GES - NYSE

Good day, everyone, and welcome to the Guess First Quarter Fiscal 2023 Earnings Conference Call. I would like to turn the call over to Fabrice Benarouche, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. On the call today, with me are Carlos Alberini, Chief Executive Officer; and Dennis Secor, Interim Chief Financial Officer. During today's call, the company will be making forward-looking statements including comments regarding future plans, strategic initiatives, capital allocation and short- and long-term outlook, including potential impacts from currency fluctuations, the Corona virus pandemic and the war in Ukraine. The company's actual results may differ materially from current expectations based on which sectors included in today's press release and the company's quarterly and annual reports filed with the SEC. Comments will also reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today's earnings release. Now, I will turn it over to Carlos.

Thank you, Fabrice. Good afternoon, everyone. And thank you for joining us today. I am very pleased to report a great start to the year with a strong first quarter performance that exceeded expectations for both top-line and operating profit despite a challenging environment. Our revenues grew 14% and in constant currency grew 21%. We delivered a 7% adjusted operating margin and our adjusted earnings from operations increased 61% from last year, reaching $41.7 million. All segments contributed to our revenue growth. And our adjusted operating margin expansion of 200 basis points was driven equally by improved gross margin and expense leverage. We continue to navigate a dynamic environment that includes higher inbound freight and product costs, a weaker euro and increased wages. Our associates across the world are executing effectively capturing opportunities to grow our business, increase our bottom line and deliver value to our shareholders. Paul and I want to thank our great teams who work together with an unwavering passion to build on our vision for this amazing brand and company. I will now share some color on our first quarter results. Our retail business in America grew revenues by 7% in the period and delivered strong gross margin expansion. As with the rest of our industry, we experienced meaningful expense pressure due to increased wages and inflation, as well as invested in services and marketing. Altogether, this resulted in almost five points of deleveraging the period. We are adjusting our model to mitigate this factors and do not expect this much deleverage going forward. Our Americas wholesale segment had another great quarter, with both revenue growth and earnings growth of over 50%. Our Europe segment exceeded our expectations, achieving top-line growth of 14% and operating earnings that was four times higher than last year's. Our retail business in Europe enjoyed a full period with open stores compared to significant closures in the same year ago period and was the primary driver for the great results of the segment. We had strong margin performance and effective expense management, which also contributed to the growth in profitability. While the Europe wholesale business had lower revenues in the quarter as a result of timing shifts in the business and currency impact, I am pleased that the business continues to trend well with the Fall Winter ‘22 campaign closing up 14% and the Pre-Spring summer '23 campaign starting strong with a positive response to the collections and the prospects for another double-digit performance. Not surprisingly, given COVID-related shutdowns in China, our performance in Asia was significantly impacted in the quarter. But we were still able to deliver top and bottom-line results consistent with last year's. Finally, our licensing business achieved revenue growth of over 22% as the business continues to benefit from our strong brand momentum, and as many of our licensees delivered product from prior orders that have not been shipped due to the supply chain disruptions plaguing the industry. Turning to our product performance. Paul and our creative and merchant teams have done an extraordinary job repositioning our product offering, and the customer is responding well to the new collections. As you know, our brand innovation strategy focused on enhancing the styling and quality of our products across categories with a focus on key products to address our main customer groups, serving their lifestyles, and purchase locations. Our global line is performing extremely well across all markets. And a consistent performance by products including bestsellers across regions and channels is a clear proof that our customers responding positively to the assortment, and our strategy is working well. In women, we have seen that our customer has renewed desire to get up and participate in social events and travel. As a result, we are having great success with dresses, where we have introduced significant newness in fabrications, textures, prints and silhouettes. We are also seeing strong performance in woven tops, dresses, sweaters, pants, and special outerwear pieces. In addition, she is buying accessories to complete the outfit. Our handbags are flying off the shelves and we are having a difficult time keeping inventory available to meet demand. The beautiful colors we offer that coordinate back to the apparel line to complement the outfit are very compelling prices make the offering extraordinary. Here also we have increased the quality of the product with additional fabrications and elevated trims and packaging. Several other categories and accessories are also performing well, including women's travel accessories, belts, men's bags, women's and men's eyewear and others. Consistent with women's, our men's business has shown strength in dressy products such as woven shirts, outerwear, blazers and pants. And our Marciano brand was on fire during the quarter. We saw strong double-digit sales growth in every region. As our customer responded positively to the new products we introduced monthly in stores online and at wholesale. Here again, dresses have been a driving force. We are offering many sophisticated fabrications, including silk prints and [indiscernible] in several styles, leather and sweaters. All prices well below what you will find in the luxury market for comparable products. I believe there is nothing like it in the market today. I have said it before. Guess is a true lifestyle brand that offers an enormous range of product to our core customers to support the lifestyle and the multiple occasions they shop for. It is at times like the present one when we can leverage the power of that product range and go from a casual offering to a much dressier and elevated one without compromising the DNA of our brand. To elevate the brand image in our stores, we are remodeling multiple locations and opening new stores that offer a more elevated customer experience, including the use of our new customer analytics tool, omni-channel capabilities, better floor design and space allocation, bigger fit and rooms and seating accommodations and more spacious shopping areas. This year we plan to open 60 new stores in North America and Europe and plan to remodel 370 additional locations between the two regions. Considering the stores have reopened and remodeled last year, by the end of fiscal year '23, we will have 750 locations out of 950 or 80% of the total stores updated. Regarding our digital transformation and CRM, we continue to make good progress and optimizing the new platform utilization and the implementation of our customer 360 solution. This solution covers several areas that in the past were either not addressed or the solutions were not effectively integrated. They include a new CRM platform that allows us to see all information related to our customers in one screen from a single data repository. A new segmentation tool, which allows us to work on dynamic customer segmentations to easily identify common characteristics among our customer base given multiple variables a new marketing tool to engage our customers by personalizing their experience through automated communications or multi step journey and a customer 360 in store clienteling app, our plan is to finalize this implementation in Europe and integrate the system into North America by year-end. Regarding our supply chain, the disruptions caused by the pandemic are still very present and continue to impact cost supply and inventory availability. The most recent lockdowns in China due to COVID and the energy crisis exacerbated by the war in Ukraine have complicated things further. While we have seen some relief in port congestions, and transportation costs, based on further costs increases due to oil constraints and inflationary forces, we are assuming prices will remain consistent with the current environment for the remainder of the year. Our teams have done an extraordinary job of addressing the complexities of the global operating environment and mitigating challenges to secure the appropriate inventory to support our business. We close the quarter with inventories up 20%. And much of the increase relates to in transit inventory growth and orders that we placed earlier to support our business and avoid late deliveries. We are very pleased with the composition of our inventory right now. And we feel that we have made the right moves to ensure monthly deliveries are protected for both our direct-to-consumer and wholesale businesses. As I reflect on our results for this quarter, and what they mean for the rest of this year and our future, it tells me one thing very clearly, our strategy is working, and our new business model is sustainable. Our first quarter results further demonstrate the benefits of a globally diversified business and the power of the transformation we are executing which is benefiting from the brand elevation I discussed earlier as we combine higher prices with increased full price selling. We drive significant efficiencies in our product development and sourcing functions and we deliver increased store profitability as a result of our Footprint Optimization Initiative. As we look to the rest of this year, our expectations for revenues remain in line with our prior guidance. And operating margin is slightly lower due to some factors in the macro environment, mostly currencies that have changed significantly since we last spoke in March. We now expect revenues to grow by 4% in U.S. dollars, or 10% in constant currency. We continue to see opportunities to grow our business through increased sales productivity and market share gains, category expansion, digital business growth, and expanding our store fleet. In addition, we plan to deliver a 10.3% adjusted operating margin. This compares to the 10.5% percent that we were targeting for this year back in March, which includes 100 basis points of currency pressures. I strongly believe our outlook for this year confirms that our model is highly sustainable. In fact, if this year's currencies were at last year's levels, we will be looking at revenues growing at 10% and reaching $2.850 billion and adjusted operating margin at 11.3%, with earnings reaching roughly $320 million. Looking further out to fiscal 2024, we remain confident in our goals to reach $2.8 billion in revenues and achieve a 12% operating margin absent further currency headwinds as our assumptions for more normalized costs, and plans for increased operational efficiencies remain intact. In addition to all that we are doing in our business to drive growth. We also continue to be committed to returning capital directly to our shareholders through our dividends and share repurchases. During the first quarter, we repurchased over 500,000 shares in open market transactions for a total amount of $11.7 million. This was in addition to entering into a $175 million accelerated share repurchase program that should be fully executed by the end of July 2022. We feel strongly about our cash flow generation power and our balance sheet. We just announced the completion of a new Є250 million revolving credit facility to support our European business. With this, our total borrowing capacity will reach over $450 million. The new facility contains a feature by which the interest rate will benefit us with the achievement of specific sustainability goals, which demonstrate how committed we are to integrate the concept of sustainability into our operations. In closing, as I look back to the last couple of years and the challenges that the pandemic brought to the business and our lives, I can't stop reflecting on how this company and this team embrace change and adapted to a completely new way of thinking and a new way to run our business. Paul and I couldn't be more proud of our teams across the world. And we want to thank you deeply for your great passion and strong contributions. And with this great teams, we are very well positioned to continue to grow our company and capture significant market share. We have an amazing brand that is enjoying strong momentum globally, we have the best product we have ever had across all 25 categories we do business in. Great marketing and customer awareness globally, a powerful distribution network leveraging all channels, and a greatly diversified business model. And this is a model that is delivering double-digit operating margins. and a high return on invested capital. We will remain focused on managing our business carefully and continuing to deliver for all our shareholders. With that, I want to more formally welcome Dennis Secor back to our Guess family. It is a great pleasure to work with you again, Dennis. Let me now pass it to you to review our financials and outlook in more detail. Thank you.

Thank you, Carlos, and good afternoon, everyone. Before I jump into the numbers, I want to tell you how excited I am to be back here at Guess and help the team drive the business of this iconic brand. Since I left a decade ago, the team has done an incredible job expanding our business across all of Europe. The brand is well represented, and we have a strong infrastructure to support it. I'm also impressed with the team's execution over the last couple of years and how they've created a platform for sustainable and profitable growth. I'm looking forward to working with you all as well and to continue to support the company's goal to deliver outstanding value to our shareholders. So with that, let's take a look at the quarter. Our overall first quarter operating results exceeded our expectations despite some continuing headwinds, including global inflation, the war in Ukraine and some isolated COVID restrictions. We delivered strong double-digit revenue growth with each of our business segments posting top-line growth versus last year's first quarter. We expanded gross margins and leveraged our expense structure, improving profitability with a 200 basis point expansion of adjusted operating margin, a solid performance that reflects both the resilience of our operating model and the strength of our team. Now let me take you through the details. First quarter revenues were $593 million, a 14% increase in U.S. dollars, and a 21% increase in constant currency. Our revenue growth was primarily driven by last year's temporary store closures, which were worth roughly 8% of revenue growth, as well as strong performance in our European wholesale business along with higher Americas wholesale shipments. Currency headwinds resulting from the relatively strong U.S. dollar muted much of that growth, negatively impacting U.S. dollar revenues by $33 million, or 7% of revenue growth. Getting into a bit more detail in our segment performance. In Americas retail revenues increased 7% both in U.S. dollars and constant currency driven in part by the anniversary of last year's temporary store closures and an overall comp increase of 4% in constant currency. Overall in the U.S. and Canada, our stores benefited from higher traffic as well as higher AUR partially offset by softer conversion. The higher AURs were fueled by the strategic price increases we implemented throughout last year to support our brand elevation. Canadian store comps were especially strong as they have now anniversaried the severe pandemic restrictions that were in place a year ago. In our U.S. stores higher AUR and traffic are offset by softer conversion as we anniversaried the stimulus checks that hit customers bank accounts in the first quarter of last year. Very encouragingly as well, our tourist locations have outperformed the rest of our store fleet as leisure travel has regained momentum in the U.S. In Europe, revenues increased 14% in U.S. dollars, and 26% in constant currency. The main driver for constant currency revenue growth was the removal and easing of many of the COVID related restrictions from last year, which kept a substantial amount of the fleet partially or fully locked down, especially in the first quarter last year. Our stores posted 7% positive comp sales and constant currency for the quarter. Just as in the U.S. the driver of our comp increase with a significant increase to a AUR resulting from last year's strategic price increases. Traffic and conversion followed a similar pattern to the U.S., with strong traffic increases being more than offset by conversion declines. Our European wholesale business also delivered revenue growth mainly fueled by our spring summer orderbook where orders were up for the season. In Asia, revenues grew 1% in U.S. dollars and 8% in constant currency, mainly driven by our direct retail operation of some of our South Korea stores, which we recently acquired from one of our wholesale partners. This increase was partially offset by 4% constant currency comp store decline as lower traffic more than offset the benefit of higher AURs from our price increases. In America's wholesale, revenues increased by 50%, both in U.S. dollars and constant currency. This resulted from the timing of this year's deliveries to some of our partners, where we expect all of the year-over-year revenue increase will occur in the first quarter. And finally, in our licensing segment, royalty revenues increased 23%. This increase was primarily driven by strong global selling of handbags, or inventory was significantly constrained during the fourth quarter of last year. In the quarter, we expanded gross margin, with a 90-basis point increased to 41.6%. Leverage of our retail cost base drove the gross margin expansion. Product margins were roughly flat as supply chain cost pressures and currency headwinds offset the benefit from last year's price increases as well as a higher mix of retail sales. Adjusted SG&A for the first quarter increased 11% to $205 million, including a favorable currency impact of $10 million compared to last year’s expense level. Our expenses this quarter included an $8 million COVID related subsidy to support our infrastructure in Europe. We received a similar amount in last year's Q1 as well. The largest increase in SG&A expense was to support the reopening of our retail stores where we are experiencing labor cost pressures, given the impact of global inflation and the relatively strong employment in many of our markets. We also increased our marketing and advertising investments to support our business and brand story. With disciplined cost control, we manage our fixed overhead structure well, and with our strong top-line growth, we improved our adjusted SG&A rate by 110 basis points in the quarter. Adjusted operating profit totaled $42 million in the quarter a 61% increase over last year's Q1 and the adjusted operating margin expanded 200 basis points to 7%. In the quarter, we recorded non-operating net charges of $16 million related primarily to revaluations of certain of our foreign subsidiaries, net assets and liabilities into U.S. dollars along with revaluation of the assets we hold to support our SERP. The vast majority of the charges we recorded in the quarter were mainly unrealized and related to the relatively strong U.S. dollar and the relatively weak performance of global equity markets. Our first quarter adjusted tax rate was 22% down from last Q1's rate of 28%. Adjusted EPS in the quarter was $0.24 versus last Q1’s $0.21. This year’s adjusted EPS was negatively impacted by the non-operating charges I just mentioned by $0.20 per share. While the similar negative impact last Q1 was $0.03. Adjusting for these non-operating items, adjusted EPS would have increased over 80% in the quarter. Moving to the balance sheet, we ended the first quarter with $148 million in cash compared to $395 million a year ago. The decrease in cash was primarily driven by $238 million of share repurchases executed in the last 12 months, including our $175 million accelerated share repurchase program, as well as $107 million of tax payments related to the IP transfer to Europe. Our business model continues to generate strong operating cash flows that support our investments and our goal is to return capital to our shareholders. We ended the quarter with a total of $221 million of borrowing availability on our various global facilities. This amount is not include the $144 million of additional borrowing capacity that we added after the first quarter. Inventories were $484 million, up 20% in U.S. dollars and 31% in constant currency versus last year. Our inventory investment includes a substantial increase in in-transit inventories, reflecting our strategy to protect revenues in the current supply chain environment and to support our growth by ordering product roughly four weeks in advance. We feel good about our overall inventory position and upcoming orders and believe we have the right assortment to satisfy demand throughout the year. Our receivables were $295 million, down 4% from $306 million last year. On a constant currency basis receivables increased about 8%. Our payables increased 12%, primarily reflecting the investments we are making to position our inventories. Capital expenditures for the quarter were $29 million, up from $9 million in the prior year, mainly driven by investments in remodels, new stores and technology. Free cash flow for the quarter reflects a net investment of $85 million versus a net investment of $65 million in the prior year, the change being mainly driven by higher capital expenditures. As we announced last quarter, our Board expanded our share repurchase authorization by $100 million, taking the capacity to $249 million. Thereafter, we entered into an accelerated share repurchase arrangement to repurchase $175 million of our shares, with a final number of shares to be repurchased, still to be determined when the program ultimately completes by the end of July. In addition, in the quarter, we repurchased another roughly half million shares for $12 million. This leaves $62 million outstanding on the authorization. Earlier this month, we finalized a Є250 million revolving credit facility in Europe more than doubling the region's borrowing capacity as it replaced several short-term borrowing arrangements with European banks. The initial term of the facility is five years. The facility also provides an option of a two-year extension and a Є100 million expansion, both subject to certain conditions. This is an important accomplishment for the company as it expands our access to longer term capital. Today, we also announced that our Board approved our quarterly dividend of 22.5 cents, which at recent stock prices represents a yield of roughly 5% return annually. We feel strongly about our financial position, our cash flow generation power and our balance sheet. So now let's talk about the rest of the year and next quarter. Our overall assessment of our plan and profit expectations for this year remained largely unchanged compared to what we shared on last quarters call. However, there are a few factors that have evolved since March, including our outperformance in the first quarter. First are currencies, currency headwinds which were already strong intensified since March with the U.S. Dollar and Euro approaching parity. Absent any material trajectory change and despite the impact of our hedging program, currencies will likely represent one of the most impactful drivers affecting this year's key operating metrics. For the full year based on our outlook and assumptions, currencies will consume nearly six percentage points of top-line growth compared to last year, roughly $40 million of operating profit, and almost 100 basis points in operating margin. In other words, all other things being equal currencies would be the difference between our current expectation of operating profit contraction versus modest operating profit growth. Second, our outlook now assumes that we will continue to deliver sales and operating earnings from Russia this year. As we mentioned on our last call, we've been in discussion with our Russian partner on what potential actions we can take in that market. In the meantime, we have suspended investments in Russia, and the business has been operating except for our direct ecommerce site. Next in Europe, our brand is doing well. And we now expect even better performance of the Fall Winter Collection, which should benefit the second and third quarters. Finally, we are experiencing modest cost increases which will affect our IMUs and in the U.S. a higher mix of markdowns given our comparison to last year's relatively tight inventory environment. Those factors taken as a whole should yield roughly the same expected level of adjusted operating earnings with slightly more revenue growth offset by a small contraction to adjusted operating margin. For the full year, we now expect constant dollar sales to increase by about 10%. with U.S. dollar sales growing by roughly 4%. We're now planning full year adjusted operating margin of about 10.3%. Given our strong performance in Q1, we are pleased that we are farther along already in delivering this year's profit than we had previously expected to be. We are closely monitoring supply chain conditions, consumer behavior, the latest developments related to COVID, especially in China, and finally market conditions and the promotional environment. For the second quarter, we do expect the top-line growth rate to naturally moderate somewhat. Now that we have passed most of the favorable comparison to last year’s store closures and the different timing of shipments in Americas wholesale, where we expect an annual segment revenue increase in the mid-single digits. We expect second quarter constant currency revenues to grow about 8% with U.S. dollar revenue growth of about 1%. We are expecting second quarter operating margin of about 7.5%. The year-over-year change in second quarter operating margin will be driven by several factors. The first is COVID subsidies and rent relief. We received $10 million last second quarter and do not expect any material amounts this quarter. Just as in the first quarter, we expect to continue to experience higher costs both in our supply chain and in our retail stores due to overall inflationary pressures and currencies will continue to affect our margins. While we are still planning for markdown rates to be lower than historical levels, we do expect the second quarter markdown rates to be slightly higher than last Q2 to the last second quarter's inventory constraints. Of the 650 basis point change in second quarter adjusted operating margin, we expect roughly 400 basis points of that will affect gross margin, and the balance will affect our SG&A rate. With that I will conclude the company's remarks and let's open up the call for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Susan Anderson from B Riley FBR. Your line is now open.

Yes. So I was wondering if maybe you could talk about the European business and kind of what you're seeing over there from a consumer perspective. I think, last year at this time the stores were shut down. So was that -- is that helpful now this year, and maybe just talk about just what you're seeing out of the consumer with inflationary pressures over there?

Yes, Susan. I'll start and I'm sure Dennis will have some comments to add here. But just we are very pleased, first of all, because the entire fleet is open, except for what we are experiencing in Ukraine, of course. But all our stores are reopened and they are behaving pretty much in line with what we had anticipated based on what we have learned through the closures and reopens both in that region as well as what we learned here in North America. And we have been very pleased because margins are behaving in line with what we expected the consumer is responding very well to our assortments. We had a very nice series of shopping days with traffic that has been a little bit better than what we had anticipated and then extended to more recent weeks. So overall, we are very pleased. Of course, when you think about the revenue growth for the first quarter was very significant only because we were comparing fleet open to many most doors being closed a year ago. The product performance that I mentioned during my prepared remarks are very much applicable to what we're experiencing in Europe as well. And which gives us a lot of confidence about our global line developments and the expectations that we have that we continue to meet or exceed. So it's all very good. And then the wholesale business, which is you didn’t ask specifically, but I think is also a very good representation of how healthy the market is. Our wholesale business continues to outperform our expectations. We closed the recent campaign with very good numbers at 14% increase. And what we're seeing now with the early reads of our pre-spring summer campaign for 2023, is that -- we have an opportunity for a double-digit growth again. So, just overall very, very good performance and very happy with the prospects of Europe as we see it.

Yes. Susan, I would just echo Carlos' comments. I mean, if you look at the first quarter performance with constant dollar revenues being up 26%, we comped positively 7% in the stores with strong traffic in AUR growth. We feel very good about the businesses that we look forward. We still have the opportunity as we're going to. We opened 71 stores last year. We opened 15 stores in the first quarter. So that will feel some of the growth. for the rest of this this year. Our ecom business was relatively flat. But if you think about what's happening in the stores, that was largely reflecting a transfer of demand online with the store as well. So we were up against that. But overall, really solid performance. And it makes us feel really good about the rest of the year.

Great. That sounds good. And then maybe if you could talk about the U.S. wholesale business. Wholesale was up pretty big this quarter. How should we think about that the rest of the year? And I guess were there any shifts in there?

Yes. So just the numbers were very strong for the first quarter. But it's not something that you should read as an expression of the trend. We have a lot of timing issues. There were many orders that we didn't fulfill at the end of last year that were eventually fulfilled during the first quarter because of inventory restrictions. And we feel that there is a big opportunity to fulfill the trends that we were seeing, but we are not expecting that that will continue for the upcoming three quarters. So Dennis, maybe you can talk about the trend for the year.

Yes. The way we're looking at it, we were up 50%. Most of that was what Carlos described. So the pattern will be unusual this year, with all the growth coming in the first quarter, but for the year, we're expecting the wholesale business to be growing in the mid-single digit range. So you will see a change in the growth pattern in quarter-over-quarter, but over for the full year, good solid performance.

Great. That's very helpful. Thanks so much. Nice job on the quarter. And good luck for rest of the year.

Thank you. [Operator Instructions] Our next question comes from Corey Tarlowe from Jefferies and Company. Your line is now open.

On the America's retail business, can you provide a little bit of context as to what drove the growth there? And it sounds like you're expecting there to be some higher promotions in that segment. Can you talk a little bit about your expectations for that segment going forward?

Yes. So, just we were very pleased with our performance in Americas retail, we had another very strong quarter. We saw just a nice revenue growth, combined with a strong gross margin performance. We did have some pressures on the expense line, but we weren't able to really look at the model again, and put a plan in place to mitigate some of those factors going forward. What you heard about our margins, last year was very unusual, especially in the second quarter, just there was tremendous demand. And partially because of all the stimulus checks and all the money that there was coming into the space and we did not have as most retailers probably. We did not have enough inventory to be able to maximize that demand and be able to service, just the entire demand expectation from the customers. And as a result, of course, we did not mark down or take any significant discounts throughout the season, and which will be the representation of a more normalized way of running the business. So, this year, we are in a much better inventory position, we are very pleased with what we own. And the better, of course, we own more, and the demand is differently aligned with that inventory ownership. But we are expecting that the cadence of markdowns and promotional activity will be more normalized, still pretty much in line with what we have been talking about elevating the brand. But a little bit less of a margin driver than what we saw last year. And the numbers are very small and we're not talking about a significant deviation here. But we are just trying to be extremely transparent and give you all the levers that we see could impact the business in the next quarter and the rest of the year.

Very helpful. And then, could you provide some more color as to what drove the gross margin outperformance? I think you were first estimating for gross margin to be down. But it was actually up. And then maybe how we should be thinking about that throughout the rest of the year.

Well, so just when we came into the year, we were facing a lot of challenges and headwinds, especially on supply chain inbound freight, or all kinds of things that we know, can impact our margins significantly. We were also seeing big pushback from vendors on costs. So it's been difficult for us to further negotiate. And being able to really navigate through all those different headwinds. As it relates to inbound freight, we have done a tremendous job. Our teams have done an incredible job and trying to minimize air freight, for example, which is something that, just if you get it this quarter, you see the immediate impact on the bottom-line. And, unfortunately, that has been very effective. But there are multiple examples of that. So most of what you see also, there is a little bit of mix, but I think that the most significant parts of that really helped us do better than what we had anticipated. And margin is a combination of lower costs coupled with lower promotions and discounts at the point of sale. And that is true in both regions in North America and in Europe.

Understood. And then, just lastly, could you talk about how -- in a little bit more detail about how FX is going to be affecting the model throughout the remainder of this year?

Yes. Sure, I'll take that. As I said in my prepared remarks, the currencies, given where they are relative to last year will be one of the most impactful drivers on our P&L this year with a top-line compression based on our current assumptions of about $150 million. That's six points growth 40 million of operating profit and about a point of operating margin. So significantly impactful and as I said the difference between operating margin contraction this year and operating margin or profit growth. So significant impact. The three ways that currencies affect our P&L, first is the translation of non-U.S. dollar reported earnings into U.S. dollars. So the way to think about that is the stronger the U.S. dollar gets, the less U.S. dollars come through the translation and Europe is the best example of that. So as the U.S. dollar gets stronger against the euro, those earnings get reduced as do the sales. Then there's the transactional impact of currency. The example there is Europe purchases of substantial amount of inventory in U.S. dollars, but there are euro-based entities. So the more U.S. dollar strengthens, they have to use more euros to buy their inventory that obviously puts pressure on their margins. And there's the last one, which you saw is fairly significant at one, this time is the mark-to-market of non-functional currency balance sheet items as they get mark-to-market based on currency rates at the end of the quarter. The challenge you'll have is that each one of those is impacted with different timing. So it's difficult for you to gauge but simpler way to think about is a strong, the U.S. dollar gets stronger, you'll see some natural reductions to earnings, you'll see some impact on margins, that will be somewhat delayed. And it'll also be cushioned by the hedging program that we have in place on the transactional items. So I know that's a lot there. But hopefully, that's helpful.

Thank you. Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.

You mentioned social events and men strength in dressy in terms of the sales there. How did denim do what are you seeing there? And then with the macro headwinds of inflation in supply chain, how are you handling pricing? And how do you think on the SG&A side on the cost of labor and freight and those portions of the expense bucket? Thank you.

Yes. Thank you, Dana. Well, so with respect to my comments about social events and people going out and traveling and all that is definitely impacting our dressy part of the assortment in a very significant way. And we are very pleased with that. The casual side of the assortment is not performing as strongly but we're pretty much in line with our plans both at retail and in our wholesale business. So, we are still seeing some growth across the board even in those categories that are not trending as strongly as the other ones. But overall we are very pleased with the overall performance of the line of course, we introduced the athleisure line, just as COVID started and that line was on fire for many seasons -- consecutive seasons. And we are seeing that growth is leveling more now, but it's completely in line. Now our men's business in active continues to be very strong. But we're seeing that the women's side is not as strong as we see for the other dressy part of the assortment. The great thing is that we do have all these different options for the customer, and I think that the customer is definitely leveraging those and we have seen that they are now buying the whole outfit. So it's not just, a dress but it's also the handbag, it's also a pair of shoes, it's also other accessories and we are seeing it all call in the way that they are shopping today especially women. With respect to pricing, just a week, of course, when we started the year, we were looking at what to expect for inbound freight and all the different big pieces that had impacted especially the back half of the year for us last year. And we built our plans based on that. We had already put in place. significant price increases across the board, but many of those have not been anniversaried obviously. So those pricing increases were put in place throughout the year. And we are going through that annualization as we speak. We are monitoring very carefully if we see that the demand for those specific products is impacted because of the price changes and we are being very careful with that. Fortunately overall we have been in a pretty good place. We don't see that the demand and sell throughs have been impacted negatively and if we do see some of that, we make adjustments here or there but so far they have not been significant. I think that what's helping here is the way we have set those prices, just we have talked quite a bit about perceived value pricing as a new methodology that we are using. And just trying to be very careful with how we assign a price to any product. And we do this throughout the line, Paul and the product teams, they spend, excruciating time just going through the entire line product-by-product and reassessing whether this is the right value for that particular product. And the idea in every case is, well, if it is the right value, then we should expect to sell whatever 89% of this product at full price. And based on that is, is how we assign the number of units that we will buy for that particular stuff. And this method is working very well for us. And I think is a very good method to ensure integrity in the pricing structure for the entire line. And, of course, if we see that the model starts, just not being as effective, we will reconsider and adjust. But so far, I think we are in a very good place. And then with respect to labor, as probably most companies in our space did, we increased the wages pretty aggressively. We want to have our great people to stay with us and to continue to be super productive and excited about being part of this family. And, of course, when we turn into the new year, and started to notice, assigning and allocating hours to do the job, especially when we reopen stores, or even those stores that are promising for a bigger business and so forth. It was more challenging, because the rates are significantly higher. But we think that we got it. And, of course, we will continue to be competitive and do what we need to do to attract the best talent and keep it. And I feel that we are in in the right place now. Of course, nobody knows what's going to happen in the future. There this very low unemployment. And I think that inflationary forces continue to drive a lot of this decisions. And we are absolutely committed to remaining very competitive on that. Our business is a people business, and we want the best.

Thank you. And our next question comes from Janice Kloppenburg from JJK Research Associates. Your line is now open.

Congrats on a good quarter. Yes, you're welcome. I got on a little late, Carlos, I did hear what you just said about causal being good. Maybe not as good as the recovery categories, which is to be expected. Did you say anything about general trends and how things are in that category? And then I wanted to ask Dennis, long time. I wanted to ask Dennis, if he factored in freight as a tailwind as the year goes along, in other words, that it would be moderating because it sounds like from your comments that it might be. And just on licensing, should we expect these strong trends to continue? Or is that a timing issue? Like a wholesale business? Thank you.

Okay. So let me take those two questions. And then, Dennis can probably touch on your freight question. So yes, I did say that casual was growing in line with our plans. It was not growing as a as an overall category, I'm talking about was not growing as aggressively as the dressy part of our business. So and it's something that we kind of anticipated. And within those categories, you have things such as denim U.S., but also knit tops and some other categories that are again more on the casual side. With respect to licensing, we had a phenomenal quarter and it was driven by some of the similar type of forces that drove our wholesale business in the first quarter. There were several categories that for which our licensees couldn't fulfill the demand that we saw, especially in the fourth quarter, and they ended up delivering a lot of those products in and that’s part of the first quarter, and that helped us with a bigger royalty business and licensing business. We do not expect that to repeat on an ongoing basis. Because again, it was somewhat abnormal, the move of orders into the first quarter. Now, that said, I want to say that, it wasn't just a timing issue, what drove the business, but also the strength of the brand. We're seeing that the brand has tremendous momentum globally. And, of course, that impacts our core business, but it also impacts significantly our licensees and I think that they are doing an incredible job with product development, and distribution. And all that is showing in extremely great results. Handbags is a standout for sure. But we are also seeing tremendous performance out of fragrances. We're seeing good performance out of watches. Just footwear have had a very good year. So there are multiple bright lights here to celebrate. But don't expect that we're going to have a 23% increase in royalties every quarter.

With an exceptional margin, by the way, with a great margin, by the way. So yes,

Yes, Janice, with respect to freight and overall supply chain cost pressures, we did begin to see them in the back half of last year. So you're right, we will be laughing. Now there's freight is one component of that. So we still see overall cost pressures throughout the year. But it's one of the reasons why the margin compression in the second quarter is going to be the strongest because some of those pressures, and all of them seem to be landing in the second quarter. And then some will start to ease all other things being equal, as we move through the year. So that's why we're down 650 basis points in the second quarter. There's some other one-time things there. But overall, we expect pressure for the full year, but it should ease as we get to the back half.

Yes. And I would like to touch on our inventories. I know that was not your direct question. But I think it's such an important point here. We closed the quarter with $484 million in inventory. And that compares to 404 million a year ago, so $80 million over the year ago period that represents 20% in U.S. dollars, but it's up 31% in constant currency, which is, just you look at the number and you say, Wow, that's a big number. I just want to make sure you all, just understand that what is driving this number is the fact that we are not buying more, but we are buying earlier. And I think that's an important distinction, because we have added about four weeks of supply in a way to make sure that we could fulfill the demand that we are expecting to come, we don't want to miss any orders, we don't want to miss any sales that at the point of sale with our ultimate customer. So we have about four weeks of supply added each week just practically speaking represents about $20 million, of course. So that's $80 million, which kind of coincidentally is about the number that we are at. Our business is trending up about 4% based on the guidance that we share with you today. And we are expecting that a lot of that inventory is going to be here earlier than it would have been to be able to satisfy that growth. We are seeing that units are up. We have about 8% more units than we had a year ago that represents about half of that growth. And the average cost is also up as a result of all the inflationary forces and increase in product production costs that we were talking about. And that number is up about 10.5% in U.S. dollars as average cost per unit. But that number will be up about 18% if you're doing it in constant currency. So you put it all together and just -- if anything, we are running a more efficient model. We are excited because the day that this forces that are driving us to order earlier just go away and we are hoping that that will happen at some point. We will be able to run on more efficient business and we can wait for those days. So also, the price increase is obviously embedded in our model. So the fact that our average cost is up 18% doesn't mean that it's impacting our margins because our average unit retail is running about 19% for the total company. So anyways, I thought that that will be good for you to have.

And Presenters, we have no further questions in queue at this time.

All right. Well, thank you, operator. Thanks again to everyone for your participation today. We really appreciate that you are very busy with many other calls and to be part of this, we greatly appreciate it. We are proud of our results. And we are very confident in our plans for the rest of this year and for the future. I believe that today, for multiple reasons, our company is in an ideal position to capitalize on the opportunities that this current environment presents and I want you to know that our team is ready. I'm very excited to tackle those opportunities head-on. So Happy Memorial Day weekend to everyone and we will talk soon, I'm sure. Good day to all of you. Thank you.