10-Q: Guess? Reports Q1 Net Loss Amidst Macroeconomic Headwinds, Revenue Grows on rag & bone Acquisition

Guess? Inc. reported a significant net loss of $32.9 million for the first quarter of fiscal 2026, a sharp decline from a $13.0 million net profit in the prior-year period, despite a 9.4% increase in total net revenue driven by the acquisition of rag & bone.

Summary

• Guess? Inc. reported a net loss attributable to Guess?, Inc. of $32.9 million, or $0.65 diluted loss per share, for the quarter ended May 3, 2025, compared to net earnings of $13.0 million, or $0.23 diluted EPS, in the prior-year quarter.
• Total net revenue increased by 9.4% to $647.8 million, or 11.9% in constant currency, primarily due to a $69 million impact from newly acquired businesses, including rag & bone, and $30 million from higher wholesale shipments.
• Gross margin decreased by 200 basis points to 39.9% for the quarter, primarily due to unfavorable business mix and higher store occupancy costs.
• Loss from operations deteriorated by 67.5% to $33.3 million, with operating margin decreasing 170 basis points to negative 5.1%.
• Asset impairment charges significantly increased to $6.1 million from $1.1 million in the prior-year quarter, mainly related to underperforming retail locations and expected store closures.
• Other income, net, decreased substantially to $1.4 million from $35.8 million, primarily due to a net $4.3 million unrealized loss on the fair value remeasurement of derivatives, compared to a $38.5 million unrealized gain in the prior-year period.
• Inventory increased by 15.0% to $638.2 million, or 13.5% in constant currency, driven by accelerated receipts to mitigate the impact of the Red Sea crisis.
• Retail comparable sales, including e-commerce, decreased across all regions: Europe down 3% (constant currency), Americas Retail down 9% (constant currency), and Asia down 20% (constant currency).
• The company opened 32 new stores and closed 28 stores worldwide during the quarter, resulting in a total of 1,601 stores and concessions globally as of May 3, 2025.
• Net cash used in operating activities deteriorated to $73.4 million from $22.9 million in the prior-year period, mainly due to unfavorable changes in working capital and lower cash earnings.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant shift from net earnings to a net loss, a deterioration in operating margin, increased asset impairment charges, and negative comparable store sales across all regions. While revenue grew due to an acquisition, core profitability and organic sales performance declined, indicating significant operational challenges and macroeconomic pressures.

Positives

• Total net revenue increased by 9.4% to $647.8 million, or 11.9% in constant currency, demonstrating top-line growth.
• The acquisition of rag & bone contributed significantly to revenue growth, adding $69 million in constant currency.
• SG&A rate decreased by 90 basis points to 44.2%, indicating some operational efficiency improvements relative to revenue.
• Net cash provided by financing activities improved significantly to $52.6 million, compared to a net cash used of $15.7 million in the prior-year period, driven by lower cash dividend payments and no convertible senior note repayments.
• The company maintains substantial global borrowing capacity of approximately $349 million, bringing combined cash, cash equivalents, and borrowing capacity to about $500 million.
• The company successfully settled the ERSRI stockholder derivative lawsuit, resulting in a $22 million payment to the company and the implementation of governance enhancements, including the formation of a Diversity, Equity, and Inclusion Council and the appointment of two new independent directors.

Negatives

• The company reported a net loss attributable to Guess?, Inc. of $32.9 million, a significant reversal from a $13.0 million net profit in the prior-year quarter.
• Operating margin decreased by 170 basis points to negative 5.1%, indicating a decline in core operational profitability.
• Gross margin decreased by 200 basis points to 39.9%, primarily due to unfavorable business mix and higher store occupancy costs.
• Asset impairment charges increased substantially to $6.1 million from $1.1 million, reflecting underperformance and expected closures of certain retail locations.
• Other income, net, saw a drastic decrease of $34.4 million, mainly due to a net unrealized loss on derivative remeasurement compared to a significant gain in the prior year.
• Retail comparable sales, including e-commerce, experienced negative growth across all key regions: Europe (-3%), Americas Retail (-9%), and Asia (-20%) in constant currency.
• Net cash used in operating activities deteriorated by $50.5 million, indicating weaker cash generation from core business operations.
• Inventory increased by 15.0%, or $83.3 million, which could signal potential future markdown risks if not managed effectively.

