GUESS?, INC. General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or
the "Company" in this Form 10Q, we are referring to Guess?, Inc. ("GUESS?") and
its subsidiaries on a consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in our other reports filed under the Securities Exchange Act of 1934, as amended, in our press releases and in other documents. Except for historical information contained herein, certain matters discussed in this Quarterly Report, including statements concerning the potential actions and impacts related to the COVID-19 pandemic; results of the accelerated share repurchase and cash needs; statements concerning the our future outlook, including with respect to the second quarter and full year of fiscal 2023; statements concerning share repurchase plans; statements concerning our expectations, goals, future prospects, and current business strategies and strategic initiatives; and statements expressing optimism or pessimism about future operating results and growth opportunities are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are frequently indicated by terms such as "expect," "could," "will," "should," "goal," "strategy," "believe," "estimate," "continue," "outlook," "plan," "create," "see," and similar terms, are only expectations, and involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from what is currently anticipated. Factors which may cause actual results in future periods to differ materially from current expectations include, among others: our ability to maintain our brand image and reputation; domestic and international economic or political conditions, including economic and other events that could negatively impact consumer confidence and discretionary consumer spending; recent sanctions and export controls targetingRussia and other impacts related to the war inUkraine ; the continuation or worsening of impacts related to the COVID-19 pandemic; risks relating to our indebtedness; changes to estimates related to impairments, inventory and other reserves, which were made using the best information available at the time; changes in the competitive marketplace and in our commercial relationships; our ability to anticipate and adapt to changing consumer preferences and trends; our ability to manage our inventory commensurate with customer demand; the high concentration of our Americas Wholesale business; risks related to the costs and timely delivery of merchandise to our distribution facilities, stores and wholesale customers; unexpected or unseasonable weather conditions; our ability to effectively operate our various retail concepts, including securing, renewing, modifying or terminating leases for store locations; our ability to successfully and/or timely implement our growth strategies and other strategic initiatives; our ability to successfully enhance our global omni-channel capabilities; our ability to expand internationally and operate in regions where we have less experience, including through joint ventures; risks relating to our$300 million 2.00% convertible senior notes due 2024 (the "Notes"), including our ability to settle the liability in cash; disruptions at our distribution facilities; our ability to attract and retain management and other key personnel; obligations or changes in estimates arising from new or existing litigation, income tax and other regulatory proceedings; risks related to the income tax treatment of our third quarter fiscal 2022 intra-entity transfer of intellectual property rights from certainU.S. entities to a wholly-owned Swiss subsidiary; the occurrence of unforeseen epidemics, such as the COVID-19 pandemic; other catastrophic events; changes inU.S. or foreign income tax or tariff policy, including changes to tariffs on imports into theU.S. ; accounting adjustments to our unaudited financial statements identified during the completion of our annual independent audit of financial statements and financial controls or from subsequent events arising after issuance of this release; risk of future non-cash asset impairments, including goodwill, right-of-use lease assets and/or other store asset impairments; violations of, or changes to, domestic or international laws and regulations; risks associated with the acts or omissions of our licensees and third party vendors, including a failure to comply with our vendor code of conduct or other policies; risks associated with cyber-attacks and other cyber security risks; risks associated with our ability to 34
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properly collect, use, manage and secure consumer and employee data; risks associated with our vendors' ability to maintain the strength and security of information technology systems; changes in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global income tax rates and economic and market conditions in the various countries in which we operate; impacts of inflation and further inflationary pressures; wages; risks relating to activist investor activity; and the significant voting power of our family founders. In addition to these factors, the economic, technological, managerial, and other risks identified in "Part I, Item 1A. Risk Factors" of our most recent Annual Report on Form 10-K, "Part II, Item 1A. Risk Factors" herein and other filings with theSecurities and Exchange Commission , including but not limited to the risk factors discussed therein, could cause actual results to differ materially from current expectations. The current global economic climate, length and severity of the COVID-19 pandemic, and uncertainty surrounding potential changes inU.S. policies and regulations may amplify many of these risks. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
COVID-19 Business Update
The COVID-19 pandemic is continuing to negatively impact certain regions of our business, especially inAsia where our operations were impacted by capacity restrictions and temporary store closures. Overall, this resulted in the closure of less than 2% of our directly operated stores as ofApril 30, 2022 , mostly inChina , the impact of which was minimal to our first quarter results. The COVID-19 crisis has also contributed to disruptions in the overall global supply chain, leading to industry-wide product delays and higher product and freight costs. We have been working actively to mitigate these headwinds to the extent possible through a number of global supply chain initiatives. In light of the fluid nature of the pandemic, we continue to carefully monitor global and regional developments and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and to mitigate, to the extent possible, the effect of supply chain disruptions.
Business Segments
Our businesses are grouped into five reportable segments for management and internal financial reporting purposes: Americas Retail, Americas Wholesale,Europe ,Asia , and Licensing. Our Americas Retail, Americas Wholesale,Europe and Licensing reportable segments are the same as their respective operating segments. Certain components of ourAsia operating segment are separate operating segments based on region, which have been aggregated into theAsia reportable segment for disclosure purposes. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before corporate performance-based compensation costs, asset impairment charges, net gains (losses) on lease modifications, restructuring charges and certain non-recurring credits (charges), if any. We believe this segment reporting reflects how our business segments are managed and how each segment's performance is evaluated by our chief operating decision maker to assess performance and make resource allocation decisions. Information regarding these segments is summarized in "Part I, Item 1. Financial Statements - Note 8 - Segment Information."
