General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or the "Company" in this Form 10K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis. Recent Developments The COVID-19 pandemic is having a significant negative impact on the Company's financial performance. The pandemic is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally, along with other major retailers. For example, the Company announced the temporary closure of its retail stores inthe United States andCanada as a result of the COVID-19 pandemic, following similar temporary closures of Guess-operated stores that are currently in place in a number of countries inEurope . InAsia , where store closures related to COVID-19 began, most of the Guess-operated stores have reopened, although to significantly lower traffic. The Company's e-commerce sites currently remain open in all regions. In addition, retail stores and e-commerce sites that are open have and continue to experience significant reductions in traffic and therefore, revenue. We are unable to determine with any degree of accuracy the length and severity of the crisis and we do expect it will have a material impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in the first quarter of fiscal 2021. The extent and duration of the crisis remains uncertain and may impact consumer purchasing activity if disruptions continue throughout the year which could continue to impact us. Due to the developing situation, the results of the first quarter endingMay 2, 2020 and the full fiscal year endingJanuary 30, 2021 could be impacted in ways we are not able to predict today, including, but not limited to, non-cash write-downs and impairments; unrealized gains or losses related to investments; foreign currency fluctuations; and collections of accounts receivables. DuringMarch 2020 , as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company drew down approximately$212 million under certain of its credit facilities in theU.S. ,Canada andEurope . In addition, inMarch 2020 , we announced that, in light of uncertainty surrounding the COVID-19 pandemic, we had decided to postpone our decision related to the potential declaration of a quarterly cash dividend for the first quarter of fiscal 2021. The Company is also implementing a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing all of itsU.S. andCanada store associates and significant portions of itsU.S. andCanada corporate and distribution center associates startingApril 2, 2020 ; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; and (v) working globally with country management teams to maximize the Company's participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic. Business Segments 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. 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) from lease terminations, restructuring charges and certain non-recurring credits (charges), if any. The Americas Retail segment includes the Company's retail and e-commerce operations in theAmericas . TheAmericas Wholesale segment includes the Company's wholesale operations in theAmericas . TheEurope segment includes the Company's retail, e-commerce and wholesale operations inEurope and theMiddle East . TheAsia segment includes the Company's retail, e-commerce and wholesale operations inAsia 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, asset impairment charges, net gains (losses) on lease terminations, restructuring charges and certain non-recurring credits (charges), if any. Corporate overhead costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, corporate performance-based compensation, facilities, global advertising and marketing, human resources, information technology and legal. 33 -------------------------------------------------------------------------------- Information regarding these segments is summarized in "Part IV. Financial Statements - Note 18 - Segment Information" in this Form 10-K. 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. Foreign Currency Volatility Since the majority of our international operations are conducted in currencies other than theU.S. dollar (primarily the British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Korean won, Mexican peso, 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. dollar amounts. Some of our transactions that occur primarily inEurope ,Canada ,South Korea ,China 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. In addition, there are certain real estate leases which are 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, the Company 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. 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. During fiscal 2020, the averageU.S. dollar rate was stronger against the British pound, Canadian dollar, Chinese yuan, euro, Korean won, Polish zloty, Russian rouble and Turkish lira and weaker against the Japanese yen and Mexican peso compared to the average rate in fiscal 2019. This had an overall unfavorable impact on the translation of our international revenues and earnings from operations during fiscal 2020 compared to the prior year. If theU.S. dollar strengthens relative to the respective fiscal 2020 foreign exchange rates, foreign exchange could negatively impact our revenues and operating results, as well as our international cash and other balance sheet items during fiscal 2021, particularly inCanada ,Europe (primarily the euro, British pound, Turkish lira and Russian rouble) andMexico . Alternatively, if theU.S. dollar weakens relative to the respective fiscal 2020 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 fiscal 2021, particularly in these regions. The Company enters into derivative financial instruments to offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Strategy InDecember 2019 ,Carlos Alberini shared his strategic vision and implementation plan for execution which includes the identification of several key priorities to drive revenue and operating profit growth over the next five years. These priorities are: (i) brand relevancy; (ii) customer centricity; (iii) global footprint; (iv) product excellence; and (v) functional capabilities; each as further described below: Brand Relevancy. We plan to optimize our brand architecture to be relevant with our three target consumer groups: Heritage, Millennials, and Generation Z. We will continue to execute celebrity and influencer partnerships and collaborations, as we believe that they are critical to engage more effectively with a younger and broader audience. Customer Centricity. We intend 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. 34 -------------------------------------------------------------------------------- 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. Product Excellence. We 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. Functional Capabilities. We expect to drive material operational improvements in the next five years 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 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. During the first quarter of fiscal 2020, the Company announced that its Board of Directors reduced the future quarterly cash dividends that may be paid to holders of the Company's common stock, when, as and if any such dividend is declared by the Company's Board of Directors, from$0.225 per share to$0.1125 per share to redeploy capital and return incremental value to shareholders through share repurchases. InApril 2019 , the Company issued$300 million aggregate principal amount of 2.00% convertible senior notes due 2024 in a private offering. During the first quarter of fiscal 2020, the Company used$170 million of proceeds from its convertible senior notes to enter into an accelerated share repurchase program ("ASR Contract"). The Company also repurchased shares of its common stock in open market and privately negotiated transactions totaling$118.1 million during fiscal 2020. Comparable Store Sales The Company reportsNational 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 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 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 the Company may differ from similarly titled measures reported by other companies. 35 -------------------------------------------------------------------------------- Executive Summary Overview Net earnings attributable to Guess?, Inc. were$96.0 million , or diluted earnings of$1.33 per common share, for fiscal 2020, compared to net earnings attributable to Guess?, Inc. of$14.1 million , or diluted earnings of$0.16 per common share for fiscal 2019. During fiscal 2020, the Company recognized$10.0 million of asset impairment charges; a net credit of$0.9 million of certain professional service and legal fees and related costs;$0.4 million of CEO separation charges and$7.6 million of amortization of debt discount related to the Company's convertible senior notes (or a combined$9.1 million after considering the related tax benefit of these adjustments as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions totaling$8.1 million ), or an unfavorable$0.12 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$105.0 million and adjusted diluted earnings were$1.45 per common share for fiscal 2020. During fiscal 2019, the Company recognized €39.8 million ($45.6 million ) related to a fine imposed by theEuropean Commission ;$6.9 million of asset impairment charges;$0.5 million of net gains on lease terminations;$6.1 million of certain professional service and legal fees and related costs,$5.2 million of CEO separation charges and$6.3 million in total income tax charges related to the enactment of the Tax Reform (or a combined$66.3 million after considering the related tax benefit of$3.4 million ), or an unfavorable$0.82 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$80.4 million and adjusted diluted earnings were$0.98 per common share for fiscal 2019. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures." Highlights of the Company's performance for fiscal 2020 compared to the prior year are presented below, followed by a more comprehensive discussion under "Results of Operations": Operations • Total net revenue increased 2.6% to$2.68 billion for fiscal 2020,
compared to
revenue increased by 5.4%.
• Gross margin (gross profit as a percentage of total net revenue)
increased 190 basis points to 37.9% for fiscal 2020, compared to 36.0% in the prior year.
• Selling, general and administrative ("SG&A") expenses as a percentage
of total net revenue ("SG&A rate") increased 20 basis points to 32.2% for fiscal 2020, compared to 32.0% in the prior year. SG&A expenses increased 3.6% to$865.1 million for fiscal 2020, compared to$835.3 million in the prior year. • During fiscal 2019, the Company recognized charges of €39.8 million ($45.6 million ) for a fine imposed by theEuropean Commission related to alleged violations ofEuropean Union competition rules by the Company. The Company paid the full amount of the fine during the first quarter of fiscal 2020.
• During fiscal 2020, the Company recognized asset impairment charges of
$10.0 million , compared to$6.9 million in the prior year. • During fiscal 2019, the Company recognized net gains on lease terminations of$0.5 million .