Risks

• Macroeconomic conditions, including declines in consumer spending, inflation, and higher interest rates, continue to negatively impact the company's businesses.
• Foreign exchange rate fluctuations can significantly impact the translation of international revenues and earnings into U.S. dollars, as well as operating margins.
• Ongoing geopolitical conflicts, such as the wars in Ukraine and Gaza and the Red Sea crisis, continue to cause supply chain disruptions and increased costs.
• Changes in global trade policies, including the imposition of new or expanded tariffs (e.g., the new 10% universal baseline tariff in the U.S.), have the potential to significantly raise product costs and impact consumer sentiment.
• The company is subject to various economic sanctions and export controls targeting Russia and Belarus, which limit business expansion in Russia and could be expanded.
• The company faces risks related to its convertible senior notes, including the impact of stock price volatility on the fair value remeasurement of derivatives.
• Litigation and regulatory proceedings, such as the ongoing Italian customs tax appeals, could result in material adverse impacts on financial position, results of operations, or cash flows.
• The ability to attract and retain management and other key personnel is crucial, and any failure could adversely affect operations.

Future Outlook

The company expects inflationary pressures to persist in the near term and continues to monitor global and regional developments, including geopolitical conflicts and changes in trade policies. It anticipates satisfying ongoing cash requirements through cash flow from operations, existing cash balances, and borrowings. The company expects currencies to be a tailwind on revenues and earnings from operations for the remainder of fiscal 2026. It plans to prioritize capital allocation towards growth and infrastructure investments, manage inventory rigorously, and continue returning value to shareholders through dividends and share repurchases, while also considering opportunistic strategic acquisitions.

Management Comments

• "Macroeconomic conditions, including declines in consumer spending, inflation, higher interest rates, foreign exchange rate fluctuations and the impacts of the ongoing wars in Ukraine and Gaza are continuing to negatively impact the Company’s businesses."
• "We continue to carefully monitor global and regional developments and respond appropriately. We also continue to strategically manage expenses in order to protect profitability and mitigate, to the extent possible, the residual effect of supply chain disruptions, including the Red Sea crisis."
• "Our strategic vision and implementation plan for execution includes several key priorities to drive revenue and operating profit growth: organization and talent; growth; brand relevancy; customer centricity and digital expansion; product excellence; and optimization, efficiency, profitability and return on invested capital."
• "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."
• "We also plan to manage product buys and inventory ownership rigorously and optimize overall working capital management consistently."
• "In addition, we plan to continue to return value to shareholders through dividends and share repurchases, as appropriate, and we will consider opportunistic strategic acquisitions of brands and businesses that leverage our global infrastructure and network of licensees and wholesale partners."

Industry Context

The retail and fashion industry continues to face significant challenges from macroeconomic conditions, including persistent inflation, high interest rates, and declining consumer discretionary spending. Geopolitical events like the wars in Ukraine and Gaza and the Red Sea crisis are exacerbating supply chain disruptions and increasing transportation costs. Guess? is navigating these headwinds by strategically managing expenses, optimizing its supply chain, and focusing on brand relevancy and digital expansion. The acquisition of rag & bone is a strategic move to diversify its brand portfolio and reach new customer segments, aligning with a broader industry trend of consolidation and brand diversification to capture market share in a challenging environment. The negative comparable store sales across regions reflect a broader softening in consumer demand impacting many apparel retailers.

Comparison to Industry Standards

• The company's gross margin of 39.9% is lower than the prior year's 41.9%, indicating pressure on profitability, which is a common challenge for apparel retailers facing increased input costs and promotional environments.
• The shift from net earnings to a net loss and the deterioration in operating margin suggest that Guess? is experiencing more significant profitability challenges compared to some industry peers who may be better positioned to absorb or pass on increased costs.
• Negative retail comparable sales across all regions (Europe -3%, Americas Retail -9%, Asia -20% in constant currency) indicate a struggle to maintain sales momentum in existing stores, a trend observed in parts of the broader retail sector, particularly in discretionary spending categories.
• The increase in inventory by 15.0% (13.5% in constant currency) to mitigate Red Sea crisis impacts is a proactive measure, but it also carries the risk of increased holding costs and potential future markdowns if consumer demand does not meet expectations, a common inventory management challenge in volatile supply chain environments.
• The strategic acquisition of rag & bone aligns with industry trends of brand portfolio expansion and leveraging existing infrastructure, similar to how other large fashion groups acquire complementary brands to diversify and grow.

Management Changes

Corporate Governance

Legal Proceedings

• Italian Customs Agency (ICA) tax audit appeals: The company is appealing unfavorable rulings from the Appeals Court to the Italian Supreme Court regarding customs tax assessments totaling 1.2 million euros ($1.4 million), while the ICA has appealed most favorable rulings to the Supreme Court. Outcomes are uncertain.
• Stockholder derivative lawsuit (ERSRI v. Paul Marciano, et al.): Settled on January 4, 2024, resulting in a $22 million payment to the company (with potential for an additional $8 million from insurers) and implementation of corporate governance enhancements.
• Stockholder derivative lawsuit (Legion Partners Holdings, LLC v. Paul Marciano, et al.): Voluntarily dismissed claims against Paul Marciano in May 2023 and the entire action was dismissed with prejudice on April 3, 2024, based on the ERSRI settlement.
• Individual claim against Paul Marciano and the Company: Settled for an aggregate total of $290,000 in June 2025, resolving allegations of improper treatment without admission of liability.

Related Party Transactions

• Lease agreements for warehouse and administrative facilities with Marciano Entities (owned by Paul and Maurice Marciano), including the Los Angeles corporate offices, Canadian warehouse, and Paris showrooms. A 12-year lease extension for the Los Angeles Location was entered in April 2025 for approximately $7.6 million annual rent, increasing 2.0% annually.
• An additional lease agreement for a second showroom in Paris was entered in April 2025 with Marciano Entities (66.7% ownership) for an annual rent of 450,000 euros ($508,500).
• Periodic chartering of aircraft owned by Marciano Entities through informal arrangements, with total fees of approximately $1.1 million for the three months ended May 3, 2025.
• Minority investment (30% ownership) in a privately-held men's footwear company (the Footwear Company), where Marciano Entities hold a 45% interest and CEO Carlos Alberini holds a 4% interest. The company has a $1.8 million note receivable from the Footwear Company and provides fulfillment services and distribution services.
• Purchases of faux fur products from a privately-held fashion accessories company (the Fashion Company), where Marciano Entities hold a 16% interest and CEO Carlos Alberini holds a 4% interest. Total payments were approximately $0.2 million for the three months ended May 3, 2025.
• No charitable donations were made to Smile Project, a charitable organization co-founded by director Elsa Michael, during the reported periods.

Stakeholder Impact

• **Shareholders**: Experienced a significant net loss and diluted loss per share, impacting shareholder value. However, the company continues to return value through regular quarterly dividends ($0.30 per share) and has remaining authority for share repurchases ($139.8 million). The settlement of legal proceedings resulted in a direct payment to the company, benefiting shareholders.
• **Employees**: Share-based compensation expense was recognized, benefiting employees. The company is evaluating compensation and benefit offerings to remain competitive and attract/retain talent amidst labor shortages. The formation of the DEI Council aims to improve workplace culture and address harassment/discrimination concerns.
• **Customers**: Negative retail comparable sales across all regions suggest a decline in customer traffic and/or spending in existing channels. The acquisition of rag & bone aims to expand the customer base and brand portfolio. Efforts to improve product quality and sustainability are intended to enhance customer appeal.
• **Suppliers**: Increased inventory levels due to accelerated receipts to mitigate supply chain disruptions (Red Sea crisis) indicate continued engagement with suppliers. Inflationary pressures on raw materials and transportation costs impact supplier relationships and pricing.
• **Creditors**: The company maintains substantial global borrowing capacity and has managed its debt obligations, including convertible senior notes. The increase in interest expense reflects higher borrowing costs.

Next Steps

• Alberto Toni will succeed Dennis Secor as Chief Financial Officer on June 12, 2025.
• The company will pay a regular quarterly cash dividend of $0.30 per share on July 3, 2025, to shareholders of record as of June 18, 2025.
• The conversion rate and conversion price of the 2028 Notes, and strike prices of related bond hedges and warrants, will be adjusted effective June 18, 2025, due to the dividend declaration.
• The company will continue to implement governance and compliance enhancements, including the oversight by the newly established Diversity, Equity, and Inclusion Council.
• Management will continue to evaluate plans for reinvestment or repatriation of unremitted foreign earnings.
• The company will continue to evaluate strategic opportunities and pursue those that support growth initiatives and/or leverage its global infrastructure.

Key Dates

Recommendation

Keywords

Apparel, Fashion, Retail, Accessories, SEC Filing, 10-Q, Quarterly Report, Financial Results, Guess, rag & bone, Luxury Goods, Consumer Discretionary, Global Operations, Supply Chain, Inflation, Foreign Exchange