Company Quick10K Filing
Quick10K
Guess?
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$21.38 81 $1,730
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
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
VFC VF
CTAS Cintas
LULU Lululemon
RL Ralph Lauren
GOOS Canada Goose Holdings
VRA Vera Bradley
WEYS Weyco Group
SQBG Sequential Brands Group
EVK Ever-Glory
NAKD Naked Brand Group
GES 2018-11-03
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-20181103x10qxex311.htm
EX-31.2 ges-20181103x10qxex312.htm
EX-32.1 ges-20181103x10qxex321.htm
EX-32.2 ges-20181103x10qxex322.htm

Guess? Earnings 2018-11-03

GES 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ges-20181103x10q.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 November 3, 2018
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)
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 December 4, 2018, the registrant had 81,038,868 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) 
 
Nov 3, 2018
 
Feb 3, 2018
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
138,922

 
$
367,441

Accounts receivable, net
286,106

 
259,996

Inventories
548,517

 
428,304

Other current assets
109,178

 
52,964

Total current assets
1,082,723

 
1,108,705

Property and equipment, net
297,173

 
294,254

Goodwill
36,893

 
38,481

Other intangible assets, net
7,063

 
5,977

Deferred tax assets
64,437

 
68,386

Restricted cash
532

 
241

Other assets
135,325

 
139,590

 
$
1,624,146

 
$
1,655,634

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of capital lease obligations and borrowings
$
3,538

 
$
2,845

Accounts payable
314,068

 
264,438

Accrued expenses
243,058

 
200,562

Total current liabilities
560,664

 
467,845

Long-term debt and capital lease obligations
36,254

 
39,196

Deferred rent and lease incentives
81,765

 
81,564

Other long-term liabilities
110,104

 
127,964

 
788,787

 
716,569

Redeemable noncontrolling interests
4,804

 
5,590

 
 
 
 
Commitments and contingencies (Note 12)
 
 
 
 
 
 
 
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 142,342,270 and 141,623,687 shares, outstanding 81,007,525 and 81,371,118 shares, as of November 3, 2018 and February 3, 2018, respectively
810

 
813

Paid-in capital
515,067

 
498,249

Retained earnings
1,072,988

 
1,132,173

Accumulated other comprehensive loss
(133,408
)
 
(93,062
)
Treasury stock, 61,334,745 and 60,252,569 shares as of November 3, 2018 and February 3, 2018, respectively
(638,559
)
 
(621,354
)
Guess?, Inc. stockholders’ equity
816,898

 
916,819

Nonredeemable noncontrolling interests
13,657

 
16,656

Total stockholders’ equity
830,555

 
933,475

 
$
1,624,146

 
$
1,655,634

 
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
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Product sales
$
583,121

 
$
528,209

 
$
1,710,788

 
$
1,518,323

Net royalties
22,286

 
20,744

 
61,779

 
53,267

Net revenue
605,407

 
548,953

 
1,772,567

 
1,571,590

Cost of product sales
385,264

 
357,844

 
1,139,055

 
1,037,812

Gross profit
220,143

 
191,109

 
633,512

 
533,778

Selling, general and administrative expenses
197,943

 
178,009

 
600,731

 
517,871

European Commission fine
42,428

 

 
42,428

 

Asset impairment charges
1,277

 
2,018

 
5,017

 
6,013

Net (gains) losses on lease terminations

 
11,494

 
(152
)
 
11,494

Loss from operations
(21,505
)
 
(412
)
 
(14,512
)
 
(1,600
)
Other income (expense):
 

 
 

 
 
 
 
Interest expense
(784
)
 
(684
)
 
(2,386
)
 
(1,642
)
Interest income
783

 
891

 
2,892

 
3,022

Other income (expense), net
(5,810
)
 
2,216

 
(7,064
)
 
1,935

 
(5,811
)
 
2,423

 
(6,558
)
 
3,315

 
 
 
 
 
 
 
 
Earnings (loss) before income tax expense (benefit)
(27,316
)
 
2,011

 
(21,070
)
 
1,715

Income tax expense (benefit)
(14,500
)
 
3,673

 
(13,001
)
 
8,723

Net loss
(12,816
)
 
(1,662
)
 
(8,069
)
 
(7,008
)
Net earnings attributable to noncontrolling interests
626

 
1,198

 
1,064

 
1,926

Net loss attributable to Guess?, Inc.
$
(13,442
)
 
$
(2,860
)
 
$
(9,133
)
 
$
(8,934
)
 
 
 
 
 
 
 
 
Net loss per common share attributable to common stockholders (Note 3):
Basic
$
(0.17
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.12
)
Diluted
$
(0.17
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.12
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 3):
Basic
80,189

 
82,390

 
80,067

 
82,599

Diluted
80,189

 
82,390

 
80,067

 
82,599

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.225

 
$
0.225

 
$
0.675

 
$
0.675


See accompanying notes to condensed consolidated financial statements.


2


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Net loss
$
(12,816
)
 
$
(1,662
)
 
$
(8,069
)
 
$
(7,008
)
Other comprehensive income (loss) (“OCI”):
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
(11,745
)
 
(9,102
)
 
(59,270
)
 
47,770

Derivative financial instruments designated as cash flow hedges
 

 
 

 
 
 
 
Gains (losses) arising during the period
1,833

 
3,387

 
14,000

 
(11,702
)
Less income tax effect
(237
)
 
(638
)
 
(1,825
)
 
1,482

Reclassification to net loss for (gains) losses realized
1,597

 
313

 
5,787

 
(997
)
Less income tax effect
(178
)
 
(78
)
 
(720
)
 
50

Defined benefit plans
 

 
 

 
 
 
 
Foreign currency and other adjustments
42

 
106

 
345

 
2

Less income tax effect
(5
)
 
(9
)
 
(31
)
 

Net actuarial loss amortization
150

 
116

 
453

 
344

Prior service credit amortization
(7
)
 
(7
)
 
(21
)
 
(20
)
Less income tax effect
(19
)
 
(21
)
 
(58
)
 
(62
)
Total comprehensive income (loss)
(21,385
)
 
(7,595
)
 
(49,409
)
 
29,859

Less comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

 
 
 
 
Net earnings
626

 
1,198

 
1,064

 
1,926

Foreign currency translation adjustment
(1,181
)
 
(918
)
 
(994
)
 
1,402

Amounts attributable to noncontrolling interests
(555
)
 
280

 
70

 
3,328

Comprehensive income (loss) attributable to Guess?, Inc.
$
(20,830
)
 
$
(7,875
)
 
$
(49,479
)
 
$
26,531


See accompanying notes to condensed consolidated financial statements.