• Operating margin increased 330 basis points to 5.3% for fiscal 2020,
compared to 2.0% in the prior year.
unfavorably impacted operating margin by 170 basis points during fiscal
2019. Lower expenses related to certain professional service and legal
fees and related (credits) costs recorded during fiscal 2020 favorably
impacted operating margin by 30 basis points compared to the prior year. Lower CEO separation charges recorded during fiscal 2020 favorably impacted operating margin by 20 basis points compared to the
prior year. Higher asset impairment charges recorded during fiscal 2020
unfavorably impacted operating margin by 10 basis points compared to the prior year. Earnings from operations increased 169.4% to$140.7 million for fiscal 2020, compared to$52.2 million in the prior year. • Other expense, net (including interest income and expense) totaled$16.9 million for fiscal 2020, compared to$5.5 million in the prior year. 36
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• The effective income tax rate decreased to 18.2% for fiscal 2020, compared to 63.2% in the prior year. During fiscal 2019, the Company revised the provisional amounts previously recorded related to the impact of the Tax Reform and recorded income tax charges totaling$6.3 million . Key Balance Sheet Accounts • The Company had$284.6 million in cash and cash equivalents and$0.2 million in restricted cash as ofFebruary 1, 2020 , compared to$210.5
million in cash and cash equivalents and
cash atFebruary 2, 2019 . • During fiscal 2019, the Company recognized charges of €39.8 million ($45.6 million ) for a fine imposed by theEuropean Commission related to alleged violations ofEuropean Union competition rules by the Company. The Company paid the full amount of the fine during the first quarter of fiscal 2020. • InApril 2019 , the Company issued$300 million aggregate principal amount of 2.00% convertible senior notes due 2024 in a private offering, for which it received total cash proceeds of$296.2 million , net of initial purchasers' discounts and commissions and offering costs of$3.8 million . In connection with the issuance of these notes, the Company (i) entered into convertible note hedge transactions for which it paid an aggregate$61.0 million and (ii) sold warrants for which it received aggregate proceeds of$28.1 million . These transactions are intended to reduce the potential dilution with respect to the Company's common stock upon conversion of the notes and/or offset any cash payments the Company may be required to make in excess of the principal amount of the converted notes. • During fiscal 2020, the Company used$170 million of proceeds from its convertible senior notes to enter into an ASR Contract, pursuant to which it received a total of approximately 10.6 million shares. During fiscal 2020, the Company also repurchased approximately 6.1 million shares of its common stock in open market and privately negotiated transactions totaling$118.1 million (including commissions). When combined, these transactions resulted in the Company investing$288.1 million to repurchase approximately 16.7 million of its common shares in fiscal 2020. During fiscal 2019, the Company invested$17.6 million to repurchase approximately 1.1 million of its common shares. 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. • The Company, through its subsidiaries inEurope andChina , maintains short-term committed and uncommitted borrowing agreements primarily for working capital purposes. The Company had$4.0 million in outstanding borrowings as ofFebruary 1, 2020 and no outstanding borrowings under these agreements atFebruary 2, 2019 .
• Accounts receivable consists of trade receivables relating primarily to
the Company's wholesale business in
its wholesale businesses in
relating to its licensing operations, credit card and retail concession
receivables related to its retail businesses and certain other receivables. Accounts receivable increased by$5.3 million , or 1.6%, to$327.3 million as ofFebruary 1, 2020 , compared to$322.0 million at
increased by
• Inventory decreased by
February 1, 2020 , from$468.9 million atFebruary 2, 2019 . On a constant currency basis, inventory decreased by$67.2 million , or 14.3%. Global Store Count In fiscal 2020, together with our partners, we opened 102 new stores worldwide, consisting of 57 stores inEurope and theMiddle East , 26 stores inAsia and the Pacific, ten stores in Central andSouth America , seven stores in theU.S and two stores inCanada . Together with our partners, we closed 92 stores worldwide, consisting of 53 stores inAsia and the Pacific, 15 stores in theU.S. , 12 stores inEurope and theMiddle East , 11 stores inCanada and one store in Central andSouth America . 37 -------------------------------------------------------------------------------- We ended fiscal 2020 with 1,729 stores and 394 concessions worldwide, comprised as follows: Stores Concessions Directly Partner Directly Partner Region Total Operated Operated Total Operated Operated United States 282 280 2 1 - 1 Canada 80 80 - - - - Central and South America 113 73 40 27 27 - Total Americas 475 433 42 28 27 1 Europe and the Middle East 745 517 228 39 39 - Asia and the Pacific 509 219 290 327 117 210 Total 1,729 1,169 560 394 183 211 Of the total 1,729 stores, 1,420 were GUESS? stores, 197 were GUESS? Accessories stores, 69 were G by GUESS (GbG) stores and 43 were MARCIANO stores. Results of Operations The following table sets forth actual operating results for the fiscal years 2020 and 2019 as a percentage of net revenue: Years Ended February 1, February 2, 2020 2019 Product sales 96.8 % 96.8 % Net royalties 3.2 3.2 Net revenue 100.0 100.0 Cost of product sales 62.1 64.0 Gross profit 37.9 36.0 Selling, general and administrative expenses 32.2 32.0 European Commission fine - 1.7 Asset impairment charges 0.4 0.3 Net gains on lease terminations - (0.0 ) Earnings from operations 5.3 2.0 Interest expense (0.6 ) (0.1 ) Interest income 0.1 0.2 Other income (expense), net (0.2 ) (0.3 ) Earnings before income tax expense 4.6 1.8 Income tax expense 0.8 1.1 Net earnings 3.8 0.7 Net earnings attributable to noncontrolling interests 0.2
0.2
Net earnings attributable to Guess?, Inc. 3.6 %
0.5 %
Fiscal 2020 Compared to Fiscal 2019 Consolidated Results Net Revenue. Net revenue increased by$68.4 million , or 2.6%, to$2.68 billion for fiscal 2020, compared to$2.61 billion in fiscal 2019. In constant currency, net revenue increased by 5.4% as currency translation fluctuations relating to our foreign operations unfavorably impacted net revenue by$72.2 million compared to the prior year. The increase in revenue was driven primarily by higher European wholesale shipments and, to a lesser extent, retail expansion inEurope , partially offset by negative comparable sales inAsia . 38 -------------------------------------------------------------------------------- Gross Margin. Gross margin increased 190 basis points to 37.9% for fiscal 2020, compared to 36.0% in fiscal 2019, of which 100 basis points was due to a lower occupancy rate and 90 basis points was due to higher product margins. The lower occupancy rate was due primarily to lower logistics costs inEurope and, to a lesser extent, the favorable impact from segment mix. The higher product margins were driven primarily by higher initial markups inEurope and Americas Retail. Gross Profit. Gross profit increased by$76.1 million , or 8.1%, to$1.02 billion for fiscal 2020, compared to$939.6 million in fiscal 2019. The increase in gross profit, which included an unfavorable impact from currency translation, was due primarily to the favorable impact on gross profit from higher revenue and, to a lesser extent, higher overall products margins and lower logistics costs. Currency translation fluctuations relating to our foreign operations unfavorably impacted gross profit by$26.4 million . The Company includes inbound freight charges, purchasing costs and related overhead, retail store occupancy costs, including lease costs and depreciation and amortization, and a portion of the Company's distribution costs related to its retail business in cost of product sales. The Company also includes net royalties received on the Company's inventory purchases of licensed product as a reduction to cost of product sales. The Company's gross margin may not be comparable to that of other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company, generally exclude wholesale-related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like the Company, include retail store occupancy costs in cost of product sales. SG&A Rate. The Company's SG&A rate increased 20 basis points to 32.2% for fiscal 2020, compared to 32.0% in fiscal 2019. The Company's SG&A rate included the favorable impact of 30 basis points from lower expenses related to certain professional service and legal fees and related (credits) costs which the Company otherwise would not have incurred as part of its business operations. The Company's SG&A rate also included the favorable impact of 20 basis points from lower CEO separation charges. Excluding these amounts, the Company's SG&A rate would have increased 70 basis points due primarily to higher corporate investments during fiscal 2020 compared to the prior year, partially offset by leveraging of expenses, mainly inEurope . SG&A Expenses. SG&A expenses increased by$29.8 million , or 3.6%, to$865.1 million for fiscal 2020, compared to$835.3 million in fiscal 2019. The increase, which included a favorable impact from currency translation, was driven primarily by higher performance-based compensation costs and, to a lesser extent, higher selling and merchandising expenses, partially offset by lower expenses related to certain professional service and legal fees and related (credits) costs and, to a lesser extent, lower separation-related charges related to the departure of our former CEO. Currency translation fluctuations relating to our foreign operations favorably impacted SG&A expenses by$23.3 million . European Commission Fine. The Company recognized charges of €39.8 million ($45.6 million ) during fiscal 2019 for a fine imposed by theEuropean Commission related to alleged violations ofEuropean Union competition rules by the Company. The Company paid the full amount of the fine during the first quarter of fiscal 2020. Asset Impairment Charges. During fiscal 2020, the Company recognized asset impairment charges of$10.0 million , compared to$6.9 million in the prior year. Currency translation fluctuations relating to our foreign operations favorably impacted asset impairment charges by$0.3 million .Net Gains on Lease Terminations. There were no net gains on lease terminations recorded during fiscal 2020. During fiscal 2019, the Company recognized net gains on lease terminations of$0.5 million related primarily to the early termination of certain lease agreements inNorth America . Operating Margin. Operating margin increased 330 basis points to 5.3% for fiscal 2020, compared to 2.0% in fiscal 2019.The European Commission fine unfavorably impacted operating margin by 170 basis points during fiscal 2019. Lower expenses related to certain professional service and legal fees and related (credits) costs recorded during fiscal 2020 favorably impacted operating margin by 30 basis points compared to the prior year. Lower CEO separation charges recorded during fiscal 2020 favorably impacted operating margin by 20 basis points compared to the prior year. Higher asset impairment charges recorded during fiscal 2020 unfavorably impacted operating margin by 10 39 -------------------------------------------------------------------------------- basis points compared to the prior year. Excluding the impact of these items, operating margin increased by 120 basis points compared to the prior year. Currency exchange rate fluctuations had an immaterial impact on operating margin. Earnings from Operations. Earnings from operations increased by$88.5 million , or 169.4%, to$140.7 million for fiscal 2020, compared to$52.2 million in fiscal 2019. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by$2.8 million . Interest Income (Expense), Net. Interest expense, net, was$14.4 million for fiscal 2020, compared to interest income, net of$1.1 million in fiscal 2019. The change was due primarily to$7.6 million in amortization of debt discount and higher interest expense related to the Company's convertible senior notes during fiscal 2020 and, to a lesser extent, decreased interest income related to the impact of hedge ineffectiveness of foreign exchange currency contracts designated as cash flow hedges recognized during fiscal 2019. As a result of the adoption of new guidance during the first quarter of fiscal 2020, there was no interest component recognized related to hedge ineffectiveness during fiscal 2020. Other Expense, Net. Other expense, net, was$2.5 million for fiscal 2020, compared to$6.6 million in fiscal 2019. The change was due primarily to net unrealized gains on non-operating assets compared to unrealized losses in the prior year and, to a lesser extent, lower net unrealized mark-to-market revaluation losses on foreign currency balances, partially offset by our proportionate share of net losses related to our minority investment in a privately-held apparel company and lower net mark-to-market gains on revaluation of foreign exchange currency contracts. Income Tax Expense. Income tax expense for fiscal 2020 was$22.5 million , or an 18.2% effective tax rate, compared to$29.5 million , or a 63.2% effective tax rate, in fiscal 2019. The decrease in the effective income tax rate was due primarily to the favorable impact from the mix of earnings in foreign jurisdictions during fiscal 2020 compared to the prior year and, to a lesser extent, the revision of provisional amounts recorded related to the impact of the Tax Reform during fiscal 2019. Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable to noncontrolling interests for fiscal 2020 was$5.3 million , net of taxes, compared to$3.1 million , net of taxes, in fiscal 2019. Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. were$96.0 million for fiscal 2020, compared to$14.1 million in fiscal 2019. Diluted earnings per share was$1.33 for fiscal 2020, compared to$0.16 in fiscal 2019. We estimate that the favorable impact from share repurchases offset by the unfavorable impact from additional interest expense recognized related to the convertible senior notes had a net positive impact on diluted earnings per share of$0.06 for fiscal 2020. We also estimate that the negative impact of currency on diluted earnings per share for fiscal 2020 was approximately$0.07 per share. During fiscal 2020, the Company recognized$10.0 million of asset impairment charges; a net credit of$0.9 million of certain professional service and legal fees and related costs;$0.4 million of CEO separation charges and$7.6 million of amortization of debt discount related to the Company's convertible senior notes (or a combined$9.1 million after considering the related tax benefit of these adjustments as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions totaling$8.1 million ), or an unfavorable$0.12 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$105.0 million and adjusted diluted earnings were$1.45 per common share for fiscal 2020. We estimate that the favorable impact from share repurchases offset by the unfavorable impact from additional interest expense recognized related to the convertible senior notes had a positive impact of$0.14 on adjusted diluted earnings per share for fiscal 2020. During fiscal 2019, the Company recognized €39.8 million ($45.6 million ) related to a fine imposed by theEuropean Commission ;$6.9 million of asset impairment charges;$0.5 million of net gains on lease terminations;$6.1 million of certain professional service and legal fees and related costs,$5.2 million of CEO separation charges and$6.3 million in total income tax charges related to the enactment of the Tax Reform (or a combined$66.3 million after considering the related tax benefit of$3.4 million ), or an unfavorable$0.82 per share impact. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$80.4 million and adjusted diluted earnings were$0.98 per common share for fiscal 2019. References to financial results excluding the impact of these items are non-GAAP measures and are addressed below under "Non-GAAP Measures." 40 -------------------------------------------------------------------------------- Information by Business Segment The following table presents our net revenue and earnings (loss) from operations by segment for the periods indicated (dollars in thousands): Fiscal 2020 Fiscal 2019 Change % Change Net revenue: Americas Retail$ 811,547 $ 824,674 $ (13,127 ) (1.6 %) Americas Wholesale 186,389 170,812 15,577 9.1 % Europe 1,248,114 1,142,768 105,346 9.2 % Asia 346,212 388,246 (42,034 ) (10.8 %) Licensing 85,847 83,194 2,653 3.2 % Total net revenue$ 2,678,109 $ 2,609,694 $ 68,415 2.6 % Earnings (loss) from operations: Americas Retail$ 22,279 $ 27,532 $ (5,253 ) (19.1 %) Americas Wholesale 35,674 29,935 5,739 19.2 % Europe 134,078 58,298 75,780 130.0 % Asia (8,894 ) 12,365 (21,259 ) (171.9 %) Licensing 74,459 72,986 1,473 2.0 %
Total segment earnings from operations 257,596 201,116
56,480 28.1 % Corporate overhead (106,948 ) (96,805 ) (10,143 ) 10.5 % European Commission fine - (45,637 ) 45,637 Asset impairment charges (9,977 ) (6,939 ) (3,038 ) 43.8 % Net gains on lease terminations - 477 (477 ) Total earnings from operations$ 140,671 $ 52,212 $ 88,459 169.4 % Operating margins: Americas Retail 2.7 % 3.3 % Americas Wholesale 19.1 % 17.5 % Europe 10.7 % 5.1 % Asia (2.6 %) 3.2 % Licensing 86.7 % 87.7 %Total Company 5.3 % 2.0 % Americas Retail Net revenue from our Americas Retail segment decreased by$13.1 million , or 1.6%, to$811.5 million for fiscal 2020, from$824.7 million in fiscal 2019. In constant currency, net revenue decreased by 1.3% compared to the prior year, driven primarily by net store closures. The store base for theU.S. andCanada decreased by an average of 14 net stores in fiscal 2020 compared to the prior year, resulting in a 3.3% net decrease in average square footage. Comparable store sales (including e-commerce) were relatively flat inU.S. dollars and constant currency. The inclusion of our e-commerce sales increased the comparable sales percentage by 1% inU.S. dollars and constant currency. Currency translation fluctuations relating to our non-U.S. retail stores and e-commerce sites unfavorably impacted net revenue by$2.1 million . Operating margin decreased 60 basis points to 2.7% for fiscal 2020, from 3.3% in fiscal 2019. This decrease was driven by a higher SG&A rate, partially offset by higher gross margins. The higher SG&A rate was driven primarily by higher store selling expenses due primarily to store payroll pressures. The higher gross margins were driven primarily by higher initial markups and, to a lesser extent, lower occupancy costs, partially offset by higher markdowns. 41 -------------------------------------------------------------------------------- Earnings from operations from our Americas Retail segment decreased by$5.3 million , or 19.1%, to$22.3 million in fiscal 2020, from$27.5 million in fiscal 2019. The decrease reflects the unfavorable impact on earnings from lower revenue and, to a lesser extent, higher store selling expenses, partially offset by lower occupancy costs. Americas Wholesale Net revenue from our Americas Wholesale segment increased by$15.6 million , or 9.1%, to$186.4 million for fiscal 2020, compared to$170.8 million in fiscal 2019. In constant currency, net revenue increased by 9.7% compared to the prior year, driven primarily by higher shipments in ourU.S. wholesale business. Currency translation fluctuations relating to our non-U.S. wholesale businesses unfavorably impacted net revenue by$1.0 million . Operating margin increased 160 basis points to 19.1% for fiscal 2020, compared to 17.5% in fiscal 2019, due primarily to higher gross margins. The higher gross margins were driven primarily by lower markdowns and, to a lesser extent, higher initial markups. Earnings from operations from our Americas Wholesale segment increased by$5.7 million , or 19.2%, to$35.7 million for fiscal 2020, compared to$29.9 million in fiscal 2019. The increase was driven primarily by the favorable impact on earnings from higher revenue. Europe Net revenue from ourEurope segment increased by$105.3 million , or 9.2%, to$1.25 billion for fiscal 2020, compared to$1.14 billion in fiscal 2019. In constant currency, net revenue increased by 14.1% compared to the prior year, driven primarily by the favorable impact from higher shipments in our European wholesale business and, to a lesser extent, retail expansion and positive comparable sales. As ofFebruary 1, 2020 , we directly operated 517 stores inEurope compared to 490 stores atFebruary 2, 2019 , excluding concessions, which represents a 5.5% increase over the prior year. Comparable sales (including e-commerce) were relatively flat inU.S. dollars and increased 4% in constant currency compared to the prior year. The inclusion of our e-commerce sales increased the comparable sales percentage by 4% inU.S. dollars and constant currency. Currency translation fluctuations relating to our European operations unfavorably impacted net revenue by$56.2 million . Operating margin increased 560 basis points to 10.7% for fiscal 2020, compared to 5.1% in fiscal 2019, driven by higher gross margins and, to a lesser extent, a lower SG&A rate. The higher gross margins were due primarily to higher initial markups and, to a lesser extent, lower logistics costs and lower markdowns. The lower SG&A rate was due primarily to overall leveraging of expenses driven by higher wholesale and e-commerce shipments. Earnings from operations from ourEurope segment increased by$75.8 million , or 130.0%, to$134.1 million for fiscal 2020, compared to$58.3 million in fiscal 2019. The increase was driven primarily by the favorable impact on earnings from higher revenue and, to a lesser extent, higher product margins, partially offset by higher occupancy costs and store selling expenses driven primarily by retail expansion. Currency translation fluctuations relating to our European operations unfavorably impacted earnings from operations by$3.4 million .Asia Net revenue from ourAsia segment decreased by$42.0 million , or 10.8%, to$346.2 million for fiscal 2020, compared to$388.2 million in fiscal 2019. In constant currency, net revenue decreased by 7.5% compared to the prior year, driven primarily by negative comparable sales. Comparable sales (including e-commerce) decreased 19% inU.S. dollars and 16% in constant currency compared to the prior year. The inclusion of our e-commerce sales decreased the comparable sales percentage by 1% inU.S. dollars and 2% in constant currency. As ofFebruary 1, 2020 , we and our partners operated 509 stores and 327 concessions inAsia , compared to 536 stores and 358 concessions atFebruary 2, 2019 . As ofFebruary 1, 2020 , we directly operated 219 stores and 117 concessions, compared to 227 directly operated stores and 174 concessions atFebruary 2, 2019 . Currency translation fluctuations relating to our Asian operations unfavorably impacted net revenue by$12.9 million . Operating margin decreased 580 basis points to negative 2.6% for fiscal 2020, from 3.2% in fiscal 2019. The decrease in operating margin was driven by a higher SG&A rate and, to a lesser extent, lower gross margins. The higher SG&A rate was driven by overall deleveraging of expenses due mainly to negative comparable sales. The lower gross margins were driven primarily by overall deleveraging of occupancy costs due mainly to negative comparable sales and, to a lesser extent, higher markdowns. 