Guess? Inc (NYSE: GES) Q2 2022 earnings call dated Aug. 25, 2021.
Corporate Participants:
Fabrice Benarouche — Vice President of Finance and Investor Relations
Carlos Alberini — Chief Executive Officer and Director
Katie Anderson — Chief Financial Officer
Analysts:
Susan Anderson — B. Riley & Co. — Analyst
Janine Stichter — Jefferies — Analyst
Warren Cheng — Evercore ISI — Analyst
Dana Telsey — Telsey Advisory Group — Analyst
Janet Kloppenburg — JJKR — Analyst
Presentation:
Operator
Good day, everyone and welcome to the Guess Second Quarter Fiscal 2022 Earnings Conference Call.
I would like to turn the call over to Fabrice Benarouche, Vice President of Finance and Investor Relations.
Fabrice Benarouche — Vice President of Finance and Investor Relations
Thank you, operator. Good afternoon everyone and thank you for joining us today. On the call today with me are Carlos Alberni, Chief Executive Officer and Katie Anderson, Chief Financial Officer.
During today’s call, the company will be making forward-looking statements including comments regarding future plans, strategic initiatives, capital allocation and short and long-term outlook. including potential impacts from the coronavirus pandemic. 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 earnings release. Before turning the call to Carlos, I would like to mention that we will be participating in the fireside chat at the Goldman Sachs Annual Global Retailing Conference on Friday, September 10 at 03:20 PM Eastern. We hope to see you there. Now to Carlos.
Carlos Alberini — Chief Executive Officer and Director
Thank you. Fabrice. Good afternoon everyone and thank you for joining us today. We are very proud of our team and our accomplishments. We just closed a great quarter and we plan to review what drove our performance in detail. But most importantly, I want to share with you where we are today and how we see the future, both short and long-term.
Let me start with our results. For the second quarter, we reported adjusted earnings from operations of $89 million. This compares to adjusted operating earnings of $48 million for the LLY period exceeding our pre-pandemic performance by 85%. This was well ahead of our expectations. We reported revenues of $629 million, 58% over last year and 8% below the LLY period. The entire decline to LLY was due to a timing shift of European wholesale shipments into Q3 and permanent store closures, which are accretive to operating profit. This is in spite of being significantly less promotional during the period in all of our direct-to-consumer businesses. For the quarter, we delivered that 14% adjusted operating margin. We expanded our operating margin by over 700 basis points from 7% in the LLY period. The star of this quarter was the North America Retail segment that reported an operating profit of $38 million versus $6 Million in the LLY period and almost 540% increase.
Our Wholesale and Licensing businesses also outperformed, and Europe and Asia delivered roughly flat operating performance to the LLY period. Paul and I continue to be thrilled with our team’s performance all over the world, adjusting and reacting seamlessly to the fluidity of the current environment. We want to give a huge shout-out to our leadership team and all our associates and thank everyone for their big efforts and great contributions during this unprecedented times.
We are happy to see demand recovering and stores reopened across the globe. We still see the pandemic’s impact on customer traffic and on the supply chain globally. The labor market has also been impacted as companies are challenged to rehire workers leading to labor shortages and higher wages