3


GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
Cash flows from operating activities:
 

 
 

Net loss
$
(8,069
)
 
$
(7,008
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization of property and equipment
47,391

 
45,614

Amortization of other long-term and intangible assets
3,008

 
1,155

Share-based compensation expense
12,534

 
12,410

Unrealized forward contract (gains) losses
(1,884
)
 
1,532

Net loss on disposition of property and equipment and long-term assets
5,663

 
4,548

Other items, net
12,937

 
(5,278
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(6,065
)
 
2,527

Inventories
(159,463
)
 
(93,337
)
Prepaid expenses and other assets
(28,398
)
 
(11,817
)
Accounts payable and accrued expenses
87,857

 
21,411

Deferred rent and lease incentives
2,975

 
1,354

Other long-term liabilities
(15,401
)
 
(7,313
)
Net cash used in operating activities
(46,915
)
 
(34,202
)
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(74,890
)
 
(65,345
)
Proceeds from sale of long-term assets

 
1,052

Changes in other assets

 
(553
)
Acquisition of businesses, net of cash acquired
(6,404
)
 
(2,929
)
Net cash settlement of forward contracts
156

 
(354
)
Purchases of investments
(2,093
)
 
(497
)
Net cash used in investing activities
(83,231
)
 
(68,626
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings

 
166

Repayment of capital lease obligations and borrowings
(1,469
)
 
(665
)
Dividends paid
(54,858
)
 
(56,527
)
Noncontrolling interest capital contribution

 
962

Noncontrolling interest capital distribution
(3,069
)
 
(1,358
)
Issuance of common stock, net of tax withholdings on vesting of stock awards
4,737

 
(82
)
Purchase of treasury stock
(23,620
)
 
(24,812
)
Net cash used in financing activities
(78,279
)
 
(82,316
)
Effect of exchange rates on cash, cash equivalents and restricted cash
(19,803
)
 
20,808

Net change in cash, cash equivalents and restricted cash
(228,228
)
 
(164,336
)
Cash, cash equivalents and restricted cash at the beginning of the year
367,682

 
397,650

Cash, cash equivalents and restricted cash at the end of the period
$
139,454

 
$
233,314

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
961

 
$
849

Income taxes paid
$
28,039

 
$
18,124

 
 
 
 
Non-cash investing and financing activity:
 
 
 
Assets acquired under capital lease obligations
$
1,172

 
$
18,042

 
See accompanying notes to condensed consolidated financial statements.

4


GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 3, 2018
(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 November 3, 2018 and February 3, 2018, the condensed consolidated statements of loss and comprehensive income (loss) for the three and nine months ended November 3, 2018 and October 28, 2017 and the condensed consolidated statements of cash flows for the nine months ended November 3, 2018 and October 28, 2017. 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 and nine months ended November 3, 2018 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 3, 2018.
The three and nine months ended November 3, 2018 had the same number of days as the three and nine months ended October 28, 2017. All references herein to “fiscal 2019,” “fiscal 2018” and “fiscal 2017” represent the results of the 52-week fiscal year ending February 2, 2019, the 53-week fiscal year ended February 3, 2018 and the 52-week fiscal year ended January 28, 2017, respectively. 
Reclassifications
The Company has made certain reclassifications to prior year amounts to conform to the current period presentation within the accompanying notes to the condensed consolidated financial statements.
Net Gains (Losses) on Lease Terminations
During the nine months ended November 3, 2018, the Company recorded net gains on lease terminations of approximately $0.2 million related primarily to the early termination of certain lease agreements in North America. The net gains on lease terminations were recorded during the three months ended May 5, 2018.
During the third quarter of fiscal 2018, the Company recorded net losses of $11.5 million on lease terminations related primarily to the modification of certain lease agreements held with a common landlord in North America. In connection with this modification, the Company made up-front payments of approximately $22.0 million, of which $12.4 million was recognized as net losses on lease terminations and $9.6 million was recorded as advance rent payments. During the third quarter of fiscal 2018, the Company also recorded net gains on lease terminations of approximately $1.0 million related primarily to the early termination of certain lease agreements in Europe.

5


New Accounting Guidance
Changes in Accounting Policies
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard which superseded previous existing revenue recognition guidance. The standard is intended to clarify the principles of recognizing revenue and create common revenue recognition guidance between GAAP and International Financial Reporting Standards. The standard also requires expanded disclosures surrounding revenue recognition. During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. The Company adopted this guidance (including clarification guidance issued) effective February 4, 2018 using the modified retrospective method and, as a result, recorded a cumulative adjustment to increase retained earnings by approximately $5.8 million, net of taxes. The adjustment related primarily to changes in the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company. Under previous guidance, the Company recorded advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. To the extent that the advertising contributions exceeded the Company’s advertising expenditures for its licensees, the excess contribution was treated as a deferred liability and was included in accrued expenses in the Company’s consolidated balance sheet. Under the new revenue recognition standard, advertising contributions and related advertising expenditures related to the Company’s licensing business are recorded on a gross basis in the Company’s condensed consolidated statements of loss. This change resulted in an increase to net revenue and selling, general, and administrative (“SG&A”) expenses of $2.7 million and $2.5 million, respectively, during the three months ended November 3, 2018 compared to the same prior-year period. During the nine months ended November 3, 2018, this change resulted in an increase to net revenue and SG&A expenses of $7.1 million and $7.2 million, respectively, compared to the same prior-year period. Other minor differences related to the timing of revenue recognition from the Company’s e-commerce operations, which are now recognized when merchandise is transferred to a common carrier rather than upon receipt by the customer, and a minimal change in the valuation of the amount that is deferred related to points earned under the Company’s loyalty programs. Additionally, allowances for wholesale sales returns and wholesale markdowns are now presented as accrued expenses rather than as reductions to accounts receivable, and the estimated cost associated with the allowance for sales returns is presented within other current assets rather than included in inventories in the Company’s condensed consolidated balance sheet. Refer to Note 2 for the Company’s expanded disclosures on revenue recognition.
In January 2016, the FASB issued authoritative guidance which requires equity investments not accounted for under the equity method of accounting or consolidation accounting to be measured at fair value, with subsequent changes in fair value recognized in net income. In February 2018, the FASB issued additional clarification guidance which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure requirements for financial instruments. The Company adopted this guidance (including the clarification guidance) effective February 4, 2018. The adoption of this guidance did not result in a cumulative-effect adjustment as of the beginning of the current year and did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In October 2016, the FASB issued authoritative guidance which amends the accounting for income taxes on intra-entity transfers of assets other than inventory. This guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The income tax consequences on intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. The Company adopted this guidance effective February 4, 2018. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements or related disclosures.
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost in the income statement. This guidance requires that the service cost component of net periodic pension cost be presented in the same line as other compensation costs arising from services rendered by the employees during the period. The other non-service components of net periodic pension cost are required to be presented in the

6


income statement separately from the service cost component and outside of earnings from operations. This guidance also allows for the service cost component to be eligible for capitalization when applicable. The Company adopted this guidance effective February 4, 2018 on a retrospective basis for the presentation of the service cost component and other non-service components of net periodic pension cost in the income statement and on a prospective basis for capitalization of the service cost component. As a result, the Company reclassified $0.5 million and $1.6 million from SG&A expenses to other income (expense) during the three and nine months ended October 28, 2017, respectively, which resulted in a related improvement in operating loss during each of the respective periods. Other than the change in presentation of other non-service components of net periodic pension cost within the Company’s condensed consolidated statements of loss, the adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.
In May 2017, the FASB issued authoritative guidance that provides clarification on accounting for modifications in share-based payment awards. The Company adopted this guidance effective February 4, 2018. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements or related disclosures.
In June 2018, the FASB issued authoritative guidance that expanded the scope of stock compensation to include non-employee share-based payment transactions. The Company early adopted this guidance during the second quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
Recently Issued Accounting Guidance
In February 2016, the FASB issued a comprehensive new lease standard which will supersede 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 standard (including clarification guidance issued during fiscal 2019) is effective for fiscal periods beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, with early adoption permitted. The Company has completed the design phase of its selected lease management system and is in the process of completing its inventory of its lease contracts, validating data migration, as well as implementing processes and controls to enable the preparation of the required financial information for this standard. In July 2018, the FASB issued authoritative guidance that provides entities with an additional transition method of applying the new lease standard at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption of the standard, the Company expects to report material right-of-use assets and material lease liabilities as well as enhanced disclosures.
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 will be 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 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

7


expected to have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
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 updates the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. 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. This guidance is effective for fiscal years beginning after December 15, 2018, which will be the Company’s first quarter of fiscal 2020, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with early adoption permitted. The updated presentation and disclosure guidance is required only on a prospective basis. 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)
Revenue Recognition
Significant Accounting Policies and Practices
Products Transferred at a Point in Time
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. For the Company’s brick-and-mortar retail stores and concessions, revenue is typically recognized at the point of sale. The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019, and accordingly, revenue generated from the Company’s e-commerce sites is recognized when merchandise is transferred to a common carrier. This is a change compared to the Company’s treatment under previous guidance where revenue from the Company’s e-commerce sites was recognized based on the estimated customer receipt date. This change had an immaterial impact on revenue for the three and nine months ended November 3, 2018. Revenue generated from the Company’s wholesale distribution channel is recognized when control transfers to the customer, which generally occurs upon shipment. The amount of revenue that is recognized is based on the transaction price, which represents the invoiced amount and includes estimates of variable consideration such as allowances for sales returns, markdowns and loyalty award obligations, where applicable. The amount of variable

8


consideration included in the transaction price may be constrained and is included only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period.
The Company accepts payments at its brick-and-mortar retail locations and its e-commerce sites in the form of cash, credit cards, gift cards and loyalty points, where applicable. Payment terms, typically less than one year, are offered to the Company’s wholesale customers and do not include a significant financing component. The Company extends credit to wholesale customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral but does obtain credit insurance when considered appropriate. As of November 3, 2018, approximately 49% of the Company’s total net trade receivables and 62% of its European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. The Company’s credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments. The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical and current collection trends, an evaluation of the impact of current economic conditions and whether the Company has obtained credit insurance or other guarantees. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. The Company’s credit losses for the periods presented were not significant compared to sales and did not significantly exceed management’s estimates. Refer to Note 5 for further information regarding the Company’s allowance for doubtful accounts.
Shipping and handling costs associated with outbound freight incurred to transfer a product to a customer are accounted for as fulfillment costs and are included in SG&A expenses. Sales and usage-based taxes collected from customers and remitted directly to governmental authorities are excluded from net revenues. This is consistent with the presentation of such amounts in previous years.
The Company does not have significant contract balances related to its direct-to-consumer or wholesale distribution channels other than the allowance for sales returns and markdowns as well as liabilities related to its gift cards and loyalty programs. The Company also does not have significant contract acquisition costs related to its direct-to-consumer or wholesale distribution channels.
Sales Return Allowances
The Company accrues for estimated sales returns in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and current trends and reduces sales and cost of sales accordingly. The Company’s policy allows retail customers in certain regions a grace period to return merchandise following the date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise. The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019, and accordingly, has included the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in its condensed consolidated balance sheet. Prior to the adoption of the new revenue recognition standard, the Company recorded the allowance for wholesale sales returns against accounts receivable and the estimated cost of inventory associated with the allowance for sales returns in inventories. The allowance for retail sales returns was included in accrued expenses which is consistent with the current presentation. As of November 3, 2018, the Company included $26.1 million in accrued expenses related to the allowance for sales returns and $10.4 million in other current assets related to the estimated cost of such sales returns. As of February 3, 2018, the Company included $25.0 million and $2.9 million in accounts receivable and accrued expenses, respectively, related to the allowance for sales returns and $11.9 million in inventories related to the estimated cost of such sales returns.

9


Markdown Allowances
Costs associated with customer markdowns are recorded as a reduction to revenues and any amounts unapplied to existing receivables are included in accrued expenses. These markdown allowances resulted from seasonal negotiations with the Company’s wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions. The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019, and accordingly, has included the allowance for markdowns in accrued expenses in its condensed consolidated balance sheet. As of November 3, 2018, the Company included $11.2 million in accrued expenses related to the allowance for markdowns. As of February 3, 2018, the Company included $10.8 million in accounts receivable related to the allowance for markdowns.
Gift Cards
Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by the Company for which a liability was recorded in prior periods. Gifts cards are mainly used in the U.S. and Canada. The Company issues its gift cards in the U.S. and Canada through one of its subsidiaries and is not required by law to escheat the value of unredeemed gift cards to the state in which the subsidiary is domiciled. Estimated breakage amounts are accounted for under the redemption recognition method and are classified as additional net revenues as the gift cards are redeemed. The Company’s gift card breakage rate is approximately 5.5% and 5.3% for the U.S. retail business and Canadian retail business, respectively, based upon historical redemption patterns, which represents the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Based upon historical redemption trends, the Company recognizes estimated gift card breakage as a component of net revenue in proportion to actual gift card redemptions, over the period that remaining gift card values are redeemed. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods. There have been no changes to the Company’s accounting for gift card breakage upon adoption of the new revenue recognition standard effective as of the first quarter of fiscal 2019. During the three and nine months ended November 3, 2018, the Company recognized $0.3 million and $0.5 million, respectively, of gift card breakage to revenue. During the three and nine months ended October 28, 2017, the Company recognized $0.4 million and $0.6 million, respectively, of gift card breakage to revenue. As of November 3, 2018 and February 3, 2018, the Company included $4.4 million and $5.2 million in accrued expenses related to its gift card liability, respectively.
Loyalty Programs
The Company has customer loyalty programs in North America, Europe and Asia which cover all of its brands. Under certain of the programs, primarily in the U.S. and Canada, customers accumulate points based on purchase activity. Once a loyalty program member achieves a certain point level, the member earns awards that may only be redeemed for merchandise. Unredeemed points generally expire after six months without additional purchase activity and unredeemed awards generally expire after two months. Where applicable, the Company allocates a portion of the transaction price from sales in its direct-to-consumer channel to its loyalty program by using historical redemption rates to estimate the value of future award redemptions. This amount is accrued in current liabilities and recorded as a reduction of net revenue in the period which the related revenue is recognized. During the three and nine months ended November 3, 2018, activity related to the Company’s loyalty programs decreased net revenue by $0.1 million and $0.5 million, respectively. During the three months ended October 28, 2017, activity related to the Company’s loyalty programs had a minimal impact on the net revenues. During the nine months ended October 28, 2017, activity related to the Company’s loyalty programs increased net revenue by $0.4 million. The aggregate dollar value of the loyalty program accruals included accrued expense was $4.5 million and $3.8 million as of November 3, 2018 and February 3, 2018, respectively. Future revisions to the estimated liability may result in changes to net revenue.
Intellectual Property Transferred Over Time
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

