions are satisfied as of the end of the reporting period, or would be considered satisfied if the end of the reporting period was the end of the related contingency period, and the results would be dilutive under the treasury stock method.

12


The computation of basic and diluted net loss per common share attributable to common stockholders is as follows (in thousands, except per share data):
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Net loss attributable to Guess?, Inc.
$
(21,374
)
 
$
(21,221
)
Less net earnings attributable to nonvested restricted stockholders
161

 
198

Net loss attributable to common stockholders
$
(21,535
)
 
$
(21,419
)
 
 
 
 
Weighted average common shares used in basic computations
79,925

 
79,901

Effect of dilutive securities:
 

 
 

Stock options and restricted stock units1

 

Weighted average common shares used in diluted computations
79,925

 
79,901

 
 
 
 
Net loss per common share attributable to common stockholders:
Basic
$
(0.27
)
 
$
(0.27
)
Diluted
$
(0.27
)
 
$
(0.27
)
__________________________________
Notes:
1 
For the three months ended May 4, 2019 and May 5, 2018, there were 1,052,518 and 1,077,017, respectively, of potentially dilutive shares that were not included in the computation of diluted weighted average common shares and common equivalent shares outstanding because their effect would have been antidilutive given the Company’s net loss.
For the three months ended May 4, 2019 and May 5, 2018, equity awards granted for 2,137,004 and 2,895,494, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common equivalent shares outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For the three months ended May 4, 2019, the Company also excluded 1,075,085 nonvested stock units which are subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of May 4, 2019. For the three months ended May 5, 2018, the Company excluded 871,904 nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common equivalent shares outstanding because these conditions were not achieved as of May 5, 2018.
The conversion spread on the Company’s convertible senior notes will have a dilutive impact on diluted earnings per share when the average market price of the Company’s common stock for a given period exceeds the conversion price of $25.78 per share of common stock. For the three months ended May 4, 2019, the convertible senior notes have been excluded from the computation of diluted earnings per share as the effect would be antidilutive since the conversion price of the convertible senior notes exceeded the average market price of the Company’s common stock. Warrants to purchase 11.6 million shares of the Company’s common shares at $46.88 per share were outstanding as of May 4, 2019 but were excluded from the computation of diluted earnings per share since the warrants’ strike price was greater than the average market price of the Company’s common stock during the period. There was no dilutive impact from the Company’s equity forward contact related to its accelerated share repurchase program as of May 4, 2019. See Note 10 and Note 4 for more information regarding the Company’s convertible senior notes and its accelerated share repurchase agreement.

(4)
Stockholders’ Equity
Share Repurchase Program
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

13


under the program, which may be discontinued at any time, without prior notice. During the three months ended May 4, 2019, the Company repurchased 10,264,052 shares under the program at an aggregate cost of $201.6 million, which is inclusive of the shares repurchased under the accelerated share repurchase agreement (the “ASR Contract”) as described below. During the three months ended May 5, 2018, the Company repurchased 1,118,808 shares under the program at an aggregate cost of $17.6 million. As of May 4, 2019, the Company had remaining authority under the program to purchase $105.1 million of its common stock.
On April 26, 2019, pursuant to existing stock repurchase authorizations, the Company entered into an ASR Contract with JPMorgan Chase Bank, National Association (in such capacity, the “ASR Counterparty”), to repurchase an aggregate of $170 million of the Company’s common stock. Under the ASR Contract, the Company made an initial payment of $170 million to the ASR Counterparty and received an initial delivery of approximately 5.2 million shares of common stock, which represented approximately $102 million (or 60%) of the ASR Contract. The remaining balance of $68 million was classified as an equity forward contract and recorded in additional paid-in capital within shareholders’ equity as of May 4, 2019. The exact number of shares the Company will repurchase under the ASR Contract will be based generally upon the average daily volume weighted average price of the common stock during the repurchase period, less a discount. At settlement, under certain circumstances, the ASR Counterparty may be required to deliver additional shares of common stock to the Company, or under certain circumstances, the Company may be required either to deliver shares of common stock or to make a cash payment to the ASR Counterparty. Final settlement of the transactions under the ASR Contract is expected to occur by the end of the third quarter of calendar 2019. The terms of the ASR Contract are subject to adjustment, including, but not limited to, adjustments arising if the Company were to enter into or announce certain types of transactions or to take certain corporate actions. The ASR Contract contains the principal terms and provisions governing the accelerated share repurchases, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the circumstances under which the ASR Counterparty is permitted to make adjustments to valuation and calculation periods and various acknowledgments, representations and warranties made by the Company and the ASR Counterparty to one another.
Dividends
The following table sets forth the cash dividend declared per share for the three months ended May 5, 2018 and May 4, 2019:
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Cash dividend declared per share
$
0.225

 
$
0.225

During the first quarter of fiscal 2020, the Company announced that its Board of Directors intends to reduce future quarterly cash dividends that may be paid to holders of the Company’s common stock, when, as and if any such dividend is declared by the Company’s Board of Directors, from $0.225 per share to $0.1125 per share to redeploy capital and return incremental value to shareholders through share repurchases. Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of the Company’s Board of Directors, which reserves the right to change or terminate the Company’s dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future 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.


14


Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three months ended May 4, 2019 and May 5, 2018 are as follows (in thousands):
 
Three Months Ended May 4, 2019
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at February 2, 2019
$
(119,546
)
 
$
2,999

 
$
(9,632
)
 
$
(126,179
)
Cumulative adjustment reclassified from retained earnings due to adoption of new accounting guidance1

 
1,981

 

 
1,981

Gains (losses) arising during the period
(12,377
)
 
3,864

 
96

 
(8,417
)
Reclassification to net loss for (gains) losses realized

 
(181
)
 
90

 
(91
)
Net other comprehensive income (loss)
(12,377
)
 
3,683

 
186

 
(8,508
)
Balance at May 4, 2019
$
(131,923
)
 
$
8,663

 
$
(9,446
)
 
$
(132,706
)
__________________________________
Notes:
1 
During the three months ended May 4, 2019, the Company adopted new authoritative guidance which eliminated the requirement to separately measure and report ineffectiveness for instruments that qualify for hedge accounting and generally requires that the entire change in the fair value of such instruments ultimately be presented in the same line as the respective hedge item. As a result, there is no interest component recognized for the ineffective portion of instruments that qualify for hedge accounting, but rather all changes in the fair value of such instruments are included in other comprehensive income (loss) beginning during the three months ended May 4, 2019. Upon adoption of this guidance, the Company reclassified $2.0 million in gains from retained earnings to accumulated other comprehensive loss related to the previously recorded interest component on outstanding instruments that qualified for hedge accounting.
 
Three Months Ended May 5, 2018
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at February 3, 2018
$
(67,049
)
 
$
(14,369
)
 
$
(11,644
)
 
$
(93,062
)
Gains (losses) arising during the period
(24,248
)
 
6,468

 
311

 
(17,469
)
Reclassification to net loss for losses realized

 
1,616

 
125

 
1,741

Net other comprehensive income (loss)
(24,248
)
 
8,084

 
436

 
(15,728
)
Balance at May 5, 2018
$
(91,297
)
 
$
(6,285
)
 
$
(11,208
)
 
$
(108,790
)

15


Details on reclassifications out of accumulated other comprehensive income (loss) to net loss during the three months ended May 4, 2019 and May 5, 2018 are as follows (in thousands):
 
Three Months Ended
Location of (Gain) Loss Reclassified from Accumulated OCI into Loss
 
May 4, 2019
 
May 5, 2018
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
   Foreign exchange currency contracts
$
(230
)
 
$
1,686

Cost of product sales
   Foreign exchange currency contracts

 
201

Other income/expense
   Interest rate swap
(46
)
 
(8
)
Interest expense
      Less income tax effect
95

 
(263
)
Income tax expense
 
(181
)
 
1,616

 
Defined benefit plans:
 
 
 
 
   Net actuarial loss amortization
111

 
152

Other income (expense)
   Prior service credit amortization
(10
)
 
(7
)
Other income (expense)
      Less income tax effect
(11
)
 
(20
)
Income tax expense
 
90

 
125

 
Total reclassifications during the period
$
(91
)
 
$
1,741

 

(5)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
May 4, 2019
 
Feb 2, 2019
Trade
$
244,271

 
$
314,651

Royalty
6,779

 
5,992

Other
8,137

 
9,892

 
259,187

 
330,535

Less allowances
8,666

 
8,540

 
$
250,521

 
$
321,995

Accounts receivable 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, credit card and retail concession receivables related to its retail businesses and certain other receivables. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Company’s products or collection of royalties.
(6)
Inventories
Inventories consist of the following (in thousands):
 
May 4, 2019
 
Feb 2, 2019
Raw materials
$
671

 
$
881

Work in progress
88

 
162

Finished goods
477,464

 
467,854

 
$
478,223

 
$
468,897

The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $27.6 million and $30.9 million as of May 4, 2019 and February 2, 2019, respectively.
(7)
Income Taxes
Income tax expense for the interim periods was computed using the tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items. The Company’s effective income tax rate was a benefit of 11.7% for the three months ended May 4, 2019, compared to a benefit of 23.0% for the three months ended May 5, 2018.

16


The change in the effective income tax rate during the three months ended May 4, 2019 was due primarily to the impact of discrete non-deductible expenses as compared to the same prior-year period and a shift in the distribution of earnings among the Company’s tax jurisdictions within the quarters of the current fiscal year.
In December 2017, the U.S. government enacted the Tax Reform, which significantly changed the U.S. corporate income tax laws, including lowering the U.S. federal corporate income tax rate from 35% to 21% and requiring a one-time mandatory transition tax on accumulated foreign earnings. The Tax Reform also established new tax laws that were effective for calendar 2018, including but not limited to (i) a new provision designed to tax global intangible low-taxed income (“GILTI”), (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (iii) a limitation on deductible interest expense and (iv) limitations on the deductibility of certain executive compensation. Any income tax payable related to the transition tax is due over an eight-year period beginning in calendar 2018. Based on the Company’s interpretation of the Tax Reform, reasonable estimates were made to record provisional adjustments during the fourth quarter of fiscal 2018. During the third quarter of fiscal 2019, the Company completed the preparation of its U.S. federal tax return for fiscal 2018 and concluded, based on the additional information that had become available, that no transition tax was due with respect to the Tax Reform. As a result, during the third quarter of fiscal 2019, the Company reversed a portion of provisional amounts initially recorded during the three months ended February 3, 2018 and recorded a benefit of $19.6 million. On November 28, 2018, the U.S. Internal Revenue Service (“IRS”) announced a proposed regulation to revise the section of the underlying IRS code which gave rise to the Company’s change in the provisional calculation. In the event such proposed legislation is passed in the future, the Company could have tax liabilities of approximately $25.8 million. Therefore, the Company accrued such amount in the fourth quarter of 2019. The balance related to this transition tax included in other long-term liabilities was $25.8 million as of May 4, 2019 and February 2, 2019.
From time-to-time, the Company is subject to routine income tax audits on various tax matters around the world in the ordinary course of business. As of May 4, 2019, several income tax audits were underway for various periods in multiple jurisdictions. The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, will incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.
The Company had aggregate accruals for uncertain tax positions, including penalties and interest, of $38.7 million and $41.4 million as of May 4, 2019 and February 2, 2019, respectively.

17


(8)
Segment Information
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale, Europe, Asia and Licensing. The Company’s Americas Retail, Americas Wholesale, Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of the Company’s Asia operating segment are separate operating segments based on region, which have been aggregated into the Asia reportable segment for disclosure purposes. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, net gains (losses) from lease terminations, asset impairment charges, restructuring charges, and other non-recurring charges, if any. The Company believes this segment reporting reflects how its business segments are managed and how each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The Americas Retail segment includes the Company’s retail and e-commerce operations in the Americas. The Americas Wholesale segment includes the Company’s wholesale operations in the Americas. 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 and the Pacific. 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, net gains (losses) on lease terminations, asset impairment charges and restructuring charges and certain non-recurring charges, if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal.
Net revenue and earnings (loss) from operations are summarized as follows for the three months ended May 4, 2019 and May 5, 2018 (in thousands):    
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Net revenue:
 

 
 

Americas Retail
$
176,423

 
$
171,340

Americas Wholesale
46,205

 
40,679

Europe
210,055

 
205,435

Asia
85,190

 
84,051

Licensing
18,818

 
19,784

Total net revenue
$
536,691

 
$
521,289

Earnings (loss) from operations:
 

 
 

Americas Retail
$
(1,812
)
 
$
(5,680
)
Americas Wholesale
7,814

 
6,026

Europe
(16,327
)
 
(20,333
)
Asia
(3,203
)
 
4,065

Licensing
16,644

 
17,486

Total segment earnings from operations
3,116

 
1,564

Corporate overhead
(25,812
)
 
(25,845
)
Asset impairment charges1
(1,775
)
 
(759
)
Net gains on lease terminations2

 
152

Total loss from operations
$
(24,471
)
 
$
(24,888
)
__________________________________
Notes:
1 
During each of the periods presented, the Company recognized asset impairment charges for certain retail locations resulting from under-performance and expected store closures. Refer to Note 15 for more information regarding these asset impairment charges.  
2 
During the three months ended May 5, 2018, the Company recorded net gains on lease terminations related primarily to the early termination of certain lease agreements in North America.

18


The table below presents information regarding geographic areas in which the Company operated. Net revenue is classified primarily based on the country where the Company’s customer is located (in thousands):
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Net revenue:
 

 
 

U.S.
$
164,371

 
$
153,310

Italy
50,435

 
57,671

Canada
38,581

 
39,520

South Korea
33,917

 
37,632

Other foreign countries
230,569

 
213,372

Total product sales
517,873

 
501,505

Net royalties
18,818

 
19,784

Net revenue
$
536,691

 
$
521,289

Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.
(9)
Borrowings and Finance Lease Obligations
Borrowings and finance lease obligations are summarized as follows (in thousands):
 
May 4, 2019
 
Feb 2, 2019
Mortgage debt, maturing monthly through January 2026
$
19,587

 
$
19,738

Finance lease obligations
16,567

 
16,702

Borrowings under credit facilities
44,824

 

Other
2,736

 
2,887

 
83,714

 
39,327

Less current installments
49,141

 
4,315

Long-term debt and finance lease obligations
$
34,573

 
$
35,012

Mortgage Debt
On February 16, 2016, the Company entered into a ten-year $21.5 million real estate secured loan (the “Mortgage Debt”). The Mortgage Debt is secured by the Company’s U.S. distribution center based in Louisville, Kentucky and provides for monthly principal and interest payments based on a 25-year amortization schedule, with the remaining principal balance and any accrued and unpaid interest due at maturity. Outstanding principal balances under the Mortgage Debt bear interest at the one-month LIBOR rate plus 1.5%. As of May 4, 2019, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $19.6 million. At February 2, 2019, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $19.7 million.
The Mortgage Debt requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if consolidated cash, cash equivalents, short-term investment balances and availability under borrowing arrangements fall below certain levels. In addition, the Mortgage Debt contains customary covenants, including covenants that limit or restrict the Company’s ability to incur liens on the mortgaged property and enter into certain contractual obligations. Upon the occurrence of an event of default under the Mortgage Debt, the lender may terminate the Mortgage Debt and declare all amounts outstanding to be immediately due and payable. The Mortgage Debt specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
On February 16, 2016, the Company also entered into a separate interest rate swap agreement, designated as a cash flow hedge, that resulted in a swap fixed rate of approximately 3.06%. This interest rate swap agreement matures in January 2026 and converts the nature of the Mortgage Debt from LIBOR floating-rate debt to fixed-rate debt. The fair value of the interest rate swap asset was approximately $0.8 million and $1.0 million as of May 4, 2019 and February 2, 2019, respectively.

19


Finance Lease Obligations
During fiscal 2018, the Company began the relocation of its primary European distribution center to the Netherlands. As a result, the Company entered into a finance lease of $17.0 million for equipment used in the new facility. The finance lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. As of May 4, 2019 and February 2, 2019, the finance lease obligation was $14.0 million and $14.7 million, respectively.
The Company also has smaller finance leases related primarily to computer hardware and software. During the three months ended May 4, 2019, the Company entered into additional finance leases of approximately $0.7 million related primarily to computer hardware and software. As of May 4, 2019 and February 2, 2019, these finance lease obligations totaled $2.6 million and $2.0 million, respectively.
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, and on April 22, 2019, the credit facility was amended to permit, among other things, the offering and sale of convertible senior notes and certain transactions related thereto (as amended, the “Credit Facility”). See Note 10 for more information regarding the Company’s convertible senior notes. 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 and inventory as of May 4, 2019, the Company could have borrowed up to $132 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.
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% to 0.75%) or at LIBOR plus an applicable margin (varying from 1.25% to 1.75%). The U.S. base rate is based on the greater of (i) the U.S. prime rate, (ii) the federal funds rate, plus 0.5%, and (iii) LIBOR for a 30-day interest period, plus 1.0%. Direct borrowings under the Credit Facility made by the Company’s Canadian subsidiaries shall bear interest at the Canadian prime rate plus an applicable margin (varying from 0.25% to 0.75%) or at the Canadian BA rate plus an applicable margin (varying from 1.25% to 1.75%). The Canadian prime rate is based on the greater of (i) the Canadian prime rate, (ii) the Bank of Canada overnight rate, plus 0.5%, and (iii) the Canadian BA rate for a one-month interest period, plus 1.0%. The applicable margins are calculated quarterly and vary based on the average daily availability of the aggregate borrowing base. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. As of May 4, 2019, the Company had $2.0 million in outstanding standby letters of credit, no outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a fixed charge coverage ratio on a trailing four-quarter basis if a default or an event of default occurs under the Credit Facility or generally if borrowings exceed 80% of the borrowing base. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and certain of its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other

20


material indebtedness, bankruptcy and insolvency defaults and material judgment defaults. The Credit Facility allows for both secured and unsecured borrowings outside of the Credit Facility up to specified amounts.
The Company, through its European subsidiaries, maintains short-term committed and uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. Some of these agreements include certain equity-based financial covenants. As of May 4, 2019, the Company had $44.8 million in outstanding borrowings, no outstanding documentary letters of credit and $88.4 million available for future borrowings under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 1.1% to 4.6%.
In March 2019, the Company, through its China subsidiary, entered into a short-term uncommitted bank borrowing agreement, primarily for working capital purposes. The multicurrency borrowing agreement provides for borrowing up to $20.0 million. As of May 4, 2019, there were no outstanding borrowings or outstanding letters of credit under this borrowing agreement.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
(10)
Convertible Senior Notes and Related Transactions
2.00% Convertible Senior Notes due 2024
In April 2019, the Company issued $300 million principal amount of 2.00% convertible senior notes due 2024 (the “Notes”) in a private offering. In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”) with respect to the Notes with U.S. Bank N.A., as trustee (the “Trustee”). The Notes are senior unsecured obligations of the Company and bear interest at an annual rate of 2.00% payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2019. The Notes will mature on April 15, 2024, unless earlier repurchased or converted in accordance with their terms.
The Notes are convertible in certain circumstances into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 38.7879 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $25.78 per share, subject to adjustment upon the occurrence of certain events. Prior to November 15, 2023, the Notes are convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes. Following certain corporate events described in the Indenture that occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its Notes in connection with such corporate event in certain circumstances. The Notes are not redeemable prior to maturity, and no sinking fund is provided for the Notes.
If the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders of the Notes may require the Company to purchase for cash all or any portion of their Notes. The fundamental change purchase price will be 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date.
The Indenture contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

21


The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.8% over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. During the three months ended May 4, 2019, the Company recorded $0.2 million of interest expense related to the amortization of the debt discount.
Debt issuance costs related to the Notes were comprised of discounts and commissions payable to the initial purchasers of $3.8 million and third party offering costs of approximately $1.5 million. As of May 4, 2019, approximately $1.0 million of the total $5.3 million in debt issuance costs was included in accrued expenses in the Company’s condensed consolidated balance sheet.
In accounting for the debt issuance costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on the Company’s condensed consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. During the three months ended May 4, 2019, the Company recorded a minimal amount related to the amortization of debt issuance costs. Debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
The Notes consist of the following components as of May 4, 2019 (in thousands):
Liability component:
 
Principal
$
300,000

Unamortized debt discount
(56,362
)
Unamortized issuance costs
(4,244
)
Net carrying amount
$
239,394

 
 
Equity component, net1
$
42,324

__________________________________
Notes:
1 
Included in additional paid-in capital on the condensed consolidated balance sheets and is net of debt issuance costs and deferred taxes.
As of May 4, 2019, the fair value of the Notes was approximately $251.7 million. The fair value of the Notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 11.6 million shares of its common stock at a price of approximately $25.78 per share, in each case subject to adjustment in certain circumstances. The total cost of the convertible note hedge transactions was $61.0 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 11.6 million shares of the Company’s common stock at a price of $46.88 per share. The Company received $28.1 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset dilution from the conversion of the Notes by effectively increasing the overall conversion price from $25.78 per share to $46.88 per share. The warrant transaction may have a dilutive effect with respect to the Company’s common stock to the extent the market price per share of the Company’s common stock exceeds the strike price of the warrants. As these transactions meet certain accounting criteria, the convertible note hedges

22


and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
The Company recorded a net deferred tax liability of $13.3 million in connection with the debt discount associated with the Notes and recorded a deferred tax asset of $14.5 million in connection with the convertible note hedge transactions. The total deferred tax impact is included in noncurrent deferred tax assets on the Company’s condensed consolidated balance sheets.
(11)
Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three months ended May 4, 2019 and May 5, 2018 (in thousands): 
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Stock options
$
590

 
$
695

Stock awards/units
3,815

 
3,170

Employee Stock Purchase Plan
63

 
93

Total share-based compensation expense
$
4,468

 
$
3,958

Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $6.6 million and $25.9 million, respectively, as of May 4, 2019. This cost is expected to be recognized over a weighted average period of 1.8 years. The weighted average grant date fair value of stock options granted was $6.72 and $5.89 during the three months ended May 4, 2019 and May 5, 2018, respectively. 
Grants
In connection with a new employment agreement entered into between the Company and Carlos Alberini (the “Alberini Employment Agreement”), who became the Company’s Chief Executive Officer on February 20, 2019, the Company granted Mr. Alberini 600,000 stock options and 250,000 nonvested stock units which are subject to the achievement of certain performance-based vesting conditions. Mr. Alberini was also granted 150,000 restricted stock units which are considered contingently returnable as a result of certain service conditions set forth in the Alberini Employment Agreement.
On June 25, 2018, the Company granted select key management 619,578 nonvested stock units which are subject to certain performance-based vesting or market-based vesting conditions.
Annual Grants
On March 29, 2019, the Company made an annual grant of 5,100 stock options and 280,700 nonvested stock awards/units to its employees. On March 30, 2018, the Company made an annual grant of 431,371 stock options and 490,528 nonvested stock awards/units to its employees.
Performance-Based Awards
The Company has granted certain nonvested stock units subject to performance-based vesting conditions to select executive officers. Each award of nonvested stock units generally has an initial vesting period from the date of the grant through either (i) the end of the first fiscal year or (ii) the first anniversary of the date of grant, followed by annual vesting periods which may range from two-to-three years.
The Company has also granted a target number of nonvested stock units to select key management, including certain executive officers. The number of shares that may ultimately vest with respect to each award may range from 0% up to 200% of the target number of shares, subject to the achievement of certain performance-based vesting conditions. Any shares that are ultimately issued are scheduled to vest at the end of the third fiscal year following the grant date.

23


The following table summarizes the activity for nonvested performance-based units during the three months ended May 4, 2019:
 
Number of Units
 
Weighted Average Grant Date Fair Value
Nonvested at February 2, 2019
1,371,230

 
$
16.44

Granted
250,000

 
21.38

Vested
40,235

 
21.83

Forfeited
268,087

 
18.19

Nonvested at May 4, 2019
1,312,908

 
$
16.86

Market-Based Awards
The Company has granted certain nonvested stock units subject to market-based vesting conditions to select executive officers. The number of shares that may ultimately vest will equal 0% to 150% of the target number of shares, subject to the performance of the Company’s total stockholder return (“TSR”) relative to the TSR of a select group of peer companies over a three-year period. Vesting is also subject to continued service requirements through the vesting date.
The following table summarizes the activity for nonvested market-based units during the three months ended May 4, 2019:
 
Number of Units
 
Weighted Average Grant Date Fair Value
Nonvested at February 2, 2019
518,409

 
$
14.28

Granted1
17,557

 
15.20

Vested1
158,014

 
15.20

Forfeited
89,750

 
15.58

Nonvested at May 4, 2019
288,202

 
$
13.43

__________________________________
Notes:
1 
As a result of the achievement of certain market-based vesting conditions, there were 17,557 shares that vested in addition to the original target number of shares granted in fiscal 2017.
(12)
Related Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities affiliated with trusts for the respective benefit of Paul Marciano, who is an executive and member of the Board of the Company, and Maurice Marciano, Chairman of the Board, and certain of their children (the “Marciano Trusts”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were four of these leases in effect as of May 4, 2019 with expiration or option exercise dates ranging from calendar years 2020 to 2021.
Aggregate rent, common area maintenance charges and property tax expense recorded under these four related party leases were approximately $1.3 million and $1.2 million for the three months ended May 4, 2019 and May 5, 2018, respectively. The Company believes that the terms of the related party leases have not been significantly affected by the fact that the Company and the lessors are related.

24


Aircraft Arrangements
The Company periodically charters aircraft owned by entities affiliated with the Marciano Trusts (the “Aircraft Entities”), through informal arrangements with the Aircraft Entities and independent third-party management companies contracted by the Aircraft Entities to manage their aircraft. There were no fees paid under these arrangements for the three months ended May 4, 2019. The total fees paid under these arrangements for the three months ended May 5, 2018 were approximately $0.7 million.
These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.
(13)
Commitments and Contingencies
Investment Commitments
As of May 4, 2019, the Company had an unfunded commitment to invest €3.6 million ($4.1 million) in a private equity fund. Refer to Note 15 for further information.
Legal and Other Proceedings
The Company is involved in legal proceedings, arising both in the ordinary course of business and otherwise, including the proceedings described below as well as various other claims and other matters incidental to the Company’s business. Unless otherwise stated, the resolution of any particular proceeding is not currently expected to have a material adverse impact on the Company’s financial position or results of operations. Even if such an impact could be material, we may not be able to estimate the reasonably possible loss or range of loss until developments in the proceedings have provided sufficient information to support an assessment.
The Company has received customs tax assessment notices from the Italian Customs Agency (“ICA”) 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 ($11.0 million), including potential penalties and interest. The Company strongly disagreed with the ICA’s positions and therefore filed appeals with the Milan First Degree Tax Court (“MFDTC”). Those appeals were split into a number of different cases that were then heard by different sections of the MFDTC. The MFDTC ruled in favor of the Company on all of these appeals. The ICA subsequently appealed €9.7 million ($10.9 million) of these favorable MFDTC judgments with the Appeals Court. To date, €8.5 million ($9.5 million) have been decided in favor of the Company and €1.2 million ($1.4 million) have been decided in favor of the ICA. The Company believes that the unfavorable Appeals Court ruling is incorrect and inconsistent with the prior rulings on similar matters by both the MFDTC and other judges within the Appeals Court, and plans to appeal the decision to the Supreme Court. The ICA has appealed most of the favorable Appeals Court rulings to the Supreme Court. There can be no assurances the Company will be successful in the 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 this matter, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcome will have a material impact on the Company’s financial position or results of operations.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”), which was established through a majority-owned joint venture during fiscal 2014. The put arrangement for Guess Brazil, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company every third anniversary beginning in March 2019, subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. The carrying value of the redeemable

25


noncontrolling interest related to Guess Brazil was $1.3 million and $1.4 million as of May 4, 2019 and February 2, 2019, respectively.
The Company is also party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest for its majority-owned subsidiary, Guess? CIS, LLC (“Guess CIS”), which was established through a majority-owned joint venture during fiscal 2016. The put arrangement for Guess CIS, representing 30% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company during the period beginning after the fifth anniversary of the agreement through December 31, 2025, or sooner in certain limited circumstances. The redemption value of the Guess CIS put arrangement is based on a multiple of Guess CIS’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments and is classified as a redeemable noncontrolling interest outside of permanent equity in the Company’s condensed consolidated balance sheet. During fiscal 2018, the Company and the noncontrolling interest holder made additional capital contributions totaling $3.2 million, of which $2.2 million was paid by the Company and the remaining amount was paid by the noncontrolling interest holder to retain the same pro-rata interest in Guess CIS. The carrying value of the redeemable noncontrolling interest related to Guess CIS was $3.5 million as of May 4, 2019 and February 2, 2019.
A reconciliation of the total carrying amount of redeemable noncontrolling interests for the three months ended May 4, 2019 and May 5, 2018 is as follows (in thousands):
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Beginning balance
$
4,853

 
$
5,590

Foreign currency translation adjustment
(79
)
 
(519
)
Ending balance
$
4,774

 
$
5,071

(14)
Defined Benefit Plans
Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies, if any, may vary depending on investment performance of the trust. The cash surrender values of the insurance policies were $64.5 million and $61.7 million as of May 4, 2019 and February 2, 2019, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains (losses) of $3.2 million and $(1.1) million in other income and expense during the three months ended May 4, 2019 and May 5, 2018, respectively. The projected benefit obligation was $52.2 million as of May 4, 2019 and February 2, 2019, and was included in accrued expenses and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.4 million were made during each of the three months ended May 4, 2019 and May 5, 2018.
Foreign Pension Plans
In certain foreign jurisdictions, primarily in Switzerland, the Company is required to guarantee the returns on Company-sponsored defined contribution plans in accordance with local regulations. These plans are typically government-mandated defined contribution plans that provide employees with a minimum investment return, and as such, are treated under pension accounting in accordance with authoritative guidance. Under the Swiss plan, both the Company and certain of its employees with annual earnings in excess of government determined amounts

26


are required to make contributions into a fund managed by an independent investment fiduciary. The Company’s contributions must be made in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender.
As of May 4, 2019 and February 2, 2019, the foreign pension plans had a total projected benefit obligation of $31.0 million and $31.1 million, respectively, and plan assets held in independent investment fiduciaries of $25.2 million and $25.4 million, respectively. The net liability of $5.8 million and $5.7 million was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of May 4, 2019 and February 2, 2019, respectively.
The components of net periodic defined benefit pension cost for the three months ended May 4, 2019 and May 5, 2018 related to the Company’s defined benefit plans are as follows (in thousands):
 
Three Months Ended May 4, 2019
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
807

 
$
807

Interest cost
481

 
68

 
549

Expected return on plan assets

 
(77
)
 
(77
)
Net amortization of unrecognized prior service credit

 
(10
)
 
(10
)
Net amortization of actuarial losses
16

 
95

 
111

Net periodic defined benefit pension cost
$
497

 
$
883

 
$
1,380

 
Three Months Ended May 5, 2018
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
740

 
$
740

Interest cost
472

 
55

 
527

Expected return on plan assets

 
(74
)
 
(74
)
Net amortization of unrecognized prior service credit

 
(7
)
 
(7
)
Net amortization of actuarial losses
47

 
105

 
152

Net periodic defined benefit pension cost
$
519

 
$
819

 
$
1,338

(15)
Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

27


The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of May 4, 2019 and February 2, 2019 (in thousands):
 
 
Fair Value Measurements at May 4, 2019
 
Fair Value Measurements at Feb 2, 2019
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
7,841

 
$

 
$
7,841

 
$

 
$
4,690

 
$

 
$
4,690

Interest rate swap
 

 
769

 

 
769

 

 
1,033

 

 
1,033

Total
 
$

 
$
8,610

 
$

 
$
8,610

 
$

 
$
5,723

 
$

 
$
5,723

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$

 
$

 
$

 
$

 
$

 
$
77

 
$

 
$
77

Deferred compensation obligations
 

 
15,454

 

 
15,454

 

 
14,405

 

 
14,405

Total
 
$

 
$
15,454

 
$

 
$
15,454

 
$

 
$
14,482

 
$

 
$
14,482

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the three months ended May 4, 2019 or during the year ended February 2, 2019.
Foreign exchange currency contracts are entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. The fair values of the Companys foreign exchange currency contracts are based on quoted foreign exchange forward rates at the reporting date. The fair values of the Companys interest rate swaps are based upon inputs corroborated by observable market data. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
As of May 4, 2019 and February 2, 2019, the Company included €1.2 million ($1.3 million) and €1.2 million ($1.4 million), respectively, in other assets in the Company’s condensed consolidated balance sheet related to its investment in a private equity fund. As permitted in accordance with authoritative guidance, the Company uses net asset value per share as a practical expedient to measure the fair value of this investment and has not included this investment in the fair value hierarchy as disclosed above. As a result of changes in the value of the private equity investment, the Company recorded unrealized losses of €0.1 million ($0.1 million) and €0.1 million ($0.2 million) in other expense during the three months ended May 4, 2019 and May 5, 2018, respectively. During fiscal 2019, the Company funded contributions of €0.9 million ($1.1 million) in this investment. As of May 4, 2019, the Company had an unfunded commitment to invest an additional €3.6 million ($4.1 million) in the private equity fund.
The fair values of the Companys debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Companys incremental borrowing rate. As of May 4, 2019 and February 2, 2019, the carrying value was not materially different from fair value, as the interest rates on the Company’s debt approximated rates currently available to the Company. The fair value of the Company’s convertible senior notes (see Note 10) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy.
The carrying amount of the Companys remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments.
Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The majority of the Company’s long-lived assets relate to its retail operations which consist primarily of regular retail and flagship locations. The Company considers each individual

28


regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software and certain long-term security deposits and lease acquisition costs. The Company reviews regular retail locations in penetrated markets for impairment risk once the locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. The Company believes that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for regular retail locations in new markets, where the Company is in the early stages of establishing its presence, once brand awareness has been established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company’s current product. Impairment for these locations is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the assets ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Companys strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on managements estimates of future cash flows over the remaining lease period or expected life, if shorter. For expected location closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The Company will use this revised useful life when estimating the asset group’s future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The Company also considers factors such as: the local environment for each regular retail location, including mall traffic and competition; the Companys ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined above. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Companys results of operations.
The Company recorded asset impairment charges of $1.8 million and $0.8 million during the three months ended May 4, 2019 and May 5, 2018, respectively. The asset impairment charges related primarily to the impairment of certain retail locations in Europe and North America resulting from under-performance and expected store closures.
(16)
Derivative Financial Instruments
Hedging Strategy
Foreign Exchange Currency Contracts
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada, South Korea, China, Hong Kong and Mexico are denominated in U.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar-denominated purchases of merchandise and U.S. dollar- and British pound-

29


denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. The Company enters into derivative financial instruments, including forward exchange currency contracts, to offset some, but not all, of the exchange risk on certain of these anticipated foreign currency transactions.
Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
Interest Rate Swap Agreements
The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Refer to Note 9 for further information. 
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign exchange currency contracts and interest rate swap agreements. As of May 4, 2019, credit risk has not had a significant effect on the fair value of the Company’s foreign exchange currency contracts and interest rate swap agreements.
Hedge Accounting Policy
Foreign Exchange Currency Contracts
U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period that approximates the time the hedged merchandise inventory is sold. The Company may hedge forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income (expense) in the period in which the royalty expense is incurred.
The Company has also used U.S. dollar forward contracts to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment.
The Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).
Interest Rate Swap Agreements
Interest rate swap agreements are used to hedge the variability of the cash flows in interest payments associated with the Company’s floating-rate debt. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense).

30


Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of May 4, 2019 and February 2, 2019 is as follows (in thousands):
 
Derivative Balance Sheet Location
 
Fair Value at
May 4, 2019
 
Fair Value at
Feb 2, 2019
ASSETS: