Executive Summary / Key Takeaways

• Guess? is strategically transforming from a single-brand company into a multi-brand platform, leveraging its extensive global infrastructure, channel capabilities, and supply chain to drive growth and profitability across its core Guess? brand, the newly acquired rag & bone, and the emerging Guess Jeans.
• Recent performance in Q1 FY26 showed revenue growth ahead of expectations, primarily fueled by the successful integration of rag & bone and strong momentum in European and Americas wholesale, offsetting softness in Americas retail and Asia.
• Key strategic initiatives are focused on enhancing direct-to-consumer productivity through targeted marketing, customer engagement, and assortment optimization, alongside rationalizing the business model by exiting underperforming stores and seeking partners for challenging markets like Greater China to unlock future operating profit.
• The company is navigating macroeconomic headwinds, including cautious consumer spending, inflation, currency volatility, and supply chain disruptions exacerbated by the Red Sea crisis, actively mitigating risks through expense management, early inventory buys, and flexible sourcing.
• Management's outlook for FY26 anticipates continued revenue growth driven by rag & bone, European wholesale, and the Middle East JV conversion, with adjusted operating margin and EPS reflecting ongoing investments in marketing and infrastructure, while aiming for meaningful gross margin expansion in Q4 FY26.

The Evolution of a Global Lifestyle Brand

Guess?, Inc. designs, markets, distributes, and licenses a leading lifestyle collection of contemporary apparel and accessories, reflecting a blend of American lifestyle and European fashion sensibilities. Founded in 1981 as a U.S. denim wholesaler, the company has undergone a significant transformation over decades, evolving into a global multi-channel retailer and licensor with operations spanning Europe, the Americas, and Asia. This journey has culminated in the development of a powerful operating platform, characterized by a wide global footprint, diverse channel capabilities including directly-operated stores, e-commerce, wholesale, and licensing, and an extensive supply chain network.

Within the competitive landscape of the apparel and accessories market, Guess? operates alongside major players like Levi Strauss & Co. (LEVI), The Gap, Inc. (GPS), PVH Corp. (PVH), and Ralph Lauren Corporation (RL). While Guess? holds an estimated moderate market share, its competitive positioning is shaped by distinct strengths and vulnerabilities. The company benefits from strong brand recognition and a robust licensing business, which contributes high-margin royalty revenue and diversifies its product offering beyond apparel into categories like eyewear, watches, handbags, and fragrances. This licensing model, with many long-standing partnerships, provides a unique revenue stream and allows for broader brand reach. However, Guess? has faced challenges in operational efficiency and profitability compared to some peers, particularly in its retail segments. For instance, while competitors like PVH and RL demonstrate higher operating margins, Guess?'s adjusted operating margin in Q1 FY26 was negative, reflecting ongoing investments and market pressures. The company's Americas retail business, in particular, has struggled with traffic declines and profitability compared to more efficient retail operations seen elsewhere in the industry.

The current strategic focus for Guess? is centered on leveraging its established global platform to support the growth of not just the core Guess? brand, but also new additions to its portfolio, notably the recently acquired rag & bone and the internally launched Guess Jeans. This multi-brand platform approach is intended to capitalize on the company's existing infrastructure and operational expertise to accelerate growth and enhance overall profitability.

While the company appears to lack specific, quantifiable technological differentiators in product manufacturing or materials science akin to those in other industries, Guess? emphasizes the strategic importance of its IT systems and digital capabilities. The company is working towards standardizing its IT infrastructure globally and enhancing its digital expansion and customer centricity initiatives. This includes improving customer insights capabilities, investing in social media strategies, and developing a seamless omni-channel experience. The stated goal is to leverage technology and data analytics to improve operations, decision-making, and customer engagement, ultimately supporting future growth with greater agility and efficiency. These digital investments are seen as critical tools to address challenges like declining retail traffic and enhance brand relevancy in an evolving consumer landscape, contributing to the company's competitive efforts in attracting and retaining customers.

Recent Performance and Strategic Execution

Guess?'s performance in the first quarter of fiscal year 2026 demonstrated progress against its strategic objectives despite a challenging external environment. Total net revenue increased by 9.4% in U.S. dollars (11.9% in constant currency) to $647.8 million, exceeding management's expectations. This growth was significantly driven by the inclusion of the rag & bone business, which contributed 9 percentage points to constant currency growth, reflecting a full quarter of ownership compared to just one month in the prior year. The core Guess? business also contributed positively, adding about 3 points of constant currency growth, primarily from strong performance in the European and Americas wholesale segments.