10


from the licensing arrangements is based on sales-based royalty and advertising fund contributions as well as specific fixed payments, where applicable.
The typical license agreement requires that the licensee pay the Company the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. Generally, licensees are also required to make contributions to advertising funds, as a percentage of their sales, over the term of the licensing agreement, and may elect to make additional contributions to support specific brand-building initiatives. The Company recognizes revenue from sales-based royalty and advertising fund contributions when the related sales occur, which is consistent with the timing of when the performance obligation is satisfied. The Company adopted the new revenue recognition standard effective as of the first quarter of fiscal 2019, and accordingly, has recorded advertising contributions in revenue on a gross basis separate from any related advertising expenditures made by the Company which are recorded in SG&A expenses in the Company’s condensed consolidated statements of income (loss). Prior to the adoption of the new revenue recognition standard, the Company recorded advertising contributions received from its licensees and the related advertising expenditures incurred by the Company on a net basis in its consolidated balance sheet. Under previous guidance, to the extent that the advertising contributions exceed the Company’s advertising expenditures for its licensees, the excess contribution was treated as a deferred liability and was included in accrued expenses in the Company’s condensed consolidated balance sheet. Refer to Note 1 for detail regarding the impact of this change on the Company’s condensed consolidated balance sheet and its condensed consolidated statements of income (loss) as a result of the adoption of the new revenue recognition standard. The Company records royalty and advertising payments received on the Company’s purchases of licensed product as a reduction of the cost of the licensed product.
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. Several of the Company’s key license agreements provide for specified, fixed payments over and above the normal, ongoing royalty payments in consideration of the grant of the license rights. These payments are recognized ratably as revenue over the term of the license agreement and do not include a significant financing component. 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 November 3, 2018, the Company had $6.7 million and $15.0 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively. This compares to $6.8 million and $12.8 million of deferred royalties related to these upfront payments included in accrued expenses and other long-term liabilities, respectively, at February 3, 2018. During the three and nine months ended November 3, 2018, the Company recognized $3.6 million and $10.5 million in net royalties related to the amortization of the deferred royalties, respectively. During the three and nine months ended October 28, 2017, the Company recognized $3.0 million and $9.0 million in net royalties related to the amortization of the deferred royalties, respectively.
Contract balances related to the Company’s licensing distribution channel consist primarily of royalty receivables and liabilities related to deferred royalties. Refer to Note 5 for further information on royalty receivables. The Company does not have significant contract acquisition costs related to its licensing operations.
Refer to Note 8 for further information on disaggregation of revenue by segment and country.
(3)
Earnings (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 (loss) per share represents net earnings (loss) attributable to common stockholders divided by the weighted average number of

11


common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. 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 (loss) 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.
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
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Net loss
$
(13,442
)
 
$
(2,860
)
 
$
(9,133
)
 
$
(8,934
)
Less net earnings attributable to nonvested restricted stockholders
187

 
186

 
577

 
581

Net loss attributable to common stockholders
$
(13,629
)
 
$
(3,046
)
 
$
(9,710
)
 
$
(9,515
)
 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
80,189

 
82,390

 
80,067

 
82,599

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units1

 

 

 

Weighted average common shares used in diluted computations
80,189

 
82,390

 
80,067

 
82,599

 
 
 
 
 
 
 
 
Net loss per common share attributable to common stockholders:
Basic
$
(0.17
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.12
)
Diluted
$
(0.17
)
 
$
(0.04
)
 
$
(0.12
)
 
$
(0.12
)
__________________________________
Notes:
1 
For the three and nine months ended November 3, 2018, there were 1,499,247 and 1,312,054, 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 November 3, 2018 and October 28, 2017, equity awards granted for 1,310,933 and 2,901,025, respectively, of the Company’s common shares and for the nine months ended November 3, 2018 and October 28, 2017, equity awards granted for 1,610,091 and 3,104,027, 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 and nine months ended November 3, 2018, the Company also excluded 1,336,679 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 November 3, 2018. For the three

12


and nine months ended October 28, 2017, the Company excluded 1,145,080 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 October 28, 2017.
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 under the program, which may be discontinued at any time, without prior notice. During the nine months ended November 3, 2018, the Company repurchased 1,118,808 shares under the program at an aggregate cost of $17.6 million. The shares were repurchased during the three months ended May 5, 2018. During the nine months ended November 3, 2018, the Company also paid an additional $6.0 million for shares that were repurchased during the fourth quarter of fiscal 2018 but were settled during the first quarter of fiscal 2019. During the nine months ended October 28, 2017, the Company repurchased 1,919,967 shares under the program at an aggregate cost of $24.8 million. The Company repurchased 1,485,195 shares at an aggregate cost of $17.8 million during the three months ended April 29, 2017 and an additional 434,772 shares at an aggregate cost of $7.0 million during the three months ended October 28, 2017. As of November 3, 2018, the Company had remaining authority under the program to purchase $374.6 million of its common stock.