42 -------------------------------------------------------------------------------- Loss from operations from ourAsia segment was$8.9 million for fiscal 2020, compared to earnings from operations of$12.4 million in fiscal 2019. The deterioration was driven primarily by the unfavorable impact on earnings from lower revenue. Licensing Net royalty revenue from our Licensing segment increased by$2.7 million , or 3.2%, to$85.8 million for fiscal 2020, compared to$83.2 million in fiscal 2019. Earnings from operations from our Licensing segment increased by$1.5 million , or 2.0%, to$74.5 million for fiscal 2020, from$73.0 million in fiscal 2019. The increase was driven by the favorable impact to earnings from higher revenue. Corporate Overhead Unallocated corporate overhead increased by$10.1 million to$106.9 million for fiscal 2020, compared to$96.8 million in fiscal 2019. The increase was driven primarily by higher performance-based compensation costs and, to a lesser extent, higher corporate investments and advertising expenses, partially offset by lower expenses related to certain professional service and legal fees and related (credits) costs and, to a lesser extent, lower separation-related charges related to the departure of our former CEO. During fiscal 2019, the Company recorded$5.2 million in separation-related charges related to the departure of our former CEO. These charges were comprised of$2.4 million in cash severance payments and$2.8 million in non-cash stock-based compensation expenses resulting from the acceleration of the service vesting requirements of certain previously granted stock awards. During fiscal 2020, the Company also recorded$0.4 million mainly related to non-cash stock-based compensation expense resulting from changes in expected performance conditions of certain previously granted stock awards that were no longer subject to service vesting requirements after his departure. Fiscal 2019 Compared to Fiscal 2018 The comparison of fiscal 2019 to fiscal 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year endedFebruary 2, 2019 , filed onMarch 29, 2019 . Non-GAAP Measures The Company's reported financial results are presented in accordance with GAAP. The reported net earnings attributable to Guess?, Inc. and diluted earnings per share in fiscal 2020 reflect the impact of (i) asset impairment charges, (ii) certain professional service and legal fees and related (credits) costs, (iii) separation charges related to the departure of our former CEO, (iv) non-cash amortization of debt discount on our convertible senior notes and (v) the related tax effects of the foregoing items as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions. The reported net earnings attributable to Guess?, Inc. and diluted earnings per share in fiscal 2019 reflect the impact of (i) theEuropean Commission fine, (ii) asset impairment charges, (iii) net gains on lease terminations, (iv) certain professional service and legal fees and related costs, (v) separation charges related to the departure of our former CEO, (vi) the related tax effects of the foregoing items and (vii) amounts recorded related to the enactment of the Tax Reform. These items affect the comparability of the Company's reported results. The financial results are also presented on a non-GAAP basis, as defined in Section 10(e) of Regulation S-K of theSEC , to exclude the effect of these items. The Company believes that these "non-GAAP" or "adjusted" financial measures are useful for investors to evaluate the comparability of the Company's operating results and its future outlook when reviewed in conjunction with the Company's GAAP financial statements. The non-GAAP measures are provided in addition to, and not as alternatives for, the Company's reported GAAP results. The adjusted measures for fiscal 2020 exclude the impact of$10.0 million of asset impairment charges;$0.4 million of CEO separation charges;$7.6 million of amortization of debt discount on the Company's convertible senior notes and a net credit of$0.9 million of certain professional service and legal fees and related (credits) costs. The asset impairment charges related primarily to the impairment of certain retail locations resulting from under-performance and expected store closures and, to a lesser extent, impairment charges related to goodwill associated with the Company'sChina retail reporting unit and impairment charges related to certain operating lease right-of-use assets. During fiscal 2020, the Company recorded$0.4 million in separation-related charges related to the departure 43 -------------------------------------------------------------------------------- of our former CEO. These charges mainly related to non-cash stock-based compensation expense resulting from changes in expected performance conditions of certain previously granted stock awards that were no longer subject to service vesting requirements after his departure. Certain professional service and legal fees and related (credits) costs were primarily due to amounts which the Company otherwise would not have incurred as part of its business operations. These items resulted in a combined$9.1 million impact (after considering the related tax benefit as well as the impact from changes in the tax law on deferred taxes in certain tax jurisdictions, net tax settlements and adjustments to specific uncertain tax positions totaling$8.1 million ), or an unfavorable$0.12 per share impact during fiscal 2020. Net earnings attributable to Guess?, Inc. were$96.0 million and diluted earnings per common share were$1.33 for fiscal 2020. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$105.0 million and adjusted diluted earnings per common share were$1.45 for fiscal 2020. The adjusted measures for fiscal 2019 exclude the impact of theEuropean Commission fine of$45.6 million , asset impairment charges of$6.9 million , certain professional service and legal fees and related costs of$6.1 million , CEO separation charges of$5.2 million and additional income tax charges of$6.3 million related to the enactment of the Tax Reform, partially offset by the impact of net gains on lease terminations of$0.5 million . The fine imposed by theEuropean Commission related to alleged violations ofEuropean Union competition rules by the Company. The Company has made certain changes to its business practices and agreements in response to these proceedings, and the Company believes that such changes and any related modifications have not had, and will not have, a material impact on its ongoing business operations within theEuropean Union . The asset impairment charges related primarily to the impairment of certain retail locations resulting from under-performance and expected store closures. Certain professional service and legal fees and related costs were primarily due to amounts which the Company otherwise would not have incurred as part of its business operations. During fiscal 2019, the Company recorded$5.2 million in separation-related charges related to the departure of our former CEO. These charges were comprised of$2.4 million in cash severance payments and$2.8 million in non-cash stock-based compensation expenses resulting from the acceleration of the service vesting requirements of certain previously granted stock awards. During the quarter endedNovember 3, 2018 , the Company revised the provisional amounts previously recorded related to the estimated amounts due related to deemed repatriation of foreign earnings, and recorded income tax benefits of$19.6 million . During the fourth quarter of fiscal 2019, the Company concluded, based on additional regulatory guidance issued during the quarter, related to the Tax Reform, that the Company would owe transition taxes if proposed legislation that clarifies existing tax regulation with respect of the dividends received deduction calculation is passed into law. As a result, during the three months endedFebruary 2, 2019 , the Company recorded additional charges due to the Tax Reform of$25.8 million , or a total of$6.3 million for fiscal 2019. Net gains on lease terminations related primarily to the early termination of certain lease agreements inNorth America . These items resulted in a combined$66.3 million impact (after considering the related tax benefit of$3.4 million ), or an unfavorable$0.82 per share impact during fiscal 2019. Net earnings attributable to Guess?, Inc. were$14.1 million and diluted earnings per common share were$0.16 for fiscal 2019. Excluding the impact of these items, adjusted net earnings attributable to Guess?, Inc. were$80.4 million and adjusted diluted earnings per common share were$0.98 for fiscal 2019. Our discussion and analysis herein also includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company's foreign revenue, expenses and balance sheet amounts intoU.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, operating results for the current-year period are translated 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 year balance 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 to the functional currency of that entity when exchange rates fluctuate. The constant currency information presented may not be comparable to similarly titled measures reported by other companies. In calculating the estimated impact of currency fluctuations (including translational and transactional impacts) on other measures such as earnings (loss) per share, the Company estimates gross margin (including the impact of foreign exchange currency contracts designated as cash flow hedges for anticipated merchandise purchases) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings (loss) at the comparable 44 -------------------------------------------------------------------------------- prior-year rates and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign exchange currency contracts not designated as cash flow hedges for merchandise purchases. Liquidity and Capital Resources We need liquidity globally primarily to fund our working capital, occupancy costs, expansion plans, remodeling and rationalization of our retail stores, shop-in-shop programs, concessions, systems, infrastructure, other existing operations, international growth and potential acquisitions and investments. In addition, in theU.S. we need liquidity to fund share repurchases, payment of dividends to our stockholders and interest payments on our debt. Generally, our working capital needs are highest during the late summer and fall as our inventories increase before the holiday selling period. During the fiscal year endedFebruary 1, 2020 , we relied primarily on trade credit, available cash, real estate and other operating leases, finance leases, proceeds from the issuance of convertible senior notes, proceeds from short-term lines of credit and internally generated funds to finance our operations, share repurchases, payment of dividends and expansion. We anticipate that we will be able to satisfy our ongoing cash requirements during the next twelve months for working capital, capital expenditures, payments on our debt, finance leases and operating leases as well as lease termination payments, potential acquisitions and investments, 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 Facility in theU.S. andCanada as well as bank facilities inEurope andChina as needed. As further noted below under the "Recent Developments" section, the Company is also implementing a number of other measures to help preserve liquidity in response to the COVID-19 pandemic. We expect to settle the principal amount of our outstanding convertible senior notes in 2024 in cash and any excess in shares. Such arrangements are described further in "Part IV. Financial Statements - Note 8 - Borrowings and Finance Lease Obligations" and "Part I, Item 1. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-K. 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 twelve months. InDecember 2017 , theU.S. government enacted the Tax Reform, which significantly changed theU.S. corporate income tax laws, including moving from a global taxation regime to a territorial regime and lowering theU.S. federal corporate income tax rate from 35% to 21%. The Tax Reform also required a one-time mandatory transition tax on accumulated foreign earnings. Any income tax payable related to the transition tax is due over an eight-year period beginning in calendar 2018. The balance related to this transition tax included in other long-term liabilities was$19.9 million and$25.8 million as ofFebruary 1, 2020 andFebruary 2, 2019 , respectively. Refer to "Part IV. Financial Statements - Note 12 - Income Taxes" for further detail. The Company has historically considered the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, the Company had a substantial amount of previously taxed earnings that could be distributed to theU.S. without additionalU.S. taxation. The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and regularly reviews its cash positions and determination of permanent reinvestment of foreign earnings. If the Company determines that all or a portion of such foreign earnings are no longer indefinitely reinvested, it may be subject to additional foreign withholding taxes andU.S. state income taxes, beyond the Tax Reform's one-time transition tax. The Company intends to indefinitely reinvest the remaining earnings from the Company's foreign subsidiaries for which a deferred tax liability has not already been recorded. As ofFebruary 1, 2020 , the Company had cash and cash equivalents of$284.6 million , of which approximately$110.1 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. Please see "Part I, Item 1A. Risk Factors" for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements. Recent Developments The COVID-19 pandemic is having a significant negative impact on the Company's financial performance. The pandemic is ongoing and dynamic in nature and, to date, the Company has experienced temporary closures in key regions globally, along with other major retailers. For example, the Company announced the temporary closure of its retail stores inthe United States andCanada as a result of the COVID-19 pandemic, following similar tempor 45 -------------------------------------------------------------------------------- ary closures of Guess-operated stores that are currently in place in a number of countries inEurope . InAsia , where store closures related to COVID-19 began, most of the Guess-operated stores have reopened, although to significantly lower traffic. The Company's e-commerce sites currently remain open in all regions. In addition, retail stores and e-commerce sites that are open have and continue to experience significant reductions in traffic and therefore, revenue. We are unable to determine with any degree of accuracy the length and severity of the crisis and we do expect it will have a material impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in the first quarter of fiscal 2021. The extent and duration of the crisis remains uncertain and may impact consumer purchasing activity if disruptions continue throughout the year which could continue to impact us.Between March 16 and March 19, 2020 , as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company drew down approximately$212 million under certain of its credit facilities in theU.S. ,Canada andEurope (the "Drawdowns"). The Drawdowns included approximately$78 million under our existing credit facility in theU.S. andCanada (the "Credit Facility") and$134 million under a number of existing short-term borrowing agreements with various banks inEurope . Following the Drawdowns, we had remaining borrowing capacity of approximately$33 million under the Credit Facility and of approximately$24 million under our various existing borrowing agreements inEurope andAsia . As ofMarch 19, 2020 , the current weighted average interest rate for borrowings under the Credit Facility was approximately 3.65% and the current interest rates for borrowings under the European borrowing agreements ranged between 0.65% and 1.1%. We are in the process of negotiating an extension for the Credit Facility, which is currently scheduled to mature onJune 22, 2020 . The European and Asian facilities are generally scheduled to mature betweenJuly 2020 andJanuary 2021 . If we have sustained decrease in consumer demand related to the COVID-19 pandemic, we may require access to additional credit. The Company is also implementing a number of other measures to help mitigate the operating and financial impact of the pandemic, including: (i) furloughing all of itsU.S. andCanada store associates and significant portions of itsU.S. andCanada corporate and distribution center associates startingApril 2, 2020 ; (ii) implementing temporary tiered salary reductions for management level corporate employees, including its executive officers; (iii) deferring annual merit increases; (iv) executing substantial reductions in expenses, store occupancy costs, capital expenditures and overall costs, including through reduced inventory purchases; and (v) working globally with country management teams to maximize the Company's participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic. Fiscal 2020 Compared to Fiscal 2019 The Company has presented below the cash flow performance comparison of the year endedFebruary 1, 2020 versus the year endedFebruary 2, 2019 . Operating Activities Net cash provided by operating activities was$197.9 million for the fiscal year endedFebruary 1, 2020 , compared to$81.7 million for the fiscal year endedFebruary 2, 2019 , or an increase of$116.2 million . The increase was driven primarily by higher cash flows generated from net earnings and, to a lesser extent, favorable changes in working capital. The favorable changes in working capital were due primarily to lower inventory levels resulting from improved inventory management during fiscal 2020 compared to the prior year, partially offset by increased payments on accounts payable and accrued expenses, of which$45.6 million related to payment of theEuropean Commission fine during the first quarter of fiscal 2020 for fines imposed and accrued in fiscal 2019. Investing Activities Net cash used in investing activities was$56.5 million for the fiscal year endedFebruary 1, 2020 , compared to$123.5 million for the fiscal year endedFebruary 2, 2019 . Net cash used in investing activities related primarily to capital expenditures incurred on international retail expansion, investments in technology infrastructure and existing store remodeling programs. In addition, proceeds from the disposition of business and long-term assets, settlements of forward exchange currency contracts, purchases of investments and the cost of any business acquisitions are also included in cash flows used in investing activities. The decrease in cash used in investing activities was driven primarily by lower spending on retail expansion and, to a lesser extent, purchases of investments and business acquisitions in the prior year, compared to proceeds 46 -------------------------------------------------------------------------------- received from the sale of business and long-term assets during fiscal 2020. During the fiscal year endedFebruary 1, 2020 , the Company opened 66 directly operated stores compared to 177 directly operated stores that were opened in the prior year. Financing Activities Net cash used in financing activities was$64.2 million for the fiscal year endedFebruary 1, 2020 , compared to$96.8 million for the fiscal year endedFebruary 2, 2019 . Cash used in financing activities related primarily to the repurchases of shares of the Company's common stock and, to a lesser extent, payment of dividends, partially offset by net proceeds from the issuance of convertible senior notes, related warrants and short-term borrowings. In addition, payments related to finance lease obligations, other long-term borrowings and capital distributions to noncontrolling interests as well as cash activity from the issuance of common stock under our equity plans and proceeds from capital contributions from noncontrolling interests are also included in cash flows used in financing activities. The decrease in cash used in financing activities was driven primarily by net proceeds received from the issuance of convertible senior notes and related warrants and, to a lesser extent, lower payment of dividends during fiscal 2020 compared to the prior year. This was partially offset by higher investments made in share repurchases, which included shares repurchased under the Company's accelerated share repurchase agreement, during fiscal 2020 compared to the prior year. Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash During the fiscal year endedFebruary 1, 2020 , changes in foreign currency translation rates decreased our reported cash, cash equivalents and restricted cash balance by$3.4 million . This compares to a decrease of$18.0 million in cash, cash equivalents and restricted cash driven by changes in foreign currency translation rates during the fiscal year endedFebruary 2, 2019 . Working Capital As ofFebruary 1, 2020 , the Company had net working capital (including cash and cash equivalents) of$425.8 million , compared to$545.3 million atFebruary 2, 2019 . The decrease in net working capital as ofFebruary 1, 2020 was driven primarily by the recognition of the current portion of operating lease liabilities of$192.1 million resulting from the adoption of a comprehensive new lease standard during the first quarter of fiscal 2020. The Company's 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 the Company's wholesale business inEurope and, to a lesser extent, to its wholesale businesses inAsia and theAmericas , royalty receivables relating to its licensing operations, credit card and retail concession receivables related to its retail businesses and certain other receivables. Accounts receivable increased by$5.3 million , or 1.6%, to$327.3 million as ofFebruary 1, 2020 , compared to$322.0 million atFebruary 2, 2019 . On a constant currency basis, accounts receivable increased by$14.7 million , or 4.6%, when compared toFebruary 2, 2019 . As ofFebruary 1, 2020 , approximately 53% of our total net trade receivables and 64% 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 decreased by$75.8 million , or 16.2%, to$393.1 million as ofFebruary 1, 2020 , from$468.9 million atFebruary 2, 2019 . On a constant currency basis, inventory decreased by$67.2 million , or 14.3%, when compared toFebruary 2, 2019 , driven primarily by improved inventory management. 47 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
The following table summarizes the Company's contractual obligations as of
Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years Contractual Obligations: Short-term borrowings$ 3,957 $ 3,957 $ - $ - $ - Convertible senior notes, net1,2 327,000 6,000 12,000 309,000 - Long-term debt, excluding convertible senior notes, net1 24,280 4,042 2,043 2,080 16,115 Finance lease obligations1 20,576 3,349 6,902 5,403 4,922 Operating lease obligations3 1,003,321 220,364 363,481 232,695 186,781 Purchase obligations4 208,613 208,613 - - - Benefit obligations5 84,202 3,414 5,751 4,703 70,334 Total$ 1,671,949 $ 449,739 $ 390,177
Other commercial commitments6
$ - $ -
______________________________________________________________________
1 Includes interest payments.
2 In
convertible senior notes due 2024 (the "Notes") in a private offering. Refer
to "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and
Related Transactions" for further detail.
3 The Company has elected the practical expedient to not separate non-lease
components from lease components in the measurement of liabilities for its
directly-operated real estate leases. As such, this amount reflects operating
lease costs that are considered in the measurement of the related operating
lease liabilities, which may include fixed payments related to rent,
insurance, property taxes, sales promotion, common area maintenance and
certain utility charges, where applicable. This does not include variable
lease costs that are excluded from the measurement of the operating lease
liabilities, such as those charges that are based on a percentage of annual
sales volume or estimates. In fiscal 2020, these variable charges totaled
$95.8 million . Refer to "Part IV. Financial Statements - Note 9 - Lease Accounting" for further detail.
4 Purchase obligations represent open purchase orders for raw materials and
merchandise at the end of the fiscal year. These purchase orders can be
impacted by various factors, including the scheduling of market weeks, the
timing of issuing orders, the timing of the shipment of orders and currency
fluctuations.
5 Includes expected payments associated with the deferred compensation plan and
the Supplemental Executive Retirement Plan through fiscal 2055.
6 Consists of standby letters of credit for workers' compensation and general
liability insurance.
Excluded from the above contractual obligations table is the noncurrent liability for unrecognized tax benefits, including penalties and interest, of$34.0 million . This liability for unrecognized tax benefits has been excluded because the Company cannot make a reliable estimate of the period in which the liability will be settled, if ever. The above table also excludes current liabilities (other than short-term borrowings) as these amounts will be paid within one year and certain long-term liabilities that do not require cash payments. Off-Balance Sheet Arrangements Other than certain obligations and commitments included in the table above, we did not have any material off-balance sheet arrangements as ofFebruary 1, 2020 . Capital Expenditures Gross capital expenditures totaled$61.9 million , before deducting lease incentives of$5.5 million , for the fiscal year endedFebruary 1, 2020 . This compares to gross capital expenditures of$108.1 million , before deducting lease incentives of$11.6 million , for the fiscal year endedFebruary 2, 2019 . We will periodically evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives. 48 --------------------------------------------------------------------------------
Dividends
OnMarch 18, 2020 , we announced that, in light of uncertainty surrounding the COVID-19 pandemic, we had decided to postpone our decision related to the potential declaration of a quarterly cash dividend for the first quarter of fiscal 2021. Decisions on whether, when and in what amounts to continue making any future dividend distributions will remain at all times entirely at the discretion of the Company's Board of Directors, which reserves the right to change or terminate the Company's dividend practices at any time and for any reason without prior notice. The payment of cash dividends in the future will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service and covenant requirements, cash paid for income taxes, earnings, share repurchases, economic conditions andU.S. and global liquidity. Share Repurchases OnJune 26, 2012 , the Company's Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to$500 million of the Company's common stock. Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program, which may be discontinued at any time, without prior notice. During fiscal 2020, the Company repurchased 16,739,740 shares under the program at an aggregate cost of$288.0 million , which is inclusive of the shares repurchased under the ASR Contract as described below. During fiscal 2019, the Company repurchased 1,118,808 shares under the program at an aggregate cost of$17.6 million . During fiscal 2018, the Company repurchased 3,866,387 shares at an aggregate cost of$56.1 million , of which$6.0 million was settled in fiscal 2019. As ofFebruary 1, 2020 , the Company had remaining authority under the program to purchase$86.7 million of its common stock. OnApril 26, 2019 , pursuant to existing stock repurchase authorizations, the Company entered into an ASR Contract withJPMorgan Chase Bank, National Association (in such capacity, the "ASR Counterparty"), to repurchase an aggregate of$170 million of the Company's common stock. Under the ASR Contract, the Company made an initial payment of$170 million to the ASR Counterparty and received an initial delivery of approximately 5.2 million shares of common stock, which represented approximately$102 million (or 60%) of the ASR Contract. The Company received a final delivery of an additional 5.4 million shares, or$68 million , under its ASR Contract onSeptember 4, 2019 . The final share amount was determined based on the daily volume-weighted average price since the effective date of the ASR Contract, less the applicable contractual discount. When combined with the 5.2 million upfront shares received at the inception of the ASR inApril 2019 , the Company repurchased approximately 10.6 million of its shares under the ASR at an average repurchase price of$16.09 per share. All shares were repurchased in accordance with the Company's publicly announced ASR program, which is now complete. The shares delivered under the ASR Contract reduced the Company's outstanding shares and its weighted average number of common shares outstanding for purposes of calculating basic and diluted earnings per share. Borrowings and Finance Lease Obligations See "Part IV. Financial Statements - Note 8 - Borrowings and Finance Lease Obligations" in this Form 10-K for disclosures about our borrowings and finance lease obligations. Subsequent to year end, as a precautionary measure to ensure financial flexibility and maintain maximum liquidity in response to the COVID-19 pandemic, the Company drew down approximately$212 million under certain of its credit facilities in theU.S. ,Canada andEurope . Supplemental Executive Retirement Plan OnAugust 23, 2005 , the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan ("SERP") which became effectiveJanuary 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 49 -------------------------------------------------------------------------------- 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$67.7 million and$61.7 million as ofFebruary 1, 2020 andFebruary 2, 2019 , respectively, and were included in other assets in the Company's consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains (losses) of$7.6 million ,$(1.1) million and$7.7 million in other income and expense during fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The projected benefit obligation was$51.9 million and$52.2 million as ofFebruary 1, 2020 andFebruary 2, 2019 , respectively, and was included in accrued expenses and other long-term liabilities in the Company's consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of$1.7 million were made during both fiscal 2020 and fiscal 2019. Employee Stock Purchase Plan The Company's qualified employee stock purchase plan ("ESPP") allows qualified employees (as defined) to participate in the purchase of designated shares of the Company's common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The Company has 4,000,000 shares of common stock registered under the ESPP. The Company's ESPP will remain in effect throughMarch 11, 2022 . During the year endedFebruary 1, 2020 , 53,424 shares of the Company's common stock were issued pursuant to the ESPP at an average price of$14.65 per share for a total of$0.8 million . Inflation The Company does not believe that inflation trends in theU.S. and internationally over the last three years have had a significant effect on net revenue or profitability. Critical Accounting Policies and Estimates The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in theU.S. , which require management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on its historical experience, an evaluation of current market trends as of the reporting date and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management evaluates its estimates and judgments on an ongoing basis including those related to the allowances for doubtful accounts, sales return and markdown allowances, gift card and loyalty accruals, valuation of inventories, share-based compensation, recoverability of deferred taxes, unrecognized tax benefits, the useful life of assets for depreciation and amortization, evaluation of asset impairment, pension obligations, workers' compensation and medical self-insurance expense and accruals, litigation reserves and restructuring expense and accruals. The Company believes that the following significant accounting policies involve a higher degree of judgment and complexity. In addition to the accounting policies mentioned below, see "Part IV. Financial Statements - Note 1 - Description of the Business and Summary of Significant Accounting Policies and Practices" in this Form 10-K for other significant accounting policies. Allowances for Doubtful Accounts In the normal course of business, the Company grants credit directly to certain wholesale customers after a credit analysis is performed based on financial and other criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. 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. 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 reduces sales and cost of sales accordingly. The Company's policy allows retail 50 -------------------------------------------------------------------------------- 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 includes the allowance for sales returns in accrued expenses and the estimated cost associated with such sales returns within other current assets in its consolidated balance sheet. Markdown Allowances Costs associated with customer markdowns are recorded as a reduction to revenues, and any unapplied amounts are included in accrued expenses. Historically, 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 economic conditions. Gift Card Breakage 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 theU.S. andCanada . The Company issues its gift cards in theU.S. andCanada 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 determined a gift card breakage rate based upon historical redemption patterns, which represented the cumulative estimated amount of gift card breakage from the inception of the electronic gift card program in late 2002. Any future revisions to the estimated breakage rate may result in changes in the amount of breakage income recognized in future periods. Loyalty Programs The Company has customer loyalty programs inNorth America ,Europe andAsia which cover all of its brands. Under certain of the programs, primarily in theU.S. andCanada , 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. The aggregate dollar value of the loyalty program accruals included in accrued expenses was$5.8 million and$5.7 million as ofFebruary 1, 2020 andFebruary 2, 2019 , respectively. Future revisions to the estimated liability may result in changes to net revenue. Inventory Reserves Inventories are valued at the lower of cost (primarily weighted average method) or net realizable value. The Company continually evaluates its inventories by assessing slow moving product as well as prior seasons' inventory. Net realizable value of aged inventory is estimated based on historical sales trends for each product line category, the impact of market trends, an evaluation of economic conditions, available liquidation channels and the value of current orders relating to the future sales of this type of inventory. The Company closely monitors off-price sales to ensure the actual results closely match initial estimates. Estimates are regularly updated based upon this continuing review. Share-Based Compensation The Company recognizes compensation expense for all share-based awards granted based on the grant date fair value. The fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model and involves several assumptions, including the risk-free interest rate, expected volatility, dividend yield and expected life. The risk-free interest rate is based on theU.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected stock price volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company's common stock. The expected dividend yield is based on the Company's history and expectations of dividend payouts. The expected life is determined based on historical trends. Compensation expense for nonvested stock options and stock awards/units that are not subject to performance-based vesting conditions is recognized on a straight-line basis over the vesting period. The Company has elected to account for forfeitures as they occur. 51 -------------------------------------------------------------------------------- In addition, the Company has granted certain nonvested units that require certain minimum performance targets to be achieved in order for these awards to vest. Vesting is also subject to continued service requirements through the vesting date. Compensation expense for performance-based awards that vest in increments is recognized based on an accelerated attribution method. If the minimum performance targets are not forecasted to be achieved, no expense is recognized during the period. The Company has also granted certain nonvested stock units which are subject to market-based performance targets in order for these units to vest. Vesting is also subject to continued service requirements through the vesting date. The grant date fair value for such nonvested stock units was estimated using a Monte Carlo simulation that incorporates option-pricing inputs covering the period from the grant date through the end of the performance period. Compensation expense for such nonvested stock units is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied. Certain restricted stock units vest immediately but are considered contingently returnable as a result of certain service conditions. Compensation expense for these types of restricted stock units are recognized on a straight-line basis over the implied service period. Derivatives Foreign Exchange Currency Contracts The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges. The Company's primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong , andMexico are denominated inU.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions includeU.S. dollar-denominated purchases of merchandise andU.S. dollar- and British pound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are 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, the Company 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. The Company enters into derivative financial instruments, including forward exchange currency contracts, to offset some but not all of the exchange risk on certain of these anticipated foreign currency transactions. Changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (expense) within stockholders' equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold or, if applicable, in other income and expense in the period in which the hedged intercompany liability is incurred. Periodically, the Company may also use foreign exchange currency contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. Changes in the fair value of theseU.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders' equity and are not recognized in earnings (loss) until the sale or liquidation of the hedged net investment. The Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense). Interest Rate Swap Agreements The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company's 52 -------------------------------------------------------------------------------- floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense over the term of the related debt. Periodically, the Company may also enter into interest rate swap agreements that are not designated as hedging instruments for accounting purposes. Changes in the fair value of interest rate swap agreements not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense). Income Taxes The Company adopted authoritative guidance which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Guidance was also provided on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company's continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As required under applicable accounting rules, 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 appropriate, as more definitive information or interpretations become available from taxing authorities, upon completion of tax audits, upon receipt of assessments, upon expiration of statutes of limitation, or upon occurrence of other events. The results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits. Deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized. The Company has historically considered the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. As a result of the Tax Reform, the Company had a substantial amount of previously taxed earnings that could be distributed to theU.S. without additionalU.S. taxation. The Company continues to evaluate its plans for reinvestment or repatriation of unremitted foreign earnings and regularly reviews its cash positions and determination of permanent reinvestment of foreign earnings. If the Company determines that all or a portion of such foreign earnings are no longer indefinitely reinvested, it may be subject to additional foreign withholding taxes andU.S. state income taxes, beyond the Tax Reform's one-time transition tax. The Company intends to indefinitely reinvest the remaining earnings from the Company's foreign subsidiaries for which a deferred tax liability has not already been recorded. Valuation ofGoodwill , Intangible and Other Long-Lived AssetsThe Company assesses the impairment of its long-lived assets (related primarily to goodwill, property and equipment and operating right-of-use assets), which requires the Company to make assumptions and judgments regarding the carrying value of these assets on an annual basis, or more frequently if events or changes in circumstances indicate that the assets might be impaired. For goodwill, determination of impairment is made at the reporting unit level which may be either an operating segment or one level below an operating segment if discrete financial information is available. Two or more reporting units within an operating segment may be aggregated for impairment testing if they have similar economic characteristics. The Company has identified its Americas Retail segment, its Americas Wholesale segment, its European wholesale and European retail components of itsEurope segment and itsChina retail component of itsAsia segment as reporting units for goodwill impairment testing. For long-lived assets (other than goodwill), the majority relate to its retail operations which consist primarily of regular retail and flagship locations. The Company considers each individual regular retail location as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes leasehold improvements, furniture, fixtures and equipment, computer hardware and software, operating lease right-of-use ("ROU") assets including lease acquisition costs, and certain long-term security deposits, and excludes operating lease liabilities. The Company reviews regular retail locations in penetrated markets for impairment risk once the 53
-------------------------------------------------------------------------------- locations have been opened for at least one year in their current condition, or sooner as changes in circumstances require. The Company believes that waiting at least one year allows a location to reach a maturity level where a more comprehensive analysis of financial performance can be performed. The Company evaluates impairment risk for regular retail locations in new markets, where the Company is in the early stages of establishing its presence, once brand awareness has been established. The Company also evaluates impairment risk for retail locations that are expected to be closed in the foreseeable future. The Company has flagship locations which are used as a regional marketing tool to build brand awareness and promote the Company's current product. Impairment for these locations is tested at a reporting unit level similar to goodwill since they do not have separately identifiable cash flows. An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset's ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Company's strategic business objectives and utilization of the assets occurred. If the assets (other than goodwill) are assessed to be recoverable, they are depreciated or amortized over the periods benefited. If the assets are considered to be impaired, an impairment charge is recognized representing the amount by which the carrying value of the assets exceeds the fair value of those assets. The Company uses market participant rents to calculate fair value of ROU assets and discounted future cash flows of the asset group to quantify fair value for other long-lived assets. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for assets in regular retail locations are based on management's estimates of future cash flows, which include sales and gross margin growth rate assumptions, over the remaining lease period or expected life, if shorter. For expected location closures, the Company will evaluate whether it is necessary to shorten the useful life for any of the assets within the respective asset group. The Company will use this revised useful life when estimating the asset group's future cash flows. The Company considers historical trends, expected future business trends and other factors when estimating the future cash flow for each regular retail location. The Company also considers factors such as: the local environment for each regular retail location, including mall traffic and competition; the Company's ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Company's results of operations. Pension Benefit Plan Actuarial Assumptions The Company's pension obligations and related costs are calculated using actuarial concepts, within the authoritative guidance framework. The Company uses the corridor approach to amortize unrecognized actuarial gains or losses over the average remaining service life of active participants. The life expectancy, estimated retirement age, discount rate, estimated future compensation and expected return on plan assets are important elements of expense and/or liability measurement. These critical assumptions are evaluated annually which enables expected future payments for benefits to be stated at present value on the measurement date. If actual results are not consistent with actuarial assumptions, the amounts recognized for the defined benefit plans could change significantly. Refer to "Part IV. Financial Statements - Note 13 - Defined Benefit Plans" in this Form 10-K for detail regarding the Company's defined benefit plans. Litigation Reserves Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position. Convertible Senior Notes InApril 2019 , the Company issued$300 million principal amount of 2.00% convertible senior notes due 2024 (the "Notes") in a private offering. Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, the Company separated 54 -------------------------------------------------------------------------------- the Notes into liability and equity components. The liability component was recorded at fair value, which was derived from a valuation technique used to calculate the fair value of a similar liability without an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes. The excess of the principal amount of the liability component over its carrying amount ("debt discount") will be amortized to interest expense using an effective interest rate over the term of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the debt issuance costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on the Company's consolidated balance sheets. These costs are amortized to interest expense using the effective interest method over the term of the Notes. Refer to "Part IV. Financial Statements - Note 10 - Convertible Senior Notes and Related Transactions" in this Form 10-K for details on the Company's convertible senior notes. Recently Issued Accounting Guidance See "Part IV. Financial Statements - Note 2 - New Accounting Guidance" in this Form 10-K for disclosures about recently issued accounting guidance. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Exchange Rate Risk More than half of product sales and licensing revenue recorded for the year endedFebruary 1, 2020 were denominated in currencies other than theU.S. dollar. The Company's primary exchange rate risk relates to operations inEurope ,Canada ,South Korea ,China ,Hong Kong , andMexico . Changes in currencies affect our earnings in various ways. For further discussion on currency-related risk, please refer to our risk factors under "Part I, Item 1A. Risk Factors." Various transactions that occur primarily inEurope ,Canada ,South Korea ,China ,Hong Kong , andMexico are denominated inU.S. dollars, British pounds and Russian roubles and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions includeU.S. dollar-denominated purchases of merchandise andU.S. dollar- and British pound-denominated intercompany liabilities. In addition, certain operating expenses, tax liabilities and pension-related liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. Further, there are certain real estate leases which are 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, the Company 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. The Company is also subject to certain translation and economic exposures related to its net investment in certain of its international subsidiaries. The Company enters into derivative financial instruments to offset some but not all of its exchange risk. In addition, some of the derivative contracts in place will create volatility during the fiscal year as they are marked-to-market according to the accounting rules and may result in revaluation gains or losses in different periods from when the currency impact on the underlying transactions are realized. Foreign Exchange Currency Contracts Designated as Cash Flow Hedges During fiscal 2020, the Company purchasedU.S. dollar forward contracts inEurope totalingUS$150.6 million that were designated as cash flow hedges. As ofFebruary 1, 2020 , the Company had forward contracts outstanding for its European operations ofUS$148.6 million to hedge forecasted merchandise purchases, which are expected to mature over the next 17 months. The Company's derivative financial instruments are recorded in its consolidated balance sheet at fair value based on quoted market rates. Changes in the fair value of theU.S. dollar forward contracts, designated as cash flow hedges for forecasted merchandise purchases, are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. Changes in the fair value of theU.S. dollar forward contracts, if any are designated as cash flow hedges for forecasted intercompany royalties, are recorded 55 -------------------------------------------------------------------------------- as a component of accumulated other comprehensive income (loss) within stockholders' equity and are recognized in other income (expense) in the period in which the royalty expense is incurred. As ofFebruary 1, 2020 , accumulated other comprehensive income (loss) related to foreign exchange currency contracts included a net unrealized gain of approximately$6.6 million , net of tax, of which$5.9 million will be recognized in cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values. As ofFebruary 1, 2020 , the net unrealized gain of the remaining open forward contracts recorded in the Company's consolidated balance sheet was approximately$4.0 million . AtFebruary 2, 2019 , the Company had forward contracts outstanding for its European and Canadian operations ofUS$175.2 million andUS$3.9 million , respectively, that were designated as cash flow hedges. AtFebruary 2, 2019 , the net unrealized gain of these open forward contracts recorded in the Company's consolidated balance sheet was approximately$4.0 million . Foreign Exchange Currency Contracts Not Designated as Hedging InstrumentsThe Company also has foreign exchange currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign exchange currency contracts not designated as hedging instruments are reported in net earnings (loss) as part of other income (expense). For the year endedFebruary 1, 2020 , the Company recorded a net gain of$1.3 million for its euro dollar foreign currency contracts not designated as hedges, which has been included in other income (expense). As ofFebruary 1, 2020 , the Company had euro foreign exchange currency contracts to purchaseUS$46.1 million expected to mature over the next 16 months. As ofFebruary 1, 2020 , the net unrealized gain of these open forward contracts recorded in the Company's consolidated balance sheet was approximately$0.9 million . AtFebruary 2, 2019 , the Company had euro foreign exchange currency contracts to purchaseUS$8.2 million . AtFebruary 2, 2019 , the net unrealized gain of these open forward contracts recorded in the Company's consolidated balance sheet was approximately$0.6 million . Sensitivity Analysis As ofFebruary 1, 2020 , a sensitivity analysis of changes in foreign currencies when measured against theU.S. dollar indicates that, if theU.S. dollar had uniformly weakened by 10% against all of theU.S. dollar denominated foreign exchange derivatives totalingUS$194.7 million , the fair value of the instruments would have decreased by$21.6 million . Conversely, if theU.S. dollar uniformly strengthened by 10% against all of theU.S. dollar denominated foreign exchange derivatives, the fair value of these instruments would have increased by$17.7 million . Any resulting changes in the fair value of the hedged instruments may be partially offset by changes in the fair value of certain balance sheet positions (primarilyU.S. dollar denominated liabilities in our foreign operations) impacted by the change in the foreign currency rate. The ability to reduce the exposure of currencies on earnings depends on the magnitude of the derivatives compared to the balance sheet positions during each reporting cycle. Interest Rate Risk The Company is exposed to interest rate risk on its floating-rate debt. The Company has entered into interest rate swap agreements to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company's floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Interest Rate Swap Agreement Designated as Cash Flow Hedge During fiscal 2017, the Company entered into an interest rate swap agreement with a notional amount of$21.5 million , designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with the Company's floating-rate debt. This interest rate swap agreement matures inJanuary 2026 and converts the nature of the Company's real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt, resulting in a swap fixed rate of approximately 3.06%. The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the interest rate swap agreement, designated as a cash flow hedge to hedge the variability of cash flows in interest payments associated with the Company's floating-rate debt, 56 -------------------------------------------------------------------------------- are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense over the term of the related debt. As ofFebruary 1, 2020 , accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately$0.3 million , net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis, which can be different than the current year-end values. As ofFebruary 1, 2020 , the net unrealized loss of the interest rate swap recorded in the Company's consolidated balance sheet was approximately$0.3 million . AtFebruary 2, 2019 , the net unrealized gain of the interest rate swap recorded in the Company's consolidated balance sheet was approximately$1.0 million . Sensitivity Analysis As ofFebruary 1, 2020 , the Company had indebtedness related to a real estate secured term loan of$19.1 million and finance lease obligations of$16.5 million . The real estate secured loan is covered by a separate interest rate swap agreement with a swap fixed interest rate of approximately 3.06% that matures inJanuary 2026 . The interest rate swap agreement is designated as a cash flow hedge and converts the nature of the Company's real estate secured term loan from LIBOR floating-rate debt to fixed-rate debt. The finance lease obligations are based on fixed interest rates derived from the respective agreements. The Company's remaining indebtedness is at variable rates of interest. Accordingly, changes in interest rates would impact the Company's results of operations in future periods. A 100 basis point increase in interest rates would have had an insignificant effect on interest expense for the year endedFebruary 1, 2020 . As ofFebruary 1, 2020 , the Company also had borrowings under its short-term borrowing arrangements of$4.0 million which are based on variable rates of interest. Accordingly, changes in interest rates would impact the Company's results of operations in future periods. A 100 basis point increase in interest rates would not have a significant effect on interest expense for the year endedFebruary 1, 2020 . The fair values of the Company's debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's incremental borrowing rate. As ofFebruary 1, 2020 andFebruary 2, 2019 , the carrying value of all financial instruments was not materially different from fair value, as the interest rates on the Company's debt approximated rates currently available to the Company. The fair value of the Company's convertible senior notes is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy. Derivatives Designated as Hedging Instruments The following table summarizes net after-tax activity related to the Company's foreign exchange currency contracts and interest rate swap agreement designated as cash flow hedges recorded in accumulated other comprehensive income (loss) (in thousands): Year Ended Feb 1, Year Ended 2020 Feb 2, 2019 Beginning balance gain (loss)$ 2,999
1,981 - Net gains from changes in cash flow hedges 8,316
10,962
Net (gains) losses reclassified to earnings (6,996 ) 6,406 Ending balance gain$ 6,300 $ 2,999
______________________________________________________________________
1 During the first quarter of fiscal 2020, the Company adopted new
authoritative guidance which eliminated the requirement to separately measure
and report ineffectiveness for instruments that qualify for hedge accounting
and generally requires that the entire change in the fair value of such
instruments ultimately be presented in the same line as the respective hedge
item. As a result, there is no interest component recognized for the
ineffective portion of instruments that qualify for hedge accounting, but
rather all changes in the fair value of such instruments are included in
other comprehensive income (loss) during fiscal 2020. Upon adoption of this
guidance, the Company reclassified
earnings to accumulated other comprehensive loss related to the previously
recorded interest component on outstanding instruments that qualified for
hedge accounting. 57
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