The European wholesale business was a notable bright spot, posting a mid-teen growth rate in the quarter. Management highlighted that reliable product deliveries, despite Red Sea-related supply chain challenges, helped gain market share among wholesale partners. To mitigate these disruptions, the company strategically brought in inventory earlier, enabling higher-than-anticipated shipments. The Americas wholesale business also surpassed expectations with double-digit top-line growth, benefiting from earlier product availability.

In contrast, the Americas retail and Asia segments faced headwinds and performed below expectations. Americas retail experienced a constant currency comparable sales decline of 9%, although performance improved later in the quarter due to better conversion offsetting traffic declines. Asia saw revenues decline by over 20%, primarily due to significant weakness in the Greater China market, where the company is actively contracting operations and seeking a partner. Licensing revenue also saw a modest decline, mainly in fragrances and footwear, partially offset by growth in handbags.

Gross margin decreased by 200 basis points to 39.9% in Q1 FY26, primarily due to an unfavorable business mix shift towards wholesale (which carries lower margins) and lower royalty income. Adjusted selling, general, and administrative (SGA) expenses increased, largely due to the integration of rag & bone and planned marketing investments, but the SGA rate decreased slightly due to the impact of acquired businesses and expense management. The operating margin decreased to negative 5.1%, influenced by the unfavorable business mix, higher asset impairment charges ($6.1 million in Q1 FY26 vs. $1.1 million in Q1 FY25), and unfavorable currency impacts, partially offset by the contribution from newly acquired businesses.

Other income, net, saw a significant decrease, primarily driven by a net unrealized loss on the fair value remeasurement of derivatives related to convertible notes and hedges, a non-cash item.

Liquidity remains a focus, with $151.2 million in cash and cash equivalents and $349 million in available global borrowing capacity as of May 3, 2025, totaling approximately $500 million in available liquidity. Net cash used in operating activities increased significantly compared to the prior year, partly due to the timing of a large license payment received in the prior period and unfavorable working capital changes, including the intentional inventory build to address supply chain risks. Inventory increased by 15% to $638.2 million, primarily driven by accelerating receipts for Europe. Accounts receivable also increased, reflecting higher wholesale shipments. The company continues to manage its debt structure, with $258.1 million outstanding under credit facilities and convertible senior notes maturing in 2028.

Capital allocation priorities include investments in growth initiatives, dividends ($0.30 per share declared quarterly), and share repurchases ($139.8 million remaining under the current program as of May 3, 2025).

Strategic Initiatives and Outlook

Guess?'s strategic roadmap is built upon several key pillars designed to drive future growth and enhance profitability by leveraging its global platform. A primary focus is increasing direct-to-consumer productivity. This involves rolling out initiatives to reengage customers and drive traffic, including a new social media strategy led by Nicolai Marciano and external partners, expanding customer loyalty programs (showing positive early results in pilot markets), and enhancing customer insights using AI-powered tools. On the product front, the company is developing fast-track buying capabilities to quickly replenish bestsellers and inject new trends, aiming to leave 50% of its buy open after initial orders. They are also rebalancing product assortments to increase the offering of opening price point products, acknowledging consumer price sensitivity, and refining store clustering models for more localized assortments.

Rationalizing the business model is another critical initiative. This includes examining the store portfolio to exit underperforming locations, particularly in North America, where approximately 20 non-strategic stores are planned for closure by the end of FY26. The challenging Greater China business, expected to lose $20 million in FY26, is targeted for a turnaround by FY27 through finding a third-party partner to take over operations. These two initiatives alone are projected to unlock over $30 million in operating profit starting in FY27. The company is also optimizing its infrastructure, exploring the integration of support structures across regions, consolidating logistics networks (partnering with GXO (GXO) globally), and standardizing IT systems to operate more efficiently as one integrated business.

The acquisition of rag & bone is central to the multi-brand platform strategy. Integration is progressing smoothly, with efforts underway to accelerate rag & bone's growth by leveraging Guess?'s platform for international expansion (new stores planned in Europe and other markets), expanding product categories through licensing (new deals in handbags, eyewear, watches), and optimizing sourcing. The launch of the Guess Jeans brand, targeting a younger demographic with affordable, sustainable denim, is also gaining momentum through wholesale distribution and new concept stores.

Management's outlook for fiscal year 2026 reflects these strategic priorities and anticipated market conditions. The company expects full-year revenue growth in the range of 5.5% to 7.4%. This growth is projected to be driven by the full-year impact of the rag & bone acquisition, continued solid performance in European wholesale, and the conversion of the Middle East business to a joint venture. Expectations for European retail have been moderated based on Q1 trends, although some improvement is anticipated in the second half from strategic initiatives. The outlook incorporates a more favorable currency environment compared to prior expectations, which is expected to provide a tailwind to revenues and operating profit.

For the second quarter of FY26, revenue is expected to grow between 2.9% and 4.7% in U.S. dollars (2% to 4% in constant currency), representing the first fully comparable quarter with rag & bone. Full-year adjusted operating margin is guided between 4.4% and 5.1%, and adjusted EPS is projected in the range of $1.32 to $1.64. The outlook fully incorporates the expected year-over-year impact of tariffs (estimated at less than $10 million on margins). While Q2 adjusted operating margin is expected to be lower than the prior year (2.5% to 3.3%), primarily due to higher occupancy and SGA rates from retail comp declines, management anticipates the year-over-year operating margin decline to abate in the middle quarters, with potential for expansion in the fourth quarter. Full-year free cash flow is expected to be approximately $55 million, with working capital tightening planned to offset changes in the earnings outlook.

Risks and Challenges

Despite the strategic vision and ongoing initiatives, Guess? faces several significant risks and challenges that could impact its performance and the realization of its investment thesis. Macroeconomic conditions, including persistent declines in consumer spending, inflationary pressures, and higher interest rates, continue to negatively affect the business globally. These factors contribute to cautious consumer behavior and price sensitivity, particularly impacting retail traffic and sales in the Americas and Asia.

Geopolitical events, such as the ongoing wars in Ukraine and Gaza and the Red Sea crisis, create significant uncertainty. While the direct impact on operations in Russia and Ukraine has been limited so far, the Red Sea crisis continues to disrupt global supply chains, leading to increased freight costs and transit times. Although the company has proactively managed this by accelerating inventory receipts, these efforts require significant working capital investment and expose the company to potential inventory risks if demand softens unexpectedly. Changes in global trade policies, including the potential imposition of new or additional tariffs (such as the recently announced U.S. baseline tariff), could significantly increase product costs and potentially impact consumer demand if price increases are necessary.

Operational challenges persist, particularly in turning around the performance of the Americas retail and Asia segments, which have experienced sustained traffic declines and missed recent expectations. The success of initiatives aimed at improving retail productivity, brand relevancy, and customer engagement is critical but not guaranteed. The planned rationalization of the business model, including store closures and finding a partner for the Greater China business, involves execution risks and may not yield the anticipated profit improvements on the expected timeline.

Legal proceedings, such as the ongoing customs tax assessments in Italy and past stockholder derivative lawsuits, while not currently expected to have a material adverse impact, introduce uncertainty and potential costs. The company's reliance on estimates and assumptions in financial reporting, particularly concerning inventory valuation, asset impairment, and the impact of global economic conditions, means that actual results could differ materially if these estimates prove inaccurate.

Furthermore, the successful integration and growth acceleration of the rag & bone acquisition, while promising, requires effective collaboration and execution across different organizational cultures and business models. The ability to leverage the Guess? platform to expand rag & bone internationally and across new product categories depends on market acceptance and successful partnership execution.

Conclusion

Guess? stands at a pivotal point in its history, actively transforming into a multi-brand platform company designed to leverage its considerable global infrastructure and operational expertise. The strategic vision, centered on expanding the reach and profitability of the core Guess? brand, integrating the newly acquired rag & bone, and nurturing the emerging Guess Jeans, represents a clear path for future growth. Recent performance in Q1 FY26, marked by revenue growth ahead of expectations driven by the rag & bone acquisition and wholesale strength, provides early validation of this strategy, even as challenges persist in certain retail markets and the broader macroeconomic environment remains uncertain.

The company's focus on enhancing direct-to-consumer productivity through targeted initiatives, optimizing its business portfolio by addressing underperforming areas, and streamlining its infrastructure are critical steps aimed at improving profitability and unlocking value. While significant investments in marketing and infrastructure are impacting near-term margins, they are viewed as necessary to build brand awareness and capabilities essential for long-term success across a broader brand portfolio. Navigating ongoing macroeconomic headwinds, supply chain disruptions, and potential tariff impacts requires disciplined execution and adaptability, areas where management believes the company's culture provides a distinct advantage. The outlook for FY26 reflects a cautious yet determined approach, balancing anticipated growth drivers with expected market challenges and planned investments. For investors, the story of Guess? is one of strategic evolution and platform leverage, with the successful execution of its multi-brand strategy and the ability to navigate external pressures being key factors to watch for realizing its potential for enhanced profitability and shareholder value creation.