13


(4)
Stockholders’ Equity and Redeemable Noncontrolling Interests
A reconciliation of common stock outstanding, treasury stock and the total carrying amount of total stockholders’ equity, Guess?, Inc. stockholders’ equity and stockholders’ equity attributable to nonredeemable noncontrolling interests for the fiscal year ended February 3, 2018 and nine months ended November 3, 2018 is as follows (in thousands, except share data):
 
Shares
 
Stockholders’ Equity
 
 
 
Common Stock
 
Treasury Stock
 
Guess?, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
 
Redeemable
Noncontrolling
Interests
Balance at January 28, 2017
84,069,492

 
56,440,482

 
$
969,222

 
$
11,772

 
$
980,994

 
$
4,452

Net earnings (loss)

 

 
(7,894
)
 
3,993

 
(3,901
)
 

Foreign currency translation adjustment

 

 
91,178

 
2,238

 
93,416

 
187

Loss on derivative financial instruments designated as cash flow hedges, net of income tax of $2,738

 

 
(19,994
)
 

 
(19,994
)
 

Actuarial valuation loss and related amortization, prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of $435

 

 
(1,647
)
 

 
(1,647
)
 

Issuance of common stock under stock compensation plans, net of tax effect
1,113,713

 

 
(1,257
)
 

 
(1,257
)
 

Issuance of stock under Employee Stock Purchase Plan
54,300

 
(54,300
)
 
566

 

 
566

 

Share-based compensation

 

 
18,852

 

 
18,852

 

Dividends

 

 
(76,048
)
 

 
(76,048
)
 

Share repurchases
(3,866,387
)
 
3,866,387

 
(56,159
)
 

 
(56,159
)
 

Noncontrolling interest capital contribution

 

 

 
11

 
11

 
951

Noncontrolling interest capital distribution

 

 

 
(1,358
)
 
(1,358
)
 

Balance at February 3, 2018
81,371,118

 
60,252,569

 
$
916,819

 
$
16,656

 
$
933,475

 
$
5,590

Cumulative adjustment from adoption of new accounting guidance

 

 
5,829

 

 
5,829

 

Net earnings (loss)

 

 
(9,133
)
 
1,064

 
(8,069
)
 

Foreign currency translation adjustment

 

 
(58,276
)
 
(994
)
 
(59,270
)
 
(786
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($2,545)

 

 
17,242

 

 
17,242

 

Actuarial valuation and prior service credit amortization and foreign currency and other adjustments on defined benefit plans, net of income tax of ($89)

 

 
688

 

 
688

 

Issuance of common stock under stock compensation plans, net of tax effect
718,583

 

 
4,124

 

 
4,124

 

Issuance of stock under Employee Stock Purchase Plan
36,632

 
(36,632
)
 
613

 

 
613

 

Share-based compensation

 

 
12,534

 

 
12,534

 

Dividends

 

 
(55,955
)
 

 
(55,955
)
 

Share repurchases
(1,118,808
)
 
1,118,808

 
(17,587
)
 

 
(17,587
)
 

Noncontrolling interest capital distribution

 

 

 
(3,069
)
 
(3,069
)
 

Balance at November 3, 2018
81,007,525

 
61,334,745

 
$
816,898

 
$
13,657

 
$
830,555

 
$
4,804


14


Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and nine months ended November 3, 2018 and October 28, 2017 are as follows (in thousands):
 
Three Months Ended Nov 3, 2018
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at August 4, 2018
$
(114,761
)
 
$
(142
)
 
$
(11,117
)
 
$
(126,020
)
Gains (losses) arising during the period
(10,564
)
 
1,596

 
37

 
(8,931
)
Reclassification to net loss for losses realized

 
1,419

 
124

 
1,543

Net other comprehensive income (loss)
(10,564
)
 
3,015

 
161

 
(7,388
)
Balance at November 3, 2018
$
(125,325
)
 
$
2,873

 
$
(10,956
)
 
$
(133,408
)
 
Nine Months Ended Nov 3, 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
(58,276
)
 
12,175

 
314

 
(45,787
)
Reclassification to net loss for losses realized

 
5,067

 
374

 
5,441

Net other comprehensive income (loss)
(58,276
)
 
17,242

 
688

 
(40,346
)
Balance at November 3, 2018
$
(125,325
)
 
$
2,873

 
$
(10,956
)
 
$
(133,408
)
 
Three Months Ended Oct 28, 2017
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at July 29, 2017
$
(103,675
)
 
$
(8,751
)
 
$
(8,483
)
 
$
(120,909
)
Gains (losses) arising during the period
(8,184
)
 
2,749

 
97

 
(5,338
)
Reclassification to net loss for losses realized

 
235

 
88

 
323

Net other comprehensive income (loss)
(8,184
)
 
2,984

 
185

 
(5,015
)
Balance at October 28, 2017
$
(111,859
)
 
$
(5,767
)
 
$
(8,298
)
 
$
(125,924
)
 
Nine Months Ended Oct 28, 2017
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Defined Benefit Plans
 
Total
Balance at January 28, 2017
$
(158,227
)
 
$
5,400

 
$
(8,562
)
 
$
(161,389
)
Gains (losses) arising during the period
46,368

 
(10,220
)
 
2

 
36,150

Reclassification to net loss for (gains) losses realized

 
(947
)
 
262

 
(685
)
Net other comprehensive income (loss)
46,368

 
(11,167
)
 
264

 
35,465

Balance at October 28, 2017
$
(111,859
)
 
$
(5,767
)
 
$
(8,298
)
 
$
(125,924
)


15


Details on reclassifications out of accumulated other comprehensive income (loss) to net loss during the three and nine months ended November 3, 2018 and October 28, 2017 are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Loss
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
   Foreign exchange currency contracts
$
1,618

 
$
(81
)
 
$
5,646

 
$
(1,360
)
 
Cost of product sales
   Foreign exchange currency contracts

 
337

 
201

 
244

 
Other income (expense)
   Interest rate swap
(21
)
 
57

 
(60
)
 
119

 
Interest expense
      Less income tax effect
(178
)
 
(78
)
 
(720
)
 
50

 
Income tax expense (benefit)
 
1,419

 
235

 
5,067

 
(947
)
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
   Net actuarial loss amortization1
150

 
116

 
453

 
344

 
Other income (expense)
   Prior service credit amortization1
(7
)
 
(7
)
 
(21
)
 
(20
)
 
Other income (expense)
      Less income tax effect
(19
)
 
(21
)
 
(58
)
 
(62
)
 
Income tax expense (benefit)
 
124

 
88

 
374

 
262

 
 
Total reclassifications during the period
$
1,543

 
$
323

 
$
5,441

 
$
(685
)
 
 
__________________________________
Notes:
1 
These accumulated other comprehensive income (loss) components are included in the computation of net periodic defined benefit pension cost. During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of loss from operations. The Company adopted this guidance on a retrospective basis and, as a result, reclassified these components from SG&A expenses to other income (expense) for the three and nine months ended October 28, 2017. Refer to Note 13 for further information.
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 beginning in the sixth year of the agreement, or sooner in certain limited circumstances, and every third anniversary from the end of the sixth year thereafter 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 noncontrolling interest related to Guess Brazil was $1.4 million and $1.6 million as of November 3, 2018 and February 3, 2018, 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 contribution

16


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 $3.4 million and $4.0 million as of November 3, 2018 and February 3, 2018, respectively.
(5)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
Nov 3, 2018
 
