Title

Management

Carlos Alberini - Chief Executive Officer and Director

Katie Anderson - Chief Financial Officer

Fabrice Benarouche - Vice President, Finance and Investor Relations

Participants

Alec Legg - B. Riley & Co. - Analyst

Janine Stichter - Jeffries - Analyst

Omar Saad - Evercore ISI - Analyst

Janet Kloppenburg - JJKR - Analyst

Presentation

Operator

Good day everyone and welcome to the Guess? Fourth Quarter and Fiscal 2021 Earnings Conference Call and Five-year Strategic Plan Update. On the call are Carlos Alberini, Chief Executive Officer; Katie Anderson, Chief Financial Officer; and Fabrice Benarouche, VP of Finance and Investor Relations.

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 with respect to the Company's fiscal 2025 strategic plan. The Company's actual results may differ materially from current expectations based on risk factors 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 earning release and accompanying presentation materials posted earlier today on the Investor Relations section of guess.com.

Now I would like to turn the call over to Carlos.

Carlos Alberini - Chief Executive Officer and Director

Thank you, operator. Good afternoon and thank you all for joining us. Our agenda today will include general comments regarding our fourth quarter and fiscal year financial results and an update to our strategic plan, after which we will open the call for your questions. In addition to our press release, we have posted a five-year strategic plan update presentation onto our Investors section at guess.com. We encourage you to view the materials along with the commentary when we discuss the strategic plan during our prepared remarks.

We are very pleased with our fourth quarter earnings performance, which was significantly ahead of our expectations. In the period we delivered adjusted earnings per share of $1.18 compared to $1.22 last year. While our revenues were 23% below last year and in line with our expectations, our digital businesses accelerated more than what we had anticipated, posting a 38% revenue increase in North America and Europe and our licensing business also outperformed. Offsetting these improvements were lower retail revenues due to additional store closures and restrictions, mostly in Europe and Canada and an anticipated shift in wholesale shipments in Europe into Q1.

In spite of the revenue decline we managed our business well and delivered an adjusted operating margin of 11.4% in the period, only 70 basis points below last year. The main driver of the outperformance for the quarter was our gross margin, which increased 240 basis points versus last year. With this performance we closed a challenging but rewarding year for our Company. While we experienced a significant revenue contraction of 30% in the year due to the pandemic, we were very proactive and lead the business carefully managing inventories well and controlling expenses tightly. All considered, we were able to reverse our first quarter adjusted operating loss of $109 million to close the year with an adjusted operating profit of $20 million. We ended the year in a good inventory position. We have the right product and our ownership is appropriate to service our business well in the new fiscal year.

As with the rest of our industry, we have experienced disruption in our supply chain both to sourcing and transportation, which has caused some delays in product deliveries globally. However, given the fact that we were operating with restrictions in some regions, we were able to appropriately allocate the product to service our demand. These conditions have resulted in limited supply, contributing to less promotional activity across the industry from which we are benefiting. In addition to time, these delays caused an increase in transportation costs. Of course, we have been prioritizing shipments and choosing alternative transportation options to minimize this cost. We believe that the port congestion delays, including the recent event in the Suez Canal, will be normalized by the summer, and we have made provisions to anticipate the receipt of goods wherever possible to mitigate further delays.

During the year, we prioritized our investments in our digital and omnichannel initiatives and rationalized our global store footprint and expense structure. We also returned value to our shareholders via dividends and we purchased $39 million of our shares. We closed the year with a strong balance sheet with $469 million in cash.

I am encouraged by our trends entering the new year. It is clear that the customer is responding well to our products and assortments. Our digital channels are accelerating, our wholesale business shows we are gaining market share and when our stores are open, they are performing well with solid product sell-throughs. Our customer traffic is showing sequential improvement while still significantly below pre-COVID levels. At the same time, our conversion continues to meaningfully exceed pre-COVID levels. In the US, we are experiencing a considerable acceleration in our direct to consumer businesses since the stimulus checks were announced.

We are confident in our business as we emerge from this pandemic. As vaccination levels increase across different countries in the upcoming months, as we have seen in the US, the consumer will be inspired to venture out and buy new clothes. Our product assortment is ideal for post-pandemic business in our industry. I believe that lifestyles have been forever altered by the pandemic and casualization is here to stay. I am pleased that we expanded our line to include categories like athleisure and essentials to support this lifestyle. But we also have rich assortments of dressier apparel and accessories for multiple occasions which will resonate as our customers begin to socialize again.

Before I turn the call to Katie to review our financial performance in more detail, let me just say that I strongly believe this was a year of test of character, proof of courage and adaptability for all of us. At Guess? we flourish in times like this. There is a strength of character that is present in the Guess? DNA. Our founders had this since day one and Paul has that same strength and commitment for our Company, our team and our Guess? brand today, something he demonstrates every single day with this work. The proof of courage in Guess? is evident with every decision we make, always running the business with a long-term view, leading our team with a clear vision to build the Company and the value of our brand for the next generation, not just the next quarter.

Our capacity to adapt to each and every change in the industry and the business has been validated by the multiple business model changes our Company has endured successfully over the last 40 years. From our denim category assortment to our lifestyle offering and brand image, from own businesses to licensed ones, from wholesale to retail, from a domestic business to a global one, from bricks and mortar retail to an omni-channel model, I strongly believe that our Company's ability to adapt to change is the foundation of our business success and value creation.

I will now pass the call to Katie and I will return to review and update our five-year strategic plan. Katie?

Katie Anderson - Chief Financial Officer

Thank you, Carlos. Good afternoon, everyone. I'm happy to report that we finished this fiscal year strong with our fourth quarter earnings significantly exceeding our expectations despite higher COVID resurgences across the globe. With revenue in line with our outlook, but margin significantly higher than expected, we were able to deliver $74 million in adjusted operating profit. We saw operating profit increases to prior year in all of our business segments except for Europe which was significantly impacted by government mandated store closures and a shift in wholesale shipments. We also saw a nice momentum in our e-commerce business, which was up 38% for the quarter in North America and Europe versus 19% in Q3 and 9% in Q2. And let me take you through the details.

Fourth quarter revenues were $648 million, down 23% in US dollars and 26% in constant currency. Stronger than expected momentum in our European digital business and an increase in licensing revenue was offset by the impact of continued COVID resurgences. The impact of temporary store closures on our sales versus prior year for the total Company during the quarter was about 10%, mostly in Europe, but also in Canada. We had some anticipated shifts in European wholesale shipments which were worth about 6% of total Company sales to prior year. Excluding these two factors, the 23% Q4 sales decline would have been a decline of about 7%.

Now let me get into the detail on sales performance by segment. In Americas Retail revenues were down 24% in constant currency where negative store comps and temporary and permanent store closures were partially offset by growth in our e-commerce business. Store comps in the US and Canada were down 21% in constant currency, slightly better than Q3, which was down 23% as continued sequential improvement in US sales was offset by softening in Canada due to traffic declines as a result of the pandemic.

The underlying trend in the US showed even greater recovery. However, the business was hurt by restrictions on capacity and consumers avoiding crowds on what are typically the busiest shopping days of the year. In fact, if we remove the five super high-volume days in Q4 from the sales calculation, our Q4 store sales comp in the US and Canada would have been about 5% better than what we reported.

In Europe, revenues were down 32% in constant currency. As you know, the region started experiencing increased lockdowns and operating restrictions at the end of Q3, which continued to the end of the fourth quarter and remain in place today. Store comps for Europe were down 26% in constant currency, significantly impacted by the increase in COVID levels in that region. Our e-commerce sales, however, accelerated nicely in the fourth quarter and helped to mitigate some of these headwinds.

As Carlos mentioned, the wholesale business in Europe in Q4 was down to prior year as a result of the planned shift in shipments for the spring, summer collection into next year.

In Asia store comps were down 22% in constant currency driven by a resurgence of the virus in some of those markets like Korea. Our Americas Wholesale business was down 14% in constant currency compared to down 34% last quarter and 49% in Q2, still under pressure from the deceleration in demand, but showing vast improvement quarter-to-quarter. Licensing revenues were strong, up 12% to prior year in Q4, driven by continuing recovery in the business, but also some timing in sales.

Gross margin for the quarter was 42.6%, 240 basis points higher than prior year. Our product margin increased 140 basis points this quarter primarily as a result of higher IMU, as well as lower promotions. Occupancy rate decreased 100 basis points as a result of rent relief and business mix, partially offset by deleverage on sales. This quarter we booked roughly $15 million in rent credits for fully negotiated rent relief deals across Europe, North America and Asia. There is still some negotiations with our landlords that are outstanding and we are also extending our conversations with landlords to address the second round of closures.

Adjusted SG&A for the quarter was $202 million compared to $237 million in the prior year, a decrease of $35 million or 15% and better than our expectations. We continue to benefit from changes to our expense structure, lower advertising spend and a decrease in expenses related to permanent store closures versus last year. In addition, there were some one-time benefits from government subsidies, mainly in Europe, which were partially offset by higher variable expenses related to the growth of our e-commerce business.

Adjusted operating profit for the fourth quarter was $74 million versus $102 million in Q4 of last year. Our fourth quarter adjusted tax rate was 7%, down from 17% last year, driven by the mix of statutory earnings. Inventories were $389 million, down 1% in US dollars and down 5% in constant currency versus last year. Our inventory levels in Europe were artificially high due to the timing of inventory receipts and the increase in in-transit inventory due to the transit delays that Carlos mentioned earlier. We ended the year with $469 million in cash versus $285 million in the prior year and we had an incremental $272 million in borrowing capacity.

Capital expenditures for the year were $19 million, down from $62 million prior year. Free cash flow for the year was $183 million, an increase of $50 million versus $133 million last year. This year, we benefited from lower capital expenditures, extended payment terms with our vendors and unpaid rents. In addition, last year's outflow included the non-recurring payment of the $46 million European Commission fine. This was a strong finish to a tough year.

For the fiscal year, we lost almost $800 million or 30% of our sales versus prior year as a result of the pandemic. However, we were still able to maintain positive adjusted operating profit of $20 million, $130 million lower than prior year, allowing for only 16% of those lost revenues to flow through to our bottom line. This demonstrates the tremendous control that we have over what we can control and a super dynamic global environment.

This year we expanded product margins, executed over $30 million in rent abatement and relief, cut SG&A by over 20% and managed our capital very tightly, all the while we had our eye on the future of our brand, positioning this Company to win as we emerge from the pandemic.

We returned value to our shareholders reinstating our dividend in Q3 and completing $39 million of share repurchases at an average price of $10. And while COVID will remain a near-term headwind, there is reason to be hopeful as vaccines roll out.

Now let's talk about our near-term future. Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance. However, I will walk you through how we are thinking about the first quarter. I'm going to anchor our comparisons to the pre-COVID Q1 of fiscal year 2020, which ended May 4th, 2019 as this past year's fiscal first quarter is clearly not a normalized comparison.

We expect first quarter revenues to be down in the high single digits to fiscal year 2020 as pandemic-related shutdowns and traffic declines are partially offset by continued momentum in our global e-commerce business and the favorable timing of our wholesale shipments in Europe. Quarter-to-date, we have seen sales comps at our retail locations of down 4% in the US and Canada, down 19% in Europe, and down 22% in Asia. Our business in Europe continues to be impacted by government mandated store closures. Currently, we have over 240 stores closed with approximately 400 additional stores with reduced operating hours. E-commerce growth has continued to accelerate and is up 58% to prior year for the quarter-to-date in North America and Europe.

Lastly, as discussed, Q1 will benefit from the shift of wholesale shipments in Europe for the spring, summer collection from Q4 of this past year. We estimate that the negative impact of the temporary store closures will roughly offset the positive impact of the wholesale timing for the quarter.

In terms of profit, adjusted gross margin in the first quarter is expected to be around 200 basis points better than fiscal quarter 2020, driven primarily by business mix as well as improved IMUs. We anticipate that this margin expansion will be offset by an increase in adjusted SG&A expenses as a percent of sales as deleverage from lost revenue will be partially offset by the cost savings initiatives rolled out over the last year.

For full fiscal year 2022, we expect revenues down in the high single digits to the fiscal year 2020 barring COVID shutdowns past Q1. This includes the resumption of a normal cadence for product development and shipments for European wholesale. As you may recall, in response to the pandemic last year we made the strategic decision to elongate the fall-winter season shipping window and cancel the development of the pre-spring, summer line. We are not planning on repeating this in fiscal 2022.

With that, I'll hand it back to Carlos to talk about the five-year strategic business plan.

Carlos Alberini - Chief Executive Officer and Director

Thank you, Katie. I'm very excited to share with you today my view of our future. This past year was truly a year of crisis, but like Winston Churchill said we didn't let the crisis go to waste. During the year, we made great progress executing our strategic plan and were able to accelerate the implementation of several key initiatives. Today, we are confirming our strong belief that our opportunities for value creation remain intact for us. Furthermore, we remain committed to delivering net revenues of $2.9 billion and an operating margin of 10% by fiscal year 2025. I am confident that we have an opportunity to more than double our earnings per share to $3 and increase our free cash flow by 65% by fiscal 2025 respect to fiscal 2020. As a result, we plan to more than double our return on invested capital to 26% by fiscal 2025 from 12% in fiscal 2020.

Let me begin with a quick review of our key accomplishments last year. From the beginning of the pandemic, we focused on the areas we could control, including our capital availability and liquidity. We managed our capital effectively and were able to return value to our shareholders through share repurchases and the reinstatement of our dividend when our visibility improved. We were able to accelerate the implementation of our new sales force platform in the US, Canada and Europe, which is now fully complete. This is a major milestone for us and the initial results are very strong. For example in Europe, we have a faster platform with a homepage download over 3.5 times faster, a 13% lower bounce rate and an 18% increase in mobile conversion rate from our previous site. We also rolled out omni-channel capabilities in Europe in addition to North America and we expanded our online product assortment globally.

During the year, we were able to rationalize our store portfolio closing over 125 underperforming stores and renegotiating 290 leases at favorable terms. As part of the store rationalization, we were successful in repositioning our business in China, partnering with four new franchisees in separate regions of the country to represent Guess? with local market expertise and capital for expansion. And we also integrated our G by Guess? brand into our GUESS Factory business in the US, converting almost 60 of our stores which have already shown very encouraging results.

Last but not least, we identified ways to transform our business model. This includes a global reorganization of our team, an omni-channel focus for our direct to consumer business, the development of our first global product line and the introduction of new product categories like athleisure and essentials. We also worked hard to eliminate redundancies and streamline processes across our operations.

Last year during our Investor Day we shared our purpose to inspire our customers to feel confident and passionate about their style and their future. At Guess? we dare to dream. That same day we shared our vision for our organization and our commitment. These constitute a timeless foundation for our team and our Company. As I said, we see an extra ordinary opportunity to create significant value for our stakeholders over the next four years and beyond. This starts with our opportunity to gain market share and all the markets and businesses that we operate. I believe the value of our offering represented by the quality, styling and price of our products is unmatched in today's marketplace. Capacity has been eliminated in our space, primarily as a result of substantial store closures. Furthermore, many of our wholesale customers have chosen to concentrate their buys with fewer, stronger brands and we are certainly one of them. Somewhat related to this is our opportunity for product category growth. I believe that we have an amazing assortment in key product categories such as denim, outerwear and handbags to expand our presence in the marketplace. And our new product lines like athleisure and essentials give us additional opportunity for growth.

While we are currently in approximately 100 countries, we have whitespace in multiple markets where we are underdeveloped. China, Russia, Poland and Germany are just good examples of this. Our opportunity for operating margin expansion has been well documented and the asset-light model that we are creating at Guess? will contribute to our ability to more than double our return on invested capital in the next few years. Last year we also shared the six strategic objectives of our five-year plan. This plan still constitutes the right roadmap for our future, despite the changes in the environment over the last year.

Our six pillars are, one, organization and culture. We will always strive to have a best-in-class team that works effectively and efficiently together. Two, brand relevancy. We strive for our brands to be relevant with three key target consumer groups, heritage, Millennials and Generation Z customers. Three, product excellence. We will design, make and distribute amazing product to support our customers' lifestyles. Four, customer centricity. We will always place the customer at the center of everything we do. Five, is global footprint. We will develop an effective and profitable global distribution ecosystem. And six, functional capabilities. We will always invest in our infrastructure to support our business well long term.

For our organization and culture objective we are organizing our teams, emphasizing global functional responsibilities and capitalizing on local market expertise and accountability. We also plan to develop each market with an omnichannel approach where the accountability is placed on one team to develop all channels in the market instead of using a traditional approach with separate accountability by channel and business unit.

At Guess? we strive to be a conscious capitalist organization and we consider our ESG priorities a driving force for change. We have big goals to improve our environmental agenda and deliver 100% denim to be equal and 100% recycle synthetic materials and packaging by 2030. Today we are at 25%.

The Guess? brand has always been in business with a strong and consistent point of view. We know who we are and we know who we are not. Our brand well-protected is a lifetime asset. And it is for this reason that we have a plan to elevate our brand. Quality and consistency are key to strengthening our brand relevancy and the new customer environment. Quality starts with product, the quality of the materials we use, a sustainability focus on increased perceived value for each item are key to win in this area. We plan to increase full price selling, reduce promotional activity and focus on certain key product categories. And last but not least, in order to elevate our brand we must elevate the customer experience across our Guess? ecosystem including stores, websites, wholesale partners and licensees all over the world. In addition, collaborations, partnerships and unique go-to-market strategies are key to drive brand awareness and fuel new customer acquisition, especially for the younger consumers.

Our next strategic pillar is about product excellence. In our business, product is everything. We have four key initiatives to fulfill this objective in the next four years. First is product quality, styling and assortment. Second is our focus on key product categories. They consist of women's and men's apparel, including denim, athelisure and essential products, handbags, footwear and kids. Our third product initiative is our one global line. As we have said in the past, this initiative drives consistency in all markets, enables us to elevate the quality of our products and will result in significant efficiencies throughout our supply chain. Our fourth initiative regarding product is the expansion of our assortment to support our omnichannel business.

The next pillar is about customer centricity. We have four big goals to optimize our strategy. Customer data collection and analysis, the understanding of our customer segments, their journeys and their preferences, creation of a seamless customer experience using world-class tools and the optimization of customer engagement on brand loyalty programs.

On the heels of our sales force and omnichannel capability rollout, we are implementing Customer 360, a fully integrated suite developed by salesforce. This solution will enable us to optimize data capture, dissect the customer journeys engagement, conduct personalized marketing and analyze the results of every activity and point of engagement.

Regarding CRM and our loyalty program. We have a rich global base with almost 5 million customers in all three regions and we see big opportunities to put the Customer 360 tool to work on this and grow this program in the next few years. Regarding our global footprint, I believe stores are a key component in our omnichannel network, a great environment to represent our lifestyle brand and our number one customer acquisition vehicle. We have been very successful in rationalizing our global store fleet over the last few years and still have significant flexibility to optimize our portfolio as 80% of our leases worldwide are expiring in the next three years. We made the decision to exit more than 15 unprofitable flagship locations, some of which have already been closed while others are planned to close later this year. And as I mentioned, we will continue to pursue opportunistic new store openings in those markets where we are underrepresented. All together, we estimate that our plan will contribute to 200 basis points of operating margin improvement by fiscal year 2025 versus fiscal year 2020.

Next I will touch on our functional capabilities. Over the next few years, we will focus on optimizing our product management, leveraging technology to become a true data-driven business and creating meaningful efficiencies across our global organization. We think about product management optimization from end to end. This means, product development, sourcing and production to distribution and logistics to inventory management. There are a few key components to this plan. We are migrating our suppliers to the most efficient places and consolidating vendors to achieve both operational and cost efficiencies.

In fact, over the last two years we have reduced our number of suppliers by over 60%. Faster lead times to market are more important now than ever. We are digitalizing our product development processes, which could reduce lead times by up to two months as well as conducting capacity planning with our key vendors to react quickly to changes in demand.

In distribution and logistics we are developing an efficient global network that capitalizes on low cost labor regions and automation. Inventory management is key to maximizing both sales and margin. We are focusing on assortment planning, allocation, fulfillment and markdown optimization. I believe that becoming a data-driven organization is a key enabler to allowing us to compete effectively in the future. This process is an evolution and must remain a constant focus for us.

Our technology plan supports our strategic plan and is anchored in innovation and data analysis. Some initiatives, in addition to the technology work that we're doing on customer centricity, include modernizing and enhancing our systems to ensure a reliable, secure and integrated global infrastructure and a migration to the cloud.

Lastly, as a global organization we are focused on a true global infrastructure. This means simplifying our business practices and eliminating system and process redundancies across the globe. In Europe, we have a multi-channel, multi-country infrastructure in place. We will leverage this model to streamline the organization and drive cost savings. This is a big opportunity for us.

Before I turn it over to Katie and Fabrice, I want to express how much this Company and plan mean to me and how excited I am about our future. This is the last chapter in my professional journey and I am giving everything I have to make it extraordinary. I have a great partner in Paul, a great team, an incredible brand and a dynamic business. Our position in the market is strong and staying focused on this roadmap will allow us to grow our business very profitably. I am very confident in our team's ability to execute our plan and meaningfully grow the value of this great company.

With that, let me pass it to Katie.

Katie Anderson - Chief Financial Officer

Thanks, Carlos. Let me give you some more color on the financials that fall out of the strategic plan. As Carlos mentioned, we are confirming the commitment that we presented in December of 2019 to deliver 10% operating margins by fiscal year 2025. And while we still believe in sales growth for our brand over the next few years, I get particularly excited that the meat of our path to double EPS from fiscal year 2020 to $3 in fiscal year 2025 lies in the middle of the P&L, where we have the most control. And this past year is proof that we can execute what we can control.

As we did with Q1, we are going to anchor our comparisons in this conversation to the pre-COVID fiscal year 2020, which ended February 1st, 2020 for a more normalized comparison.

In terms of revenue we anticipate that we will reach $2.9 billion in fiscal 2025 versus $2.7 billion in fiscal 2020. Most of this growth is being fueled by our e-commerce business with growth in wholesale being offset by a decline in retail. As a result, we see our e-commerce penetration of direct to consumer sales growing from 13% in fiscal year 2020 to 23% in fiscal year 2025.

I'll mention that e-comm penetration was 22% this past year, but that was inflated a bit with the pandemic induced store closures. In terms of adjusted operating margin, we see 440 basis points of growth over the next few years. The vast majority, 400 basis points, is coming from operational efficiencies with the remaining 40 basis points coming from leverage on higher sales. Store portfolio optimization represents a large portion of the margin expansion, about 200 basis points. This is higher than we had modeled pre-pandemic.

We expect 90 basis points of supply chain efficiencies primarily from better IMUs. We've been very successful in expense streamlining this year and are working on longer term opportunities as well. We anticipate 70 basis points of margin expansion from fiscal 2020 in this area. Lastly is logistics which is expected to contribute 40 basis points of operating margin improvement.

The operational efficiencies that Carlos mentioned will be partially offset by variable costs associated with e-commerce growth. We see the 400 basis points of operational efficiency falling roughly equally over the next four fiscal years as some of the initiatives require some lead time. I will say though that while the underlying savings will be present in fiscal year 2022 sales to leverage will slightly offset the impact on operating margin expansion from these savings.

With that I'll pass it to Fabrice to walk you through the rest of the five-year financials.

Fabrice Benarouche - Vice President, Finance and Investor Relations

Thank you, Katie, and good afternoon everyone. Protecting our strong balance sheet and returning capital to shareholders was and remains the key priority for us. We believe we can generate higher free cash flows over the next four years as we continue to remain disciplined on managing working capital and driving operating margin to 10%. At the same time, we believe we can support our strategic plan with investment levels flat to 2020 of roughly $65 million. This should result in $220 million of annual free cash flow by fiscal 2025, 1.7 times that of our fiscal 2020.

Turning to capital allocation. Our picking order going forward will remain consistent. Our first priority is to make the investments that will enable the execution of our strategic plan. Our second priority is to return capital to shareholders through dividend and share repurchases. We will continue to prioritize capital allocations throughout the technology and infrastructure that will support our transformation into a truly customer-centric, data-driven company. We would invest in remodeling some of our key store locations across the globe and opening new stores in underpenetrated markets.

One of our key objectives is to improve our return on invested capital. Our plan provides a path to increase profitability from the smaller but more efficient portfolio of assets. As we exit underperforming stores, optimize our working capital and migrate to a capital-light model where appropriate, our goal is to more than double return on invested capital to 26% by fiscal 2025, that is 12% in fiscal 2020. Our second priority is the dividend payment which we resumed in Q3.

Finally, share repurchases. We have been able to deliver significant shareholder value here in the past. As a reminder, we repurchased slightly over 25% of our shares over the last two years at an average price of $15.76. We believe that our five-year strategic plan provides a solid roadmap to value creation. And we will continue to approach share repurchases opportunistically when we believe that our stock is trading below its intrinsic value.

With that I will conclude the Company's remarks and let's open up the call for your questions.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question comes from Susan Anderson from B. Riley Securities. Your line is now open.

Alec Legg - B. Riley & Co. - Analyst

Hi. It's Alec Legg on for Susan. First off, nice job on the quarter and congratulations. Hopefully the momentum continues and the economies keep reopening up. But, first question - [Speech Overlap]

Carlos Alberini - Chief Executive Officer and Director

Thank you. Thank you. Good afternoon.

Alec Legg - B. Riley & Co. - Analyst

Thank you. Thanks, Carlos. So pre-COVID you were already headed in the right direction for operating margins. But due to the pandemic unfortunately it was set back. How much do you think you can get that back this year? And I know you aren't giving guidance for this year, but at a high level, if you're able to kind of break down the SG&A and gross margin leverage too.

Carlos Alberini - Chief Executive Officer and Director

Yeah. Let me just kick us off and then Katie will probably talk more about the numbers and how we are looking at the plan. But just - we were very excited, as you remember, when - after we had the Investor Day back a year and change ago. And at that time we had a lot of confidence in the plan to reach 10% operating margin. Last year, obviously, set us back. But the great thing is that we used the crisis in a very effective way, I think. And we were able to transform the business model.

We found significant opportunities to really accelerate the operating margin expansion plan that we had. And that includes several pieces of the plan that we were able to affect this past year. When you put it all together the same 10% operating margin that we are looking at is somewhat differently configured than what we shared with you back then and we tried to really explain how those pieces are different. Katie will talk a little bit more about this now.

Katie Anderson - Chief Financial Officer

Yeah. Hi. So, as Carlos said, we're still committed to the 10% in fiscal 2025. So the 440 basis points of margin expansion, 400 basis points of them are coming from operational efficiencies. So about half that is store portfolio optimization. This is higher than we had modeled pre-pandemic and of course the pandemic gave us opportunity to close a lot of underperforming stores and renegotiate rents.

The second piece is supply chain which is 90 basis points, pretty much in line with what we had modeled pre-pandemic. And then expense streamlining we have at 70 basis points. This is more than we had modeled before, because again we found as we went through the process of zero-based budgeting etc. during this past year, we were able to find some more efficiencies that we had identified pre-pandemic.

And then the last piece is logistics. And this we have 40 basis points. We still have good underlying savings in optimizing our logistics network. But we're going to have a business model shift post pandemic as we're leaning more into e-comm. So originally we had our e-comm penetration of direct-to-consumer business going to '18 and now we see it going into '23. And with that comes some more variable costs that offset the logistics savings. So that's the - those are the operational efficiencies. And then we see 40 basis points of leverage coming from higher revenues.

So now let's talk about kind of the geography on the P&L. So 400 basis points of the margin expansion is going to come in gross margin and 40 basis points is going to come in SG&A. And why is that more weighted in gross margin than SG&A? Well, one of the reasons is I talked about the growth in the e-commerce business as a percent of our sales. And with that comes higher variable costs and those costs live in SG&A.

So coming back to what we think we're going to achieve in fiscal '22, the 400 basis points of operating efficiencies that we see by fiscal '25 are going to flow evenly over the next four years and that includes fiscal '22. So the underlying expense savings will be present in fiscal '22. However, because the revenue is going to take some time to get back up to the levels that we saw pre-pandemic, we're going to get some of that - some of that will be offset by deleverage of sales.

Carlos Alberini - Chief Executive Officer and Director

And the exciting thing about this is that if you look at our plan, most of the value created here is depending on cost reductions or efficiencies that we will achieve over that four-year period and they are - there is very little that is depending on top line growth. But that doesn't mean that we don't see big opportunities for top line growth. Just we are very excited about the opportunity to gain market share here. We have a great brand. The product is incredible.

I think that the value that we represent in the marketplace today with our assortment is just unmatched and we are seeing that the customers not only the ultimate customers when they have an opportunity to shop, whether it's online or even in our stores when we are open, we see a tremendous response to the new line. But on top of that as we have a pretty meaningful wholesale business, we are seeing that our retail customers in wholesale have been making significant investments with us as a brand and we believe that that will give us an opportunity to grow.

Now, of course, we have reduced some of our capacity in terms of stores that we closed, and frankly, we are very happy with where we are in terms of the portfolio, but we also have even more opportunities to streamline the portfolio further because we have a lot of flexibility on the leases.

Alec Legg - B. Riley & Co. - Analyst

That's extremely helpful, Carlos and Katie. And then I guess hopefully, just a quick follow-up. Just on inventory, it's down just 1% this year. Are you in possession of that inventory right now or is that impacted and still stuck at the ports, hopefully not the Suez Canal and considered in-transit inventory?

Carlos Alberini - Chief Executive Officer and Director

Yeah. That's a great question. Yeah, we do have some in-transit inventory in those numbers that's accounting. But it's true that we have an inventory that we feel that the ownership and the composition of that inventory ownership is right where we want it to be. We are - we did experience some delays in inventory receipts. You are talking about between two and three weeks and obviously that is impacting some of these numbers. But the big driver for the minus 1% versus the significantly lower inventory that we had relative to the year before when we closed the third quarter is related to the shift in shipments for wholesale in Europe.

And we - I think we made this clear the last time when we talked that we were expecting that a lot of the shipments that is historically traditionally would have occurred in the fourth quarter, were going to move into the first quarter of this year. And obviously in order to ship all that, and it's significant by the way, we had to have the inventory, which we did in the down 1% that we reported. And it's almost identical, the number, that brings just everything that we had to ship this year. And the great thing is that we are sitting here already with 90% of those shipments already materialized. So we are very happy with that. And, of course, the numbers are significantly ahead of last year's because of the shift and the timing of shipments.

When you look at the rest of the inventory now getting out of Europe, just our inventory is down about 12% in North America, is down significantly in Asia as well. And also, we are very happy with the composition of those two pieces because just we have been running pretty lean inventories trying to anticipate what the demand was going to look like based on the experience that we have been accumulating during pandemic days. And the great thing is that we have been exceeding our expectations.

So inventories continue to be leaner and that has allowed us to run really good - with good margins. We are seeing gross margin improvements across the board really. And this also applies to China within Asia where you may remember we took a significant charge last year by this time in the first quarter, just to clean up our inventory position and now we are running with a much leaner position. And again we are seeing a lot more full price sell-throughs in China and we are seeing that margins are up very nicely there as well. So very happy with the inventory position.

Alec Legg - B. Riley & Co. - Analyst

Perfect. Thank you.

Carlos Alberini - Chief Executive Officer and Director

Thank you.

Operator

Thank you. Our next question comes from Janine Stichter from Jeffries. Your line is now open.

Janine Stichter - Jeffries - Analyst

Hi, everyone, and thanks for all the detail.

Carlos Alberini - Chief Executive Officer and Director

Thank you. How are you, Janine?

Janine Stichter - Jeffries - Analyst

Wanted to ask a little bit more about the - good, good. How are you?

Carlos Alberini - Chief Executive Officer and Director

Good.

Janine Stichter - Jeffries - Analyst

Wanted to ask a little bit more about the 10% margin target. I think you mentioned the benefits flowing roughly evenly over the next four years. Maybe talk a bit about where you see the easiest wins and then what will take longer?

And then on the 400 basis points of gross margin expansion. Is there any assumption in there for markdowns? It seems like you and a lot of the industry has benefited from lower markdowns, just kind of given where the inventory position is and the promotional environment being fairly rational. Do you assume that you get some of that back or do you assume that you can kind of build from where you are now? I just don't see anything in the outlook about the markdown assumptions, so some color would be helpful. Thank you.

Carlos Alberini - Chief Executive Officer and Director

Yeah. Thank you, Janine. Great questions. Well, let me start. I think that the quick wins, just we did a lot of the heavy work this past year frankly. I mean, we weren't planning that everything was going to happen as it did. But we saw the opportunities to really go after the whole store portfolio reorganization and we did a lot more than what we have planned in our regional plan and we are very, very pleased with where we are with that. And I think that that is pretty much kind of like baked, meaning we have renegotiated 290 leases, we have closed 125 stores and many of these were not very - not profitable locations or were not right for the brand. So we did a lot of that and it's going to have a major impact on our profitability through occupancy leverage.

Then another big win and I think that it's probably somewhat masked is about logistics. We - when we talked a year ago or more now, we had a plan to really reorganize our network, especially in Europe. And we had a big opportunity to get rid of one big facility which we did last year and we did it with at no cost. We just passed our entire obligations onto the new tenant. I think that the pandemic, in this case, helped us because people were looking for facilities like that. This was in Venlo in the Netherlands.

And then we were able to get a very good deal with a Polish provider and they are our partners now. And that is a very attractive place to do logistics and distribution work because the labor rates are very, very appealing. And now we are kind of like where we wanted to be and we did it much quicker. So we think that we are going to capture those savings faster. But like Katie said just the issues that this savings are somewhat masked by the fact that we are growing at a faster rate than we had planned our e-commerce business and that carries variable costs and that is somewhat offsetting the savings that we are expecting to get. So overall I would say those two are big.

IMU, we have been increasing IMU for the last four years just - and consistently. And - but this was before we had one global product line in place. And we just put that and of course we are having a lot more leverage and great volume efficiencies as a result of that. And also there are other costs that go into that bucket of IMU or cost of goods and we think that that is going to help us as well. Of course, we have some headwinds with cotton prices increasing and so forth. But we feel that we are in a very good place to continue to grow our IMU in accordance with our plan.

So I would say those are the big ones.

But frankly I - this is one of the beauties of this plan is that everything that we have there, we have a plan and we are acting on it. So all of those 450 basis points - 440 basis points are I think a very, very tangible number. So if you ask me, well, what is the upside or where do you think we can go from here, I think that a couple of points of top line growth can go a very long way here to even increase the numbers that you are seeing there. So that's why we're so excited.

Katie Anderson - Chief Financial Officer

And, Janine, in terms of your question about markdowns. we have planned some slight improvements in markdown in the plan, but that 90 basis point is really focused on IMU.

Janine Stichter - Jeffries - Analyst

Great. Thank you very much.

Carlos Alberini - Chief Executive Officer and Director

Thank you, Janine.

Operator

Thank you. Our next question comes from Omar Saad from Evercore ISI. Your line is now open.

Omar Saad - Evercore ISI - Analyst

Thank you. Thanks for taking my question and also thanks for all the information. There was a lot to absorb. I have a couple of questions.

Carlos Alberini - Chief Executive Officer and Director

[Speech Overlap]

Omar Saad - Evercore ISI - Analyst

Sure. I have a couple of questions. I guess I'd start with the profitability, the gross margin profitability that's kind of going on in the business. You talked about a less promotional environment, significantly less promotional environment industry wide, given some of the supply constraints and strong gross margins as a result. How sustainable is this dynamic? Do you think as inventory frees up, we should expect that component, the promotionality component of gross margin, at least to kind of more normalize or is it possible that the industry maybe is going to operate on a leaner level of inventory over time? I guess that would be my first question. Then I have a follow-up.

Carlos Alberini - Chief Executive Officer and Director

Yeah. Thank you, Omar. Yeah, it's hard to say what is going to happen. I think just we have chosen this road for our brand. We want to elevate the brand. We want to have better quality in everything we do. And this touches every aspect, but for sure, starts with pricing, putting the right value to each garment, each product that we sell and then expecting that we're going to sell most of what we buy at full price. That is exactly where we are going.

Now, obviously, if others do the same that is going to help us be more successful with our initiative. But at the end of the day it goes back to product. If you have amazing product that others cannot match and you have it well-priced and you buy it in sufficient quantities but not in excess, then you should be able to sell a lot of that at full price. And we are hoping that the environment is going to continue to be receptive to that. We think we have a brand that can do that very effectively and so far it has worked really well.

I think that just looking at the malls, looking at how people are operating, look at what's happening online, I think that a lot of companies are going in this direction and many of the ones that were promoting very, very aggressively, I think that have - had to adjust their models in one way or the other, either closing stores or doing other things. And we feel that over time, just the reduced capacity is so healthy for the entire industry. And we feel that we can be a big winner, as I said before, just by gaining share.

So I don't know if margins are going to stay exactly where they are or if there is just a more normalized environment that comes after the balance is more restored. But we can control what we do and the way we are looking at this is, we are always looking at our sales and saying, okay, what is our demand going to look like and then buying accordingly so then we can fulfill our margin expectations. But we are not going to play somebody else's game. We are - we like the game we're playing.

Omar Saad - Evercore ISI - Analyst

Got it, got it. Okay. Thank you, Carlos. That's helpful. And then on China, I know there's been a repositioning. You mentioned new partners there. Can you talk a little bit more detail? I mean it's such a big market for fashion, but it's still a really small business and it's gone through different iterations. Maybe you could give a little bit more detail why you think this - this take at China is going to be the one that works?

Carlos Alberini - Chief Executive Officer and Director

Yeah. Yes, well, so the - our China plan has four parts. First is product. Again, going back to product and elevating the brand, we think that the market and the way we had run that market was not necessarily in line with what we are going now. And we wanted to clean up our both distribution and our product ownership and what we were showing the customers and it took us some - over a year to do so.

We put a great team of merchants to help with the product assortment. We - like I said, we took some significant hits just to move the inventory that we had but we are in a much healthier position today and we like where we are going, We are also thinking about the local tastes and what the customer wants to see and leveraging our global line and trying to augment that with more local design. And we have - we are putting together a team to be able to do that effectively.

The second big part is what you alluded to, Omar, and that is our portfolio and how do we approach the physical store network. And this is nothing new what we are doing now. Frankly when I was with a company earlier, we were structuring our store base there with franchisee partners and this is not new for the company. I mean, I think Guess? has done this with multiple locations. We have many very successful partnerships in other parts of the world and - with the franchisee model. I love it, because I think it's capital-light. And I think that when you're dealing with a country that is of the size of China it's such a huge market and each region is somewhat different and unique.

So having people that are very experienced in those particular areas and have access to capital and have the relationships with landlords and can open stores where they belong and represent the brand consistently across, it gives you a lot of speed, it gives you flexibility, and it gives you talent and expertise that otherwise would be very difficult to do within a reasonable time period.

The third big piece is marketing and marketing is also impacted by this elevation of the brand initiative. We think that we were being too promotional and we were doing things that were not exactly aligned with the brand DNA and what we stand for. And we think that again being more localized would help us. We are doing a couple of collaborations with local artists and celebrities and we'll see how that goes. But we have a lot of confidence that this is the right place to go.

And the last thing is about e-commerce. We have big partners in Tmall and we want to reinvent that model to again stand up for elevation and quality in front of the consumer. And we are making big strides towards that. So big market is still a very high priority for us.

In fact, we were talking with Paul today of how important this is on our priority list. Yes, you're right, it's a small business now, but it can be huge. And we think that our brand is vibrant there. We love - the consumer base is very, very young and very energetic and we are talking about the biggest middle class in the world. We are talking about a huge economy with $13 trillion, I mean it's a big deal. So we want to win and we are going to give everything we have to be able to win with good partners.

Omar Saad - Evercore ISI - Analyst

Got it. Very helpful. Thanks. Best wishes.

Carlos Alberini - Chief Executive Officer and Director

Thank you, Omar.

Katie Anderson - Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Janet Kloppenburg from JJK Research Associates. Your line is now open.

Janet Kloppenburg - JJKR - Analyst

Hi, everybody and congratulations on all the progress.

Carlos Alberini - Chief Executive Officer and Director

Thank you. Hi, Janet.

Janet Kloppenburg - JJKR - Analyst

I just want you to know that the product hasn't looked this good in years. So it's really quite exciting. I just - I wanted to share that with you.

Carlos Alberini - Chief Executive Officer and Director

Sorry, I couldn't hear you. What - can you repeat?

Janet Kloppenburg - JJKR - Analyst

You can't - oh, you can't hear me. Can you hear me now? Can you hear me?

Carlos Alberini - Chief Executive Officer and Director

Yes. Yes, I can. Go ahead. Sorry, Janet.

Janet Kloppenburg - JJKR - Analyst

I just said that, I wanted you to know that the assortments look very, very strong, the strongest I have seen in years.

Carlos Alberini - Chief Executive Officer and Director

Oh, thanks.

Janet Kloppenburg - JJKR - Analyst

And I wanted to -

Carlos Alberini - Chief Executive Officer and Director

Oh, thank you. Thank you very much. We're very proud. I think that Paul and the team has done an incredible job with [Speech Overlap].

Janet Kloppenburg - JJKR - Analyst

Really well done. Yeah. So the first question is on the store closings. When I look at the presentation, it looks like a large portion of those are behind you or at least the big chunk was done in fiscal '21. So when we talk about getting the 400 basis points improvement, is some of that coming from lower wins from negotiations in '21 or are there more to come? And how should we think about the store base?

And secondly, I was wondering if you could - about the store base and if there'll be more shrinkage going forward? And then I was wondering about the direct business, how big you see that getting and what the margins, how they'll ramp in that channel? And lastly, it's exciting to see the licensing business grow again and the profitability improve there. So I'm just wondering what product categories are driving that and if you think there is a lot more room for growth in that business segment? Thank you.

Carlos Alberini - Chief Executive Officer and Director

Okay. So I'm going to start with a couple of things and then I'm sure that Katie and Fabrice will chime in. So with respect to the store closings, you are right, we have done a lot this past year, but there is more to come. And when you look at our network, there are many locations that we see within the next four years that we may even improve over what we currently have based on what we think those locations can command considering the new environment. And we have been successful in negotiating grants when they became due. So some of that is embedded in the numbers that you see or in our expectations.

Janet Kloppenburg - JJKR - Analyst

Okay.

Carlos Alberini - Chief Executive Officer and Director

Looking - so Katie, do you want to - [Speech overlap]?

Katie Anderson - Chief Financial Officer

Yeah. Yeah. I'll just add. So, Janet, we closed over 120 stores this year. And when you look our five-year plan going from this year to fiscal '25, it's not a lot - the total store base isn't changing a lot. We some more closures in the US, some additions in North - or sorry in North America, some additions in Europe and China and - but we don't see a lot of movement now from now until fiscal '25. So that the 200 basis points of margin, a lot of that is already baked, like Carlos said, it's made up of closures, also rent relief.

On top of this Carlos mentioned in the prepared remarks that we closed over 15 flagships. This has a big impact here too. Those stores in 2020 had operating losses of $12 million. And now think about the environment now it's even more than that. So that's included as well.

Carlos Alberini - Chief Executive Officer and Director

Yeah. And I want to say that our plan is relatively conservative when it comes to fleet. We do expect to have a few openings in that plan. But we are testing new things, we are looking at opportunities to really represent the brand appropriately in several markets. And like I said, we have a lot of underdeveloped markets. So if we see that we can do significantly better we will probably be more aggressive on this.

With respect to the direct business, I think that Katie talked about - if you look at our penetration of e-comm this year as a percentage of our direct-to-consumer business, so adding the retail business there, we closed the year with about a 22% penetration.

Janet Kloppenburg - JJKR - Analyst

Right.

Carlos Alberini - Chief Executive Officer and Director

Obviously, that's somewhat artificial because we had many stores closed for extended periods of time. So it diminishes the number of retail there. But we are targeting 23% by fiscal year 2025 and that assumes that obviously we are accelerating the growth of e-commerce with respect to the rest of our business and - at retail and we feel that that's the right way to plan it.

I mean, just to be honest, we are very pleased with the acceleration of this business. So it could be that we do even better than this. And we are happy with that because our business is very accretive to our operating margin for the Company. So the direct business is - or our e-commerce business is making good money. We're talking about teens and we are happy about that. And we see opportunities to make more money frankly with the business. So we are excited and we think that once we are fully implemented and optimized with the Customer 360 and salesforce we think that we can have even a more productive business there.

And the last thing you mentioned licensing, we are super excited. I think that obviously the business is still down and it's still tough. We were up this quarter. But it's just that there were a couple of unusual things that happened during the quarter. So you cannot consider this a trend and I think it's important that you keep your expectations low with respect to this, because we are not seeing an organic change in the way we were planning the business.

So there are a few categories that are doing better and we are excited. Even watches, which is a very interesting category that we are seeing better performance. Our handbags, I think, are completely alone in the marketplace and we think we have an incredible selection of handbags. I don't know if you had seen them. But it's just that line keeps coming - keeps getting better and better. So amazing job they're doing there.

And we have some very nice, bright spots. Footwear is doing well. I mean, we have a lot of areas that just eye wear business is strong. It's across the board, but obviously everybody is going through the challenges of our wholesale business that has been bravely distorted last year with the pandemic.

Janet Kloppenburg - JJKR - Analyst

Okay. Thanks so much and lots of luck. Talk to you later.

Carlos Alberini - Chief Executive Officer and Director

Yeah. Thank you. Thank you. We will talk later. Bye, Janet.

Operator

Thank you. And at this time we have no further questions in queue. I will now turn the call back to Carlos for closing comments.

Carlos Alberini - Chief Executive Officer and Director

All right. Well, thank you very much. I just want to say thank you to all of you for attending today's call and thank you for your very generous time and attention. I know that we had a lot on this agenda and we were somewhat concerned about how much - how long it was. But we felt that it was a good opportunity to really give you a lot of details and we appreciate your patience on this. We are very excited about our plan and we cannot wait to report to you on our progress. I am just so excited about what we're about to do. Please have a wonderful time this week and happy holidays to all of you. Thank you so much for your time.

Operator