Products
We derive our net revenue from the sale of GUESS?, G by GUESS (GbG), GUESS Kids and MARCIANO apparel and our licensees' products through our worldwide network of directly-operated and licensed retail stores, wholesale customers and distributors, as well as our online sites. We also derive royalty revenue from worldwide licensing activities. During fiscal 2021, we made the decision to integrate our G by GUESS brand into our Factory business over time in order to drive further efficiencies. Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies
other than the
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Polish zloty, Russian rouble and Turkish lira), currency fluctuations can have a significant impact on the translation of our international revenues and earnings (loss) intoU.S. dollars. Some of our transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong andMexico are denominated inU.S. dollars, Swiss francs, British pounds and Russian roubles, exposing them to exchange rate fluctuations when these transactions (such as inventory purchases or periodic lease payments) are converted to their functional currencies. As a result, fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings (loss), and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. When these foreign exchange rates weaken versus theU.S. dollar at the time the respectiveU.S. dollar denominated payment is made relative to the payments made in the comparable period, our product margins could be unfavorably impacted. In addition, there are certain real estate leases denominated in a currency other than the functional currency of the respective entity that entered into the agreement (primarily Swiss francs, Russian roubles and Polish zloty). As a result, we may be exposed to volatility related to unrealized gains or losses on the translation of present value of future lease payment obligations when translated at the exchange rate as of a reporting period-end. During the first three months of fiscal 2023, the averageU.S. dollar rate was weaker against the Chinese yuan, and stronger against the euro, British pound, Turkish lira, Polish Slotzy, Canadian dollar, Russian rouble, Japanese yen, Korean won, and Mexican peso, compared to the average rate in the same prior-year period. This had an overall unfavorable impact on the translation of our international revenues and on earnings from operations for the three months endedApril 30, 2022 compared to the same prior-year period. If theU.S. dollar strengthens in fiscal 2023 relative to the respective fiscal 2022 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items, particularly inCanada ,Europe (primarily the euro, Turkish lira, British Pound and Russian rouble) andMexico . Alternatively, if theU.S. dollar weakens relative to the respective fiscal 2022 foreign exchange rates, our revenues and operating results, as well as our other cash balance sheet items, could be positively impacted by foreign currency fluctuations during the remainder of fiscal 2023, particularly in these regions. We are currently operating inRussia through our wholesale and retail channels, including through our 70%-owned Russian joint venture. Please refer to "Part II, Item 1A. Risk Factors" herein for a discussion of risks we face relating to the ongoing conflict betweenRussia andUkraine . We enter into derivative financial instruments to offset some, but not all, of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
Strategy
InDecember 2019 and updated inMarch 2021 ,Carlos Alberini , our Chief Executive Officer, shared his strategic vision and implementation plan for execution which included the identification of several key priorities to drive revenue and operating profit growth. These priorities are: (i) brand relevancy and brand elevation; (ii) product excellence; (iii) customer centricity; (iv) global footprint; and (v) functional capabilities; each as further described below: Brand Relevancy and Brand Elevation. We will continue to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We have developed and launched one global line of product for all categories. We have also elevated our brand and improved the quality of our products, allowing us to realize more full-priced sales and rely less on promotional activity. We will continue to use unique go-to-market strategies and execute celebrity and influencer partnerships and collaborations as we believe that they are critical to engage more effectively with a younger and broader audience. 36
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Product Excellence. We believe product is a key factor of success in our business. We strive to design and make great products and will extend our product offering to provide our customers with products for the different occasions of their lifestyles. We will seek to better address local product needs.
Customer Centricity. We will continue to place the customer at the center of everything we do. We plan to implement processes and platforms to provide our customers with a seamless omni-channel experience and expand our digital business.
Global Footprint. We will continue to expand the reach of our brands by optimizing the productivity and profitability of our current footprint and expanding our distribution channels.
Functional Capabilities. We will continue to drive operational improvements to leverage and support our global business more effectively, primarily in the areas of logistics, sourcing, product development and production, inventory management, and overall infrastructure.
Capital Allocation
We plan to continue to prioritize capital allocation toward investments that support growth and infrastructure, while remaining highly disciplined in the way we allocate capital across projects, including new store development, store remodels, technology and logistics investments and others. When we prioritize investments, we will focus on their strategic significance and their return on invested capital expectations. We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently. In addition, we plan to continue to return value to shareholders through dividends and share repurchases. During fiscal 2022, the Board of Directors terminated our previous 2012$500 million share repurchase program (which had$47.8 million capacity remaining) and authorized a new$200 million share repurchase program. OnMarch 14, 2022 , the Board of Directors expanded the repurchase authorization by$100.0 million , leaving an available capacity of$249.0 million at that time. OnMarch 18, 2022 , in connection with this expanded authorization, we entered into an accelerated share repurchase agreement (the "2022 ASR Contract) with a financial institution (in such capacity, the "2022 ASR Counterparty") to repurchase an aggregate$175.0 million of our common stock. Under the 2022 ASR Contract, we made a payment of$175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of our common stock onMarch 21, 2022 , representing approximately 40% ($70.0 million ) of the total value expected to be repurchased under the 2022 ASR Contract. Refer to "Part I, Item 1. Financial Statements - Note 4 - Stockholders' Equity" for further information on the 2022 ASR Contract. During the three months endedApril 30, 2022 , we also repurchased approximately 0.5 million shares of our common stock in open market transactions totaling$11.7 million .
Comparable Store Sales
We reportNational Retail Federation calendar comparable store sales on a quarterly basis for our retail businesses which include the combined results from our brick-and-mortar retail stores and our e-commerce sites. We also separately report the impact of e-commerce sales on our comparable store sales metric. As a result of our omni-channel strategy, our e-commerce business has become strongly intertwined with our brick-and-mortar retail store business. Therefore, we believe that the inclusion of e-commerce sales in our comparable store sales metric provides a more meaningful representation of our retail results. Sales from our brick-and-mortar retail stores include purchases that are initiated, paid for and fulfilled at our retail stores and directly-operated concessions as well as merchandise that is reserved online but paid for and picked up at our retail stores. Sales from our e-commerce sites include purchases that are initiated and paid for online and shipped from either our distribution centers or our retail stores as well as purchases that are initiated in a retail store, but due to inventory availability at the retail store, are ordered and paid for online and shipped from our distribution centers or picked up from a different retail store. Store sales are considered comparable after the store has been open for 13 full fiscal months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store 37
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concept, the store sales are removed from the comparable store base until the store has been opened at its new size, in its new location or under its new concept for 13 full fiscal months. Stores that are permanently closed or temporarily closed (including as a result of pandemic-related closures) for more than seven days in any fiscal month are excluded from the calculation in the fiscal month that they are closed. E-commerce sales are considered comparable after the online site has been operational in a country for 13 full fiscal months and exclude any related revenue from shipping fees. These criteria are consistent with the metric used by management for internal reporting and analysis to measure performance of the store or online sites. Definitions and calculations of comparable store sales used by us may differ from similarly titled measures reported by other companies.
Other
We operate on a 52/53-week fiscal year calendar which ends on the Saturday
nearest to
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 33.6% to$8.0 million , or diluted earnings per share ("EPS") of$0.12 per common share, for the quarter endedApril 30, 2022 , compared to$12.0 million , or diluted EPS of$0.18 per common share, for the quarter endedMay 1, 2021 . During the quarter endedApril 30, 2022 , we recognized$1.5 million in asset impairment charges;$0.6 million in net gains on lease modifications;$4.4 million for certain professional service and legal fees and related credits (costs); and$3.2 million in additional income tax expense from certain discrete income tax adjustments (or a combined$7.3 million , or$0.12 per share, negative impact after considering the related tax benefit of$1.3 million ). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was$15.2 million and adjusted diluted earnings was$0.24 per common share for the quarter endedApril 30, 2022 . During the quarter endedMay 1, 2021 , we recognized$0.4 million in asset impairment charges;$2.1 million in net gains on lease modifications;$1.1 million for certain professional services and legal fees and related credits (costs);$2.8 million of amortization of debt discount related to our Notes; and$0.1 million in additional income tax expense from certain discrete income tax adjustments (or a combined$1.9 million , or$0.03 per share, negative impact after considering the related income tax benefit of these adjustments of$0.4 million ). Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. was$13.9 million and adjusted diluted earnings was$0.21 per common share for the quarter endedMay 1, 2021 . References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures."
Highlights of our performance for the quarter ended
Operations
• Total net revenue increased 14.1% to$593.5 million for the quarter endedApril 30, 2022 , compared to$520.0 million in the same prior-year quarter. In constant currency, net revenue increased by 20.6%. • Gross margin (gross profit as a percentage of total net revenue) increased 90 basis points to 41.6% for the quarter endedApril 30, 2022 , compared to 40.7% in the same prior-year quarter. • Selling, general and administrative ("SG&A") expenses as a percentage of total net revenue ("SG&A rate") decreased 60 basis points to 35.3% for the quarter endedApril 30, 2022 , compared to 35.9% in the same prior-year quarter. SG&A expenses increased 12.4% to$209.8 million for the quarter endedApril 30, 2022 , compared to$186.7 million in the same prior-year quarter. 38
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• During the quarter ended
• During the quarter ended
• Operating margin improved 100 basis points to 6.1% for the quarter endedApril 30, 2022 , compared to 5.1% in the same prior-year quarter. The improvement in operating margin was mainly driven by 410 basis points resulting from expense leverage due to higher sales. This was partially offset by higher store labor costs in Americas Retail and an unfavorable currency impact which negatively impacted operating margin by 120 basis points and 100 basis points, respectively. Higher expenses related to certain professional service and legal fees and related costs unfavorably impacted operating margin by 50 basis points. Lower net gains from lease modifications and higher asset impairment charges negatively impacted operating margin by 50 basis points. Earnings from operations increased 36.9% to$36.4 million for the quarter endedApril 30, 2022 , compared to$26.6 million in the same prior-year quarter.
• Other expense, net, totaled
• The effective income tax rate increased by 10.1% to 39.9% for the quarter
ended
Key Balance Sheet Accounts
•We had
•As ofApril 30, 2022 , we had$43.8 million in outstanding borrowings under our term loans and$42.7 million in outstanding borrowings under our credit facilities compared to$56.0 million in outstanding borrowings under our term loans and$5.1 million in outstanding borrowings under our credit facilities as ofMay 1, 2021 . •During the quarter endedApril 30, 2022 , we made a payment of$175.0 million related to the 2022 ASR Contract and also repurchased 0.5 million shares of our common stock for$11.7 million in open market transactions. During the quarter endedMay 1, 2021 , there were no share repurchases. •Accounts receivable consists of trade receivables relating primarily to our wholesale business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable decreased by$10.9 million , or 3.5%, to$295.4 million as ofApril 30, 2022 compared to$306.3 million atMay 1, 2021 . On a constant currency basis, accounts receivable increased by$23.8 million , or 7.8%, when compared toMay 1, 2021 .
•Inventory increased by
Global Store Count During the quarter endedApril 30, 2022 , together with our partners, we opened 34 new stores worldwide, consisting of 25 stores inEurope and theMiddle East , six stores inAsia and the Pacific, and three stores in theU.S. Together with our partners, we closed 27 stores worldwide, consisting of 12 stores inAsia and the Pacific, nine stores inEurope and theMiddle East , and six stores in theAmericas . 39
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We ended the first quarter of fiscal 2023 with stores and concessions worldwide
comprised as follows:
Stores Concessions
Region Total Directly-Operated Partner Operated Total Directly-Operated Partner Operated
United States 244 244 - 1 - 1
Canada 74 74 - - - -
Central and South America 101 67 34 29 29 -
Total Americas 419 385 34 30 29 1
Europe and the Middle East 795 564 231 51 51 -
Asia and the Pacific 424 124 300 253 111 142
Total 1,638 1,073 565 334 191 143
Of the total stores, 1,355 were GUESS? stores, 186 were GUESS? Accessories stores, 60 were G by GUESS (GbG) stores and 37 were MARCIANO stores.
Results of Operations
Three Months Ended
Consolidated Results
The following presents our condensed consolidated statements of income (in thousands, except per share data):
Three Months Ended
Apr 30, 2022 May 1, 2021 $ change % change
Net revenue $ 593,473 100.0 % $ 520,002 100.0 % $ 73,471 14.1 %
Cost of product sales 346,324 58.4 % 308,444 59.3 % 37,880 12.3 %
Gross profit 247,149 41.6 % 211,558 40.7 % 35,591 16.8 %
Selling, general and
administrative expenses 209,831 35.3 % 186,684 35.9 % 23,147 12.4 %
Asset impairment charges 1,544 0.3 % 441 0.1 % 1,103 250.1 %
Net gains on lease
modifications (601) (0.1 %) (2,145) (0.4 %) 1,544 (72.0 %)
Earnings from operations 36,375 6.1 % 26,578 5.1 % 9,797 36.9 %
Interest expense, net (2,519) (0.4 %) (5,552) (1.0 %) 3,033 (54.6 %)
Other expense, net (16,452) (2.8 %) (2,701) (0.6 %) (13,751) 509.1 %
Earnings before income tax
expense 17,404 2.9 % 18,325 3.5 % (921) (5.0 %)
Income tax expense 6,950 1.1 % 5,455 1.1 % 1,495 27.4 %
Net earnings 10,454 1.8 % 12,870 2.4 % (2,416) (18.8 %)
Net earnings attributable to
noncontrolling interests 2,484 0.5 % 864 0.1 % 1,620 187.5 %
Net earnings attributable to
Guess?, Inc. $ 7,970 1.3 % $ 12,006 2.3 % (4,036) (33.6 %)
Net earnings per common share attributable to common stockholders:
Basic $ 0.13 $ 0.19 $ (0.06)
Diluted $ 0.12 $ 0.18 $ (0.06)
Effective income tax rate 39.9 % 29.8 %
Net Revenue. Net revenue increased by $73.5 million or 14%, compared to the same
prior-year quarter. In constant currency, net revenue increased by 20.6%. Almost
60% of the increase was driven by the operation of stores this quarter that had
been temporarily closed in the same prior-year quarter and slightly over 25%
from higher wholesale shipments. The remaining increase was driven by new stores
and higher licensing revenue,
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partially offset by permanent store closures. Currency translation fluctuations relating to our non-U.S. operations unfavorably impacted net revenue by$33.5 million compared to the same prior-year quarter. Gross Margin. Gross margin increased 0.9% for the quarter endedApril 30, 2022 compared to the same prior-year quarter, driven entirely by a lower occupancy rate. The lower occupancy rate was due to a 180 basis point favorable impact from leveraging of expenses as a result of higher revenues and business mix, partially offset by 70 basis points due to rent relief in the same prior-year quarter. Product margin remained flat to the same prior-year quarter as favorable business mix and lower markdowns were offset by unfavorable currency translation fluctuations and lower initial markups. Gross Profit. Gross profit increased$35.6 million for the quarter endedApril 30, 2022 compared to the same prior-year quarter. The increase in gross profit, which included an unfavorable impact from currency translation, was driven by$43 million due to higher net revenue, partially offset by$9 million due to rent relief in the same prior-year quarter and lower initial markups. Currency translation fluctuations relating to our foreign operations unfavorably impacted gross profit by$16.7 million . We include inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including lease costs and depreciation and amortization, and a portion of our distribution costs related to our retail business in cost of product sales. We also include net royalties received on our inventory purchases of licensed product as a reduction to cost of product sales. Our gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like us, generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like us, include retail store occupancy costs in cost of product sales. SG&A Rate. Our SG&A rate decreased 0.6% for the quarter endedApril 30, 2022 from the same prior-year quarter. The favorable change in SG&A rate was driven by a 240 basis point favorable impact resulting from an overall leveraging of expenses, partially offset by 120 basis points from higher store labor costs in Americas Retail and 50 basis points from higher expenses related to certain professional service and legal fees and related (credits) costs. SG&A Expenses. SG&A expenses increased$23.1 million for the quarter endedApril 30, 2022 from the same prior-year quarter, mainly driven by approximately$18 million of higher store expenses as stores were fully open compared to last year and store labor costs were higher in Americas Retail. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by$10.3 million .
Asset Impairment Charges. During the quarters ended
Net Gains on Lease Modifications. During the quarters endedApril 30, 2022 andMay 1, 2021 , we recorded net gains on lease modifications of$0.6 million and$2.1 million related primarily to the early termination of lease agreements for certain retail locations, respectively. Operating Margin. Operating margin increased 1.0% for the quarter endedApril 30, 2022 compared to the same prior-year quarter. The improvement in operating margin was mainly driven by 410 basis points resulting from expense leverage due to higher sales. This was partially offset by higher store labor costs in Americas Retail and an unfavorable currency impact which negatively impacted operating margin by 120 basis points and 100 basis points, respectively. Higher expenses related to certain professional service and legal fees and related (credits) costs unfavorably impacted operating margin by 50 basis points. Excluding the impact of higher asset impairment charges and lower net gains on lease modifications, our operating margin would have increased 2.0% compared to the same prior-year quarter. Earnings from Operations. Earnings from operations increased by$9.8 million for the quarter endedApril 30, 2022 compared to the same prior-year quarter. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by$6.4 million . 41
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Other Expense, Net. Other expense, net for the quarter endedApril 30, 2022 was$16.5 million compared to$2.7 million in the same prior-year quarter. The change was primarily due to higher net unrealized and realized losses from foreign currency exposures and higher net unrealized losses on our Supplemental Executive Retirement Plan ("SERP") related assets compared to the same prior-year quarter. Income Tax Expense. Income tax expense for the quarter endedApril 30, 2022 was$7.0 million , or a 39.9% effective income tax rate, compared to$5.5 million , or a 29.8% effective income tax rate in the same prior-year quarter. Generally, income taxes for the interim periods are computed using the income tax rate estimated to be applicable for the full fiscal year, adjusted for discrete items, which is subject to ongoing review and evaluation by management. The change in the effective income tax rate was primarily due to: (1) a shift in the distribution of earnings among our tax jurisdictions compared to the same prior-year quarter; and (2) losses during the current quarter in certain tax jurisdictions for which we did not recognize an income tax benefit. Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased$4.0 million for the quarter endedApril 30, 2022 compared to the same prior-year quarter. Diluted EPS decreased$0.06 for the quarter endedApril 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact of$0.04 from our adoption of new accounting guidance related to our Notes and share buybacks and a negative impact from currency of$0.14 on diluted EPS in the quarter endedApril 30, 2022 when compared to the same prior-year quarter. Refer to "Non-GAAP Measures" for an overview of our non-GAAP, or adjusted, financial results for the quarters endedApril 30, 2022 andMay 1, 2021 . Excluding the impact of these non-GAAP items, adjusted net earnings attributable to Guess?, Inc. increased$1.4 million and adjusted diluted EPS increased$0.03 for the quarter endedApril 30, 2022 compared to the same prior-year quarter. We estimate a net positive impact from our share buybacks of$0.01 and a net negative impact from currency of$0.14 on adjusted diluted EPS in the quarter endedApril 30, 2022 when compared to the same prior-year quarter. 42
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Information by Business Segment
The following presents our net revenue and earnings from operations by segment
(in thousands):
Three Months Ended
Apr 30, 2022 May 1, 2021 $ change % change
Net revenue:
Americas Retail $ 166,485 $ 155,535 $ 10,950 7.0 %
Americas Wholesale 68,357 45,430 22,927 50.5 %
Europe 276,009 241,852 34,157 14.1 %
Asia 56,222 55,660 562 1.0 %
Licensing 26,400 21,525 4,875 22.6 %
Total net revenue $ 593,473 $ 520,002 73,471 14.1 %Earnings (loss) from operations:
Americas Retail$ 14,266 $ 20,274 (6,008) (29.6 %) Americas Wholesale 17,397 11,555 5,842 50.6 % Europe 17,890 4,198 13,692 326.2 % Asia (3,487) (1,808) (1,679) 92.9 % Licensing 24,444 19,431 5,013 25.8 % Total segment earnings from operations 70,510 53,650 16,860 31.4 % Corporate overhead (33,192) (28,776) (4,416) 15.3 % Asset impairment charges (1,544) (441) (1,103) 250.1 % Net gains on lease modifications 601 2,145
(1,544) (72.0 %)
Total earnings from operations$ 36,375 $ 26,578 9,797 36.9 % Operating margins: Americas Retail 8.6 % 13.0 % Americas Wholesale 25.5 % 25.4 % Europe 6.5 % 1.7 % Asia (6.2 %) (3.2 %) Licensing 92.6 % 90.3 %Total Company 6.1 % 5.1 % Americas Retail Net revenue from our Americas Retail segment increased by$11.0 million , or 7.0% for the quarter endedApril 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 7.1% compared to the same prior-year quarter. Over 80% of the increase was driven by the operation of stores this quarter that had been temporarily closed in the same prior-year quarter and 40% of the increase was driven by positive comparable store sales, partially offset by permanent store closures. Comparable sales (including e-commerce) increased 3% inU.S. dollars and constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% inU.S. dollars and constant currency. As ofApril 30, 2022 , we directly operated 385 stores in theAmericas compared to 388 stores atMay 1, 2021 , excluding concessions, which represents a 0.8% decrease from the same prior-year quarter. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites had an immaterial impact on net revenue. Operating margin decreased 4.4% for the quarter endedApril 30, 2022 from the same prior-year quarter. Approximately 320 basis points of the decrease was driven by higher store labor costs, and approximately 150 basis points for both higher markdowns and higher government subsidies received in the same prior-year quarter. This was partially offset by 280 basis points of favorable impact from higher initial markups. Earnings from operations from our Americas Retail segment decreased by$6.0 million , or 29.6% for the quarter endedApril 30, 2022 from the same prior-year quarter. Higher store expenses drove$7.3 million of the decrease and approximately$2.5 million in decreases resulted from both higher markdowns and higher 43
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government subsidies received in the same prior-year quarter. This was partially
offset by
Americas Wholesale
Net revenue from our Americas Wholesale segment increased by$22.9 million , or 50.5% for the quarter endedApril 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 50.4%. Approximately 65% of the increase was driven by ourU.S. wholesale business, almost 20% from ourMexico wholesale business, and the remaining increase was driven by ourCanada wholesale business. Overall, the growth compared to the same prior-year quarter was driven by a favorable timing of this year's deliveries to some of our partners. Currency translation fluctuations relating to our non-U.S. wholesale businesses had an immaterial impact on net revenue.
Operating margin increased 0.1% for the quarter ended
Earnings from operations from our Americas Wholesale segment increased by$5.8 million , or 50.6% for the quarter endedApril 30, 2022 from the same prior-year quarter, mainly driven by higher revenues.
Net revenue from ourEurope segment increased by$34.2 million , or 14.1% for the quarter endedApril 30, 2022 compared to the same prior-year quarter. In constant currency, net revenue increased by 26.4%. The increase in constant currency was driven over 60% by the operation of stores this quarter that had been temporarily closed in the same prior-year quarter, nearly 20% by higher wholesale revenues, 10% by net new store impact and almost 5% by positive comparable store sales. Comparable sales (including e-commerce) decreased 6% inU.S. dollars and increased 3% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales decreased the comparable sales percentage by 2% inU.S. dollars and decreased 4% in constant currency. As ofApril 30, 2022 , we directly operated 564 stores inEurope compared to 511 stores atMay 1, 2021 , excluding concessions, which represents a 10.4% increase from the same prior-year quarter. Currency translation fluctuations relating to our European operations unfavorably impacted net revenue by$29.7 million . Operating margin increased 4.8% for the quarter endedApril 30, 2022 compared to the same prior-year quarter. The increase was mainly driven by a 730 basis point improvement due to expense leverage resulting from higher sales and a 190 basis point improvement due to lower markdowns, partially offset by a 390 basis point unfavorable impact from lower initial markups due to higher freight costs and a 200 basis point unfavorable impact from currency exchange rate. Earnings from operations from ourEurope segment increased by$13.7 million , or 326.2% for the quarter endedApril 30, 2022 compared to the same prior-year quarter. Higher revenue, including the benefits from lower markdowns, was the main driver for the increase in earnings from operations and resulted in an increase of$25.0 million compared to the same prior-year quarter. This was partially offset by$11.7 million increase in freight expenses. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by$6.4 million .
Net revenue from ourAsia segment increased by$0.6 million , or 1.0% for the quarter endedApril 30, 2022 from the same prior-year quarter. In constant currency, net revenue increased by 7.7% driven by the impact of the direct operation of some of our stores inSouth Korea , which we acquired from one of our wholesale partners, which was slightly offset by the impact of the COVID-19 pandemic inChina . Comparable sales (including e-commerce) decreased 11% inU.S. dollars and 5% in constant currency compared to the same prior-year quarter. The inclusion of our e-commerce sales negatively impacted the comparable sales percentage by 1% inU.S. dollars and constant currency. Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by$3.7 million . 44
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Operating margin decreased 3.0% for the quarter endedApril 30, 2022 from the same prior-year quarter. Approximately 800 basis points of margin decrease were driven by the lower profitability in ourChina business mainly due to the impact of the COVID-19 pandemic in that market. This was partially offset by 400 basis points of impact driven by the profitability improvement inSouth Korea mainly due to the direct operation of some of our stores. Earnings from operations from ourAsia segment decreased by$1.7 million , or 92.9% for the quarter endedApril 30, 2022 compared to the same prior-year quarter. Approximately$4.0 million was driven by the lower profit inChina due to the impact of the COVID-19 pandemic, partially offset by$1.7 million of higher profit inSouth Korea . Currency translation fluctuations relating to ourAsia operations unfavorably impacted the loss from operations by$0.2 million .
Licensing
Net royalty revenue from our Licensing segment increased by
Earnings from operations from our Licensing segment increased by$5.0 million , or 25.8% for the quarter endedApril 30, 2022 from the same prior-year quarter. The increase was driven by the favorable impact to earnings from higher revenues.
Corporate Overhead
Unallocated corporate overhead increased by$4.4 million , or 15.3% for the quarter endedApril 30, 2022 compared to the same prior-year quarter primarily due to higher expenses related to certain professional service and legal fees and related (credits) costs. Non-GAAP Measures The financial information presented in this Quarterly Report includes non-GAAP financial measures, such as adjusted results and constant currency financial information. For the three months endedApril 30, 2022 andMay 1, 2021 , the adjusted results exclude the impact of certain professional service and legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications, non-cash amortization of debt discount on our Notes, the related income tax impacts of these adjustments as well as certain discrete income tax adjustments related primarily to an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary, in each case where applicable. These non-GAAP measures are provided in addition to, and not as alternatives for, our reported GAAP results. These items affect the comparability of our reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of theSEC , to exclude the effect of these items. We have excluded these items from our adjusted financial measures primarily because we believe these items are not indicative of the underlying performance of our business and the adjusted financial information provided is useful for investors to evaluate the comparability of our operating results and our future outlook (when reviewed in conjunction with our GAAP financial statements). 45
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A reconciliation of reported GAAP results to comparable non-GAAP results follows (in thousands, except per share data):
Three Months Ended
Apr 30, 2022 May 1, 2021 Reported GAAP net earnings attributable to Guess?, Inc. $
7,970
4,417 1,078
Asset impairment charges2 1,544 441
Net gains on lease modifications3 (601) (2,145)
Amortization of debt discount4 - 2,781
Discrete tax adjustments5 3,188 147
Income tax impact from adjustments6 (1,281) (435)
Total adjustments affecting net earnings attributable to Guess?, Inc.
7,267 1,867
Adjusted net earnings attributable to Guess?, Inc. $
15,237
Net earnings per common share attributable to common stockholders: GAAP diluted7$ 0.12 $ 0.18 Adjusted diluted7$ 0.24 $ 0.21
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Notes:
1 Amounts recorded represent certain professional service and legal fees and related (credits) costs which we otherwise would not have incurred as part of our business. 2 Amounts represent asset impairment charges related primarily to impairment of operating lease right-of-use assets and property and equipment related to certain retail locations resulting from under-performance and expected store closures.
3 Amounts recorded represent net gains on lease modifications related primarily to the early termination of certain lease agreements.
4 InApril 2019 , we issued$300 million principal amount of the Notes in a private offering. Prior to adoption of ASU 2020-06, we separated the Notes into liability (debt) and equity (conversion option) components. The debt discount, which represented an amount equal to the fair value of the equity component, was amortized as non-cash interest expense over the term of the Notes. We adopted ASU 2020-06 under the modified retrospective method as ofJanuary 30, 2022 . Upon adoption, the equity component was eliminated in the current period and recorded as an adjustment to retained earnings. Prior periods are not affected. 5 Amounts represent discrete income tax adjustments related primarily to the impacts from an intra-entity transfer of intellectual property rights to a wholly-owned Swiss subsidiary, impacts from cumulative valuation allowances and the income tax benefits from an income tax rate change due to net operating loss carrybacks. 6 The income tax effect of certain professional service and legal fees and related (credits) costs, asset impairment charges, net gains on lease modifications and the amortization of debt discount was based on the our assessment of deductibility using the statutory income tax rate (inclusive of the impact of valuation allowances) of the tax jurisdiction in which the charges were incurred. 7 Prior to adoption of ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), for GAAP purposes, we incurred dilution above the initial strike price of our Notes of$25.78 . AtMay 1, 2021 , there was no dilution related to the Notes for the period. We adopted ASU 2020-06 under the modified retrospective method as ofJanuary 30, 2022 . Upon adoption, we prospectively utilize the if-converted method to calculate GAAP diluted EPS. For GAAP purposes, we incur dilution of our Notes based on the initial conversion rate associated with the Notes. For the three months endedApril 30, 2022 , shares used in computing diluted EPS increased by 11.8 million shares due to the change from the treasury stock method to the if-converted method. Diluted net income per share for the three months endedApril 30, 2022 is calculated based on GAAP net income and diluted weighted-average shares of 74.5 million, which also includes the potentially dilutive effect of our stock options, restricted stock units and the Notes. For adjusted diluted shares, we exclude the dilutive impact of the Notes at stock prices below$46.88 , based on the bond hedge contracts in place that will deliver shares to offset dilution. At stock prices in excess of$46.88 , we would have an obligation to deliver additional shares in excess of the dilution protection provided by the bond hedges. Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating our foreign revenue, expenses and balance sheet amounts intoU.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. We provide constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated intoU.S. dollars at the average exchange rates in effect during the comparable period of the prior year. To calculate balance sheet amounts on a constant currency basis, the current period balance 46
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sheet amount is translated intoU.S. dollars at the exchange rate in effect at the comparable prior-year period end. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different from the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, we estimate gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translate the estimated foreign earnings (loss) at the comparable prior-year rates and exclude the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases.
Liquidity and Capital Resources
We need liquidity globally primarily to fund our working capital, occupancy costs, interest payments on our debt, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, compensation expenses, other existing operations, expansion plans, international growth and potential acquisitions and investments. If we experience a sustained decrease in consumer demand, we may require access to additional credit, which may not be available to us on commercially acceptable terms, or at all. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. In addition, in theU.S. , we need liquidity to fund share repurchases and payment of dividends to our stockholders. During the three months endedApril 30, 2022 , we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from our credit facilities and term loans and internally generated funds to finance our operations. We anticipate we will be able to satisfy our ongoing cash requirements for at least the next 12 months for working capital, capital expenditures, payments on our debt, finance leases and operating leases, as well as lease modification payments, potential acquisitions and investments, expected income tax payments, and share repurchases and dividend payments to stockholders, primarily with cash flow from operations and existing cash balances as supplemented by borrowings under our existing Credit Facilities and proceeds from our term loans, as needed. (Such arrangements are described further in "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" in the Form 10-Q.)Due to the seasonality of our business and cash needs, we may increase borrowings under our established credit facilities from time-to-time during the next 12 months and beyond. OnMay 5, 2022 , we entered into a €250 million revolving credit facility through a European subsidiary, which replaced certain European short-term borrowing arrangements. Refer to "Part I, Item 1. Financial Statements - Note 17 - Subsequent Events" for further information. If we experience a sustained decrease in consumer demand related to the COVID-19 pandemic or to economic, political or other conditions or events, we may require access to additional credit, which may not be available to us on commercially acceptable terms or at all. We expect to settle the principal amount of our outstanding Notes in 2024 in cash and any excess in shares. Our outstanding Notes may be converted at the option of the holders as described in "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" of this Form 10-Q and in "Note 10 - Convertible Senior Notes and Related Transactions" of the Consolidated Financial Statements included in our Annual Report on Form 10-K. As ofApril 30, 2022 , none of the conditions allowing holders of the Notes to convert had been met. Pursuant to one of these conditions, if our stock trading price exceeds 130% of the conversion price of the Notes (currently$25.53 ) for at least 20 trading days during the 30 consecutive trading-day period ending on, and including, the last trading day of any calendar quarter, holders of the Notes would have the right to convert their convertible notes during the next calendar quarter. In accordance with the terms of the indenture governing the Notes, we have adjusted the conversion rate and the conversion price of the Notes for quarterly dividends exceeding$0.1125 per share. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at 47
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our election, in the manner and subject to the terms and conditions provided in the indenture governing the Notes. The convertible note hedge transaction we entered into in connection with our issuance of the Notes is expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes that are converted, as the case may be. We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, we had a substantial amount of previously taxed earnings that could be distributed to theU.S. without additionalU.S. taxation. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and regularly review our cash positions and determination of indefinite reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes andU.S. state income taxes, beyond the one-time transition tax. As ofApril 30, 2022 , we determined that approximately$12.7 million of such foreign earnings are no longer indefinitely reinvested. The incremental tax cost to repatriate these earnings to theU.S. is immaterial. We intend to indefinitely reinvest the remaining earnings from the our foreign subsidiaries for which a deferred income tax liability has not already been recorded. It is not practicable to estimate the amount of income tax that might be payable if these earnings were repatriated due to the complexities associated with the hypothetical calculation. As ofApril 30, 2022 , we had cash and cash equivalents of$147.9 million , of which approximately$16.5 million was held in theU.S. Excess cash and cash equivalents, which represent the majority of our outstanding cash and cash equivalents balance, are held primarily in overnight deposit and short-term time deposit accounts and money market accounts. Please refer to "Forward-Looking Statements" discussed above and "Part I, Item 1A. Risk Factors" contained in our most recent Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
COVID-19 Impact on Liquidity
Refer to the "COVID-19 Business Update" section and in "Part 1, Item 1. Financial Statements - Note 1 - Basis of Presentation" for a discussion of the impact from the COVID-19 pandemic on our financial performance and our liquidity.
In light of store closures and reduced traffic in stores, we have taken certain actions with respect to certain of our existing leases, including engaging with landlords to discuss rent deferrals as well as other rent concessions. We suspended rental payments and/or paid reduced rental amounts with respect to certain of our retail stores that were closed or experiencing drastically reduced customer traffic as a result of the COVID-19 pandemic. We also have successfully negotiated with several landlords, including some of our larger landlords and received rent abatement benefits as well as new lease terms for some of our affected leases. In some instances, where negotiations with landlords proved unsuccessful, we were engaged in litigation related to rent obligations both during the COVID-19 pandemic and through the term of the lease.
Three Months Ended
Operating Activities
Net cash provided by operating activities was$54.6 million for the three months endedApril 30, 2022 , compared to$53.6 million for the three months endedMay 1, 2021 , or a deterioration of$0.9 million . This deterioration was driven primarily by unfavorable changes in working capital partially offset by higher cash flows generated from net earnings. The unfavorable changes in working capital were due primarily to higher inventory levels as we placed orders earlier in order to mitigate some of the supply chain disruptions.
Investing Activities
Net cash used in investing activities was$29.2 million for the three months endedApril 30, 2022 compared to$7.8 million for the three months endedMay 1, 2021 . Net cash used in investing activities for the 48
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three months ended
The increase in cash used in investing activities was driven primarily by higher retail remodel and expansion costs and higher investments in technology and other infrastructure during the three months endedApril 30, 2022 compared to the same prior-year period. During the three months endedApril 30, 2022 , we opened 20 directly-operated stores compared to 11 directly-operated stores that were opened in the same prior-year period.
Financing Activities
Net cash used in financing activities was$176.8 million for the three months endedApril 30, 2022 compared to$9.7 million for the three months endedMay 1, 2021 . Net cash used in financing activities for the three months endedApril 30, 2022 related primarily to our entrance into the 2022 ASR Contract to repurchase an aggregate of$175.0 million of the our common stock.
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
During the three months endedApril 30, 2022 , the change in foreign currency translation rates decreased our reported cash, cash equivalents and restricted cash balance by$7.1 million compared to a decrease of$2.8 million during the three months endedMay 1, 2021 . Refer to "Foreign Currency Volatility" for further information on fluctuations in exchange rates.
Working Capital
As of
Our primary working capital needs are for the current portion of lease liabilities, accounts receivable and inventory. The accounts receivable balance consists of trade receivables relating primarily to our wholesale business inEurope and, to a lesser extent, to our wholesale businesses in theAmericas andAsia , royalty receivables relating to our licensing operations, credit card and retail concession receivables related to our retail businesses and certain other receivables. Accounts receivable decreased by$10.9 million , or 3.5%, to$295.4 million as ofApril 30, 2022 , from$306.3 million atMay 1, 2021 . On a constant currency basis, accounts receivable increased by$23.8 million , or 7.8%, when compared toMay 1, 2021 . As ofApril 30, 2022 , approximately 45% of our total net trade receivables and 61% of our European net trade receivables were subject to credit insurance coverage, certain bank guarantees or letters of credit for collection purposes. Our credit insurance coverage contains certain terms and conditions specifying deductibles and annual claim limits. Inventory increased by$79.1 million , or 19.5%, to$483.9 million as ofApril 30, 2022 , from$404.9 million atMay 1, 2021 . On a constant currency basis, inventory increased by$124.1 million , or 30.7%, when compared toMay 1, 2021 , driven primarily by management initiatives to mitigate supply chain disruptions, including accelerating product orders.
Capital Expenditures
Gross capital expenditures totaled$28.7 million for the three months endedApril 30, 2022 . This compares to gross capital expenditures of$9.1 million , before deducting lease incentives of$1.1 million , for the three months endedMay 1, 2021 .
We will periodically evaluate strategic acquisitions and alliances and pursue those we believe will support and contribute to our overall growth initiatives.
Dividends
OnMay 25, 2022 , we announced a regular quarterly cash dividend of$0.225 per share on our common stock. The cash dividend will be paid onJune 24, 2022 to shareholders of record as of the close of business onJune 8, 2022 . In accordance with the terms of the indenture governing the Notes, we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes effective as ofJune 7, 2022 . 49
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Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions andU.S. and global liquidity.
Share Repurchases
During fiscal 2022, the Board of Directors terminated its previous 2012$500 million share repurchase program and authorized a new$200 million share repurchase program. OnMarch 14, 2022 , the Board of Directors expanded its repurchase authorization by$100.0 million . Repurchases 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 and the program may be discontinued at any time, without prior notice. OnMarch 18, 2022 , pursuant to existing share repurchase authorizations, we entered into the 2022 ASR Contract with the 2022 ASR Counterparty to repurchase an aggregate of$175.0 million of our common stock. Under the 2022 ASR Contract, we made an initial payment of$175.0 million to the 2022 ASR Counterparty and received an initial delivery of approximately 3.3 million shares of common stock onMarch 21, 2022 , representing approximately 40% ($70.0 million ) of the total shares expected to be repurchased under the 2022 ASR Contract. The remaining balance of$105.0 million was classified as an equity forward contract and recorded in additional paid-in capital within shareholders' equity as ofMarch 21, 2022 . The exact number of shares we will repurchase under the 2022 ASR Contract will be based generally upon the average daily volume weighted average price of the common stock during the repurchase period, less a discount. At settlement, under certain circumstances, the 2022 ASR Counterparty may be required to deliver additional shares of common stock to us, or under certain circumstances, we may be required either to deliver shares of common stock or to make a cash payment to the 2022 ASR Counterparty. Final settlement of the transactions under the 2022 ASR Contract is expected to be completed by the end ofJuly 2022 . The terms of the 2022 ASR Contract are subject to adjustment, including, but not limited to, adjustments arising if we were to enter into or announce certain types of transactions or to take certain corporate actions. The 2022 ASR Contract contains the principal terms and provisions governing the accelerated share repurchases, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the circumstances under which the 2022 ASR Counterparty is permitted to make adjustments to valuation and calculation periods and various acknowledgments, representations and warranties made by us and the 2022 ASR Counterparty to one another. During the three months endedApril 30, 2022 , we repurchased 3,789,576 shares under our share repurchase program at an aggregate cost of$81.7 million , which is inclusive of the shares repurchased under the 2022 ASR Contract. As ofApril 30, 2022 , we had remaining authority under the share repurchase program to purchase$62.3 million of our common stock. There were no shares repurchased during the three months endedMay 1, 2021 .
Borrowings and Finance Lease Obligations and Convertible Senior Notes
Refer to "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations," "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" and "Part I, Item 1. Financial Statements - Note 17 - Subsequent Events" in this Form 10-Q for disclosures about our borrowings and finance lease obligations and convertible senior notes.
Supplemental Executive Retirement Plan
As a non-qualified pension plan, no dedicated funding of our SERP is required;
however, we have made periodic payments into insurance policies held in a rabbi
trust to fund the expected obligations arising under the non-qualified SERP.
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The cash surrender values of the insurance policies were$67.1 million and$70.9 million as ofApril 30, 2022 andJanuary 29, 2022 , respectively, and were included in other assets in our condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, we recorded unrealized losses of$3.3 million and minimal unrealized losses in other expense during the three months endedApril 30, 2022 andMay 1, 2021 , respectively. The projected benefit obligation was$49.3 million and$49.4 million as ofApril 30, 2022 andJanuary 29, 2022 , respectively, and was included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of$0.5 million were made during each of the three months endedApril 30, 2022 andMay 1, 2021 .
Material Cash Requirements
As ofApril 30, 2022 , there were no material changes to our material cash requirements from known contractual and other obligations, including commitments for capital expenditures, outside the ordinary course of business compared to the disclosures included under "Liquidity and Capital Resources - Material Cash Requirements" in Item Part II, Item 7 in our Form 10-K for the fiscal year endedJanuary 29, 2022 . Refer to "Part I, Item 1. Financial Statements - Note 9 - Borrowings and Finance Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" for further information on these arrangements.
Application of Critical Accounting Policies and Estimates
Our critical accounting policies reflecting our estimates and judgments are described in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 filed with theSEC onMarch 24, 2022 . There have been no significant changes to our critical accounting policies other than theJanuary 30, 2022 adoption of ASU 2020-06 which impacted the accounting and financial statement presentation of our Notes and our calculation of diluted earnings per common share. Refer to "Part I, Item 1. Financial Statements - Note 3 - Earnings per Share" and "Part I, Item 1. Financial Statements - Note 10 -Convertible Senior Notes and Related Transactions" for further information.
Recently Issued Accounting Guidance
Refer to "Part I, Item 1. Financial Statements - Note 1 - Basis of Presentation" for disclosures about recently issued accounting guidance.
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