Feb 3, 2018
Trade
$
282,919

 
$
290,478

Royalty
8,437

 
5,504

Other
6,453

 
13,233

 
297,809

 
309,215

Less allowances1
11,703

 
49,219

 
$
286,106

 
$
259,996

__________________________________
Notes:
1 
As of February 3, 2018, the accounts receivable allowance included allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. During the first quarter of fiscal 2019, the Company adopted a new revenue recognition standard on a modified retrospective basis which changed the presentation of allowances for wholesale sales returns and wholesale markdowns to be classified within accrued expenses rather than as a reduction to accounts receivable. Accordingly, the Company has included allowances of $26.1 million and $11.2 million related to wholesale sales returns and wholesale markdowns, respectively, in accrued expenses as of November 3, 2018. As of November 3, 2018, the accounts receivable allowance was only related to allowances for doubtful accounts. Refer to Notes 1 and 2 for further information regarding the impact from the adoption of the new revenue recognition standard on the Company’s condensed consolidated financial statements and related disclosures during the third quarter of fiscal 2019.
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):
 
Nov 3, 2018
 
Feb 3, 2018
Raw materials
$
1,360

 
$
604

Work in progress
166

 
16

Finished goods1
546,991

 
427,684

 
$
548,517

 
$
428,304

__________________________________
Notes:
1 
During the first quarter of fiscal 2019, the Company adopted a new revenue recognition standard on a modified retrospective basis which changed the presentation of the estimated cost associated with the allowance for sales returns to be included within other current assets rather than included in inventories. Accordingly, the Company has included $10.4 million related to the estimated cost associated with the allowance for sales returns in other current assets as of November 3, 2018. Refer to Notes 1 and 2 for further information regarding the impact from the adoption of the new revenue recognition standard on the Company’s condensed consolidated financial statements and related disclosures during the third quarter of fiscal 2019.
The above balances include an allowance to write down inventories to the lower of cost or net realizable value of $26.7 million and $29.9 million as of November 3, 2018 and February 3, 2018, respectively.

17


(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 61.7% for the nine months ended November 3, 2018, compared to 508.6% for the nine months ended October 28, 2017. The improvement in the effective income tax rate during the nine months ended November 3, 2018 was due primarily to the revision of provisional amounts recorded related to the impact of the 2017 Tax Cuts and Jobs Act in the U.S. (referred to herein as the “Tax Reform”) as discussed further below, lower losses during the nine months ended November 3, 2018 in jurisdictions in which the Company has valuation allowances, the impact of discrete non-deductible expenses as compared to the same prior-year period and, to a lesser extent, the reversal of a valuation allowance on certain deferred taxes.
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 establishes new tax laws that are 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. The SEC issued authoritative guidance which addresses accounting for the impact of the Tax Reform. This guidance provides a measurement period, which should not extend beyond one year from the enactment date, during which the Company may finalize the accounting for the impacts of the Tax Reform, and allows for the Company to record provisional estimates of such amounts. 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 the fiscal year 2018 and concluded, based on the additional information that has become available, that no transition tax is due. As a result, during the three months ended November 3, 2018, the Company revised its provisional amount initially recorded in the three months ended February 3, 2018 related to the Tax Reform and recognized a tax benefit of $19.6 million. The Company will continue to refine such amounts within the measurement period allowed if and when additional interpretations are issued. 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 legislation is passed in the future to revise the relevant IRS code section, the Company could have additional tax expense and tax liabilities of approximately $12.8 million. In accordance with current legislation, such charges would be payable over the next seven years.
The Company had no amounts recorded in the condensed consolidated balance sheet related to the transition tax in accrued expenses or other long-term liabilities as of November 3, 2018. The Company included $1.9 million and $17.7 million related to the transition tax in accrued expenses and other long-term liabilities in its condensed consolidated balance sheets as of February 3, 2018, respectively.
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 November 3, 2018, 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 $18.4 million and $19.0 million as of November 3, 2018 and February 3, 2018, respectively.

18


(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 North, South and Central America. 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. 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 loss from operations are summarized as follows for the three and nine months ended November 3, 2018 and October 28, 2017 (in thousands):    
 
Three Months Ended
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Net revenue:
 

 
 

 
 
 
 
Americas Retail
$
186,925

 
$
187,021

 
$
555,390

 
$
561,903

Americas Wholesale
52,698

 
45,636

 
127,630

 
114,151

Europe
254,037

 
221,230

 
771,470

 
641,833

Asia
89,461

 
74,322

 
256,298

 
200,436

Licensing1,2
22,286

 
20,744

 
61,779

 
53,267

Total net revenue1,2
$
605,407

 
$
548,953

 
$
1,772,567

 
$
1,571,590

Earnings (loss) from operations:
 

 
 

 
 
 
 
Americas Retail2,3
$
3,799

 
$
(2,414
)
 
$
3,701

 
$
(27,550
)
Americas Wholesale2,3
10,392

 
8,562

 
21,743

 
20,783

Europe3,4
7,410

 
9,095

 
17,608

 
38,147

Asia3
1,938

 
2,954

 
7,637

 
5,734

Licensing2,3
19,485

 
18,346

 
54,408

 
46,196

Total segment earnings from operations2,4
43,024

 
36,543


105,097

 
83,310

Corporate overhead2,4
(20,824
)
 
(23,443
)
 
(72,316
)
 
(67,403
)
Net gains (losses) on lease terminations5

 
(11,494
)
 
152

 
(11,494
)
Asset impairment charges6
(1,277
)
 
(2,018
)
 
(5,017
)
 
(6,013
)
European Commission fine7
(42,428
)
 

 
(42,428
)
 

Total loss from operations2,4
$
(21,505
)
 
$
(412
)

$
(14,512
)
 
$
(1,600
)
 
 
 
 
 
 
 
 
__________________________________
Notes:
1 
During the fourth quarter of fiscal 2018, the Company reclassified net royalties received on the Company’s inventory purchases of licensed product from net revenue to cost of product sales to reflect its treatment as a reduction of the cost of such licensed product. Accordingly, net revenue for the three and nine months ended October 28, 2017 has been adjusted to conform to the current period presentation. This reclassification had no impact on previously reported loss from operations.
2 
During the first quarter of fiscal 2019, the Company adopted a comprehensive new revenue recognition standard using a modified retrospective method that does not restate prior periods to be comparable to the current period presentation. The

19


adoption of this guidance primarily impacted the presentation of advertising contributions received from the Company’s licensees and the related advertising expenditures incurred by the Company. The adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of $2.7 million, as well as an increase in SG&A expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of $1.0 million, $0.6 million, $0.3 million and $0.6 million, respectively, during the three months ended November 3, 2018 compared to the same prior-year period. The net favorable impact on loss from operations was approximately $0.2 million during the three months ended November 3, 2018 compared to the same prior-year period. During the nine months ended November 3, 2018, the adoption of this guidance resulted in an increase in net royalty revenue within the Company’s Licensing segment of $7.1 million, as well as an increase in SG&A expenses in our Americas Retail, Americas Wholesale and Licensing segments as well as corporate overhead of $3.3 million, $1.5 million, $0.7 million and $1.7 million, respectively, during the nine months ended November 3, 2018 compared to the same prior-year period. The net unfavorable impact on loss from operations was approximately $0.1 million during the nine months ended November 3, 2018 compared to the same prior-year period. Refer to Note 1 for more information regarding the impact from the adoption of this new standard.
3 
During the first quarter of fiscal 2019, the Company changed the segment accountability for funds received from licensees on the Company’s purchases of its licensed products. These amounts were treated as a reduction of cost of product sales within the Licensing segment but now are considered in the results of the segments that control the respective purchases for purposes of segment performance evaluation. Accordingly, segment results for the three and nine months ended October 28, 2017 have been adjusted to conform to the current period presentation.
4 
During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of earnings (loss) from operations. Accordingly, loss from operations and segment results for the three and nine months ended October 28, 2017 have been adjusted to conform to the current period presentation.
5 
During the nine months ended November 3, 2018, the Company recorded net gains on lease terminations related primarily to the early termination of certain lease agreements in North America. The net gains on lease terminations were recorded during the three months ended May 5, 2018. During the nine months ended October 27, 2018, the Company recorded net losses on lease termination related primarily to the modification of certain lease agreements held with a common landlord in North America. Refer to Note 1 for more information regarding the net gains (losses) on lease terminations.
6 
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 14 for more information regarding these asset impairment charges.  
7 
During the third quarter of fiscal 2019, the Company recorded a charge of €37.0 million euro ($42.4 million) related to an estimated fine expected to be imposed on the Company by the European Commission related to its inquiry concerning possible violations of European Union competition rules by the Company. Refer to Note 12 for further information.
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
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Net revenue:
 

 
 

 
 
 
 
U.S.
$
181,113

 
$
170,068

 
$
519,547

 
$
507,239

Italy
65,050

 
67,561

 
213,336

 
195,955

Canada
49,961

 
53,381

 
136,296

 
142,905

South Korea
40,623

 
41,709

 
114,706

 
114,547

Other foreign countries
268,660

 
216,234

 
788,682

 
610,944

Total net revenue
$
605,407

 
$
548,953

 
$
1,772,567

 
$
1,571,590

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.

20


(9)
Borrowings and Capital Lease Obligations
Borrowings and capital lease obligations are summarized as follows (in thousands):
 
Nov 3, 2018
 
Feb 3, 2018
Mortgage debt, maturing monthly through January 2026
$
19,885

 
$
20,323

Capital lease obligations
17,031

 
18,589

Other
2,876

 
3,129

 
39,792

 
42,041

Less current installments
3,538

 
2,845

Long-term debt and capital lease obligations
$
36,254

 
$
39,196

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 November 3, 2018, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $19.9 million. At February 3, 2018, outstanding borrowings under the Mortgage Debt, net of debt issuance costs of $0.1 million, were $20.3 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 values of the interest rate swap asset as of November 3, 2018 and February 3, 2018 were approximately $1.7 million and $1.5 million, respectively.
Capital Lease Obligations
During fiscal 2018, the Company began the relocation of its European distribution center to the Netherlands. As a result, the Company entered into a capital lease of $17.0 million for equipment used in the new facility. The capital lease primarily provides for monthly minimum lease payments through May 2027 with an effective interest rate of approximately 6%. As of November 3, 2018 and February 3, 2018, the capital lease obligation was $14.9 million and $17.3 million, respectively.
The Company also has smaller capital leases related primarily to computer hardware and software. As of November 3, 2018 and February 3, 2018, these capital lease obligations totaled $2.1 million and $1.3 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 (the “Credit Facility”). The Credit Facility provides for a borrowing capacity in an amount up to $150 million, including a Canadian sub-facility up to $50 million, subject to a borrowing base. Based on applicable accounts receivable, inventory, eligible cash balances and relevant covenant restrictions as of November 3, 2018, the Company could have borrowed up to $134 million under the

21


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 November 3, 2018, 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 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. As of November 3, 2018, the Company could have borrowed or entered into documentary letters of credit totaling up to $87.1 million under these agreements. As of November 3, 2018, the Company had no outstanding borrowings or outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 1.1% to 5.0%. With the exception of one facility for up to $39.9 million that has a minimum net equity requirement, there are no other financial ratio covenants.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.

22


(10)
Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three and nine months ended November 3, 2018 and October 28, 2017 (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
Nov 3, 2018
 
Oct 28, 2017
 
Nov 3, 2018
 
Oct 28, 2017
Stock options
$
824

 
$
571

 
$
2,191

 
$
1,761

Stock awards/units
3,692

 
3,658

 
10,154

 
10,539

Employee Stock Purchase Plan
29

 
31

 
189

 
110

Total share-based compensation expense
$
4,545

 
$
4,260

 
$
12,534

 
$
12,410

Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $4.2 million and $27.2 million, respectively, as of November 3, 2018. This cost is expected to be recognized over a weighted average period of 1.6 years. The weighted average grant date fair value of stock options granted was $5.89 and $1.57 during the nine months ended November 3, 2018 and October 28, 2017, respectively. 
Grants
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. On April 28, 2017, the Company granted select key management 1,056,042 nonvested stock units which are subject to certain performance-based vesting or market-based vesting conditions.
Annual Grants
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. On March 29, 2017, the Company made an annual grant of 1,283,175 stock options and 707,675 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.
The following table summarizes the activity for nonvested performance-based units during the nine months ended November 3, 2018:
 
Number of
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at February 3, 2018
1,300,921

 
$
14.01

Granted
489,646

 
21.83

Vested
(141,625
)
 
15.07

Forfeited
(52,312
)
 
15.37

Nonvested at November 3, 2018
1,596,630

 
$
16.27


23


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 nine months ended November 3, 2018:
 
Number of
Units
 
Weighted
Average
Grant Date
Fair Value
Nonvested at February 3, 2018
388,477

 
$
12.28

Granted
129,932

 
20.28

Vested

 

Forfeited

 

Nonvested at November 3, 2018
518,409

 
$
14.28

(11)
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 November 3, 2018 with expiration or option exercise dates ranging from calendar years 2018 to 2020.
Aggregate rent, common area maintenance charges and property tax expense recorded under these four related party leases were approximately $3.7 million and $3.6 million for the nine months ended November 3, 2018 and October 28, 2017, 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.
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. The total fees paid under these arrangements for the nine months ended November 3, 2018 and October 28, 2017 were approximately $1.0 million and $0.7 million, respectively.
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 3, 2018.
(12)
Commitments and Contingencies
Leases
The Company 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 December 2037. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume,

24


generally ranging from 4% to 20%, 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 35% of annual sales volume. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through October 2023.
As discussed in further detail in Note 9, the Company leases equipment as well as computer hardware and software under capital lease obligations.
Investment Commitments
As of November 3, 2018, the Company had an unfunded commitment to invest €3.6 million ($4.1 million) in a private equity fund. Refer to Note 14 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.
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third-party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action were subsequently filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Intermediate People’s Court of Nanjing, China and the Court of Paris, France. The three-week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $26 million and an accounting of profits of $99 million, the final ruling provided for monetary damages of $2.3 million against the Company and $2.3 million against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of three of the plaintiff’s Italian and four of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. On September 15, 2014, the Court of Appeal of Milan affirmed the majority of the lower Court’s ruling in favor of the Company, but overturned the lower Court’s finding with respect to an unfair competition claim. That portion of the matter moved to a damages phase based on the ruling. On October 16, 2015, the plaintiff appealed the remainder of the Court of Appeal of Milan’s ruling in favor of the Company to the Italian Supreme Court of Cassation. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately $80,000. The Company strongly disagreed with the Court’s decision and appealed the ruling. On August 31, 2016, the Court of Appeal for the China matter issued a decision in favor of the Company, rejecting all of the plaintiff’s claims. In March 2017, the plaintiff petitioned the China Supreme Court for a retrial of the matter. On January 30, 2015, the Court of Paris ruled in favor of the Company in the France matter, rejecting all of the plaintiff’s claims and partially canceling two of the plaintiff’s community trademark registrations and one of the plaintiff’s international trademark registrations. On February 17, 2015, the plaintiff appealed the Court of Paris’ ruling. In April 2018, the parties entered into an agreement to settle all pending worldwide intellectual property litigation and trademark office matters between the parties and their subsidiaries, including the previously active litigation matters in Italy, China and France. As part of the settlement, the parties agreed on the use of

25


various design elements by each party on a go-forward basis. The settlement did not have a significant impact on the Company’s financial results, and the terms of the settlement are not expected to have a negative impact on the Company’s business operations going forward.
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 ($11.4 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 ($11.0 million) of these favorable MFDTC judgments with the Appeals Court. To date, €6.3 million ($7.2 million) have been decided in favor of the Company, €1.3 million ($1.4 million) have been decided in favor of the ICA, and €2.1 million ($2.4 million) remain pending. 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 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.
On June 6, 2017, the European Commission notified the Company that it had initiated proceedings to investigate whether certain of the Company’s practices and agreements concerning the distribution of apparel and accessories within the European Union breached European Union competition rules related to cross-border transactions, internet sales limitations and resale price restrictions. The Company has cooperated with the European Commission, including through responses to requests for information, through changes to certain business practices and agreements and by engaging in a settlement discussion process. Depending on the outcome of the proceedings, a broad range of remedies is available to the European Commission, including imposing a fine and/or injunctive relief prohibiting or restricting certain business practices. The Company has already made certain changes to its business practices and agreements in response to, and early in the course of, these proceedings, and the Company believes that such changes have not had, and will not have, a material impact on its ongoing business operations within the European Union. Based on the settlement discussion process, the Company now believes that it is likely to incur a fine in an amount between €37.0 million ($42.4 million) and €40.6 million ($46.6 million) with no further modifications of the Company’s business practices and agreements beyond those already made. Accordingly, the Company accrued an estimated charge of €37.0 million ($42.4 million) during the third quarter of fiscal 2019. A final outcome in this matter could occur as early as the fourth quarter of fiscal 2019, although any resolution may be delayed or different than current expectations due to the inherent unpredictability of the proceedings.
(13)
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 $61.6 million and $64.5 million as of November 3, 2018 and February 3, 2018, respectively, and were included in other assets

26


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 loss of $2.3 million and $1.6 million in other expense during the three and nine months ended November 3, 2018, respectively, and unrealized gains of $1.6 million and $5.5 million in other income during the three and nine months ended October 28, 2017, respectively. The projected benefit obligation was $54.9 million and $54.8 million as of November 3, 2018 and February 3, 2018, respectively, 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 and $1.3 million were made during the three and nine months ended November 3, 2018, respectively. SERP benefit payments of $0.4 million and $1.3 million were made during the three and nine months ended October 28, 2017, respectively.
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 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 November 3, 2018 and February 3, 2018, the foreign pension plans had a total projected benefit obligation of $27.9 million and $26.4 million, respectively, and plan assets held in independent investment fiduciaries of $22.4 million and $21.4 million, respectively. The net liability of $5.5 million and $5.0 million was included in other long-term liabilities in the Company’s condensed consolidated balance sheets as of November 3, 2018 and February 3, 2018, respectively.

27


The components of net periodic defined benefit pension cost for the three and nine months ended November 3, 2018 and October 28, 2017 related to the Company’s defined benefit plans are as follows (in thousands):
 
Three Months Ended Nov 3, 2018
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
730

 
$
730

Interest cost
471

 
54

 
525

Expected return on plan assets

 
(72
)
 
(72
)
Net amortization of unrecognized prior service credit

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

 
103

 
150

Net periodic defined benefit pension cost
$
518

 
$
808

 
$
1,326

 
Nine Months Ended Nov 3, 2018
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
2,224

 
$
2,224

Interest cost
1,415

 
164

 
1,579

Expected return on plan assets

 
(221
)
 
(221
)
Net amortization of unrecognized prior service credit

 
(21
)
 
(21
)
Net amortization of actuarial losses
140

 
313

 
453

Net periodic defined benefit pension cost
$
1,555

 
$
2,459

 
$
4,014

 
Three Months Ended Oct 28, 2017
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
492

 
$
492

Interest cost
461

 
22

 
483

Expected return on plan assets

 
(48
)
 
(48
)
Net amortization of unrecognized prior service credit

 
(7
)
 
(7
)
Net amortization of actuarial losses
38

 
78

 
116

Net periodic defined benefit pension cost
$
499

 
$
537

 
$
1,036

 
Nine Months Ended Oct 28, 2017
 
SERP
 
Foreign Pension Plans
 
Total
Service cost
$

 
$
1,452

 
$
1,452

Interest cost
1,382

 
64

 
1,446

Expected return on plan assets

 
(143
)
 
(143
)
Net amortization of unrecognized prior service credit

 
(20
)
 
(20
)
Net amortization of actuarial losses
114

 
230

 
344

Net periodic defined benefit pension cost
$
1,496

 
$
1,583

 
$
3,079

During the first quarter of fiscal 2019, the Company adopted new authoritative guidance which requires that the non-service components of net periodic defined benefit pension cost be presented outside of loss from operations. The Company adopted this guidance on a retrospective basis and, as a result, reclassified approximately $0.5 million and $1.6 million from SG&A expenses to other income (expense) for the three and nine months ended October 28, 2017, respectively.

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(14)
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.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of November 3, 2018 and February 3, 2018 (in thousands):
 
 
Fair Value Measurements at Nov 3, 2018
 
Fair Value Measurements at Feb 3, 2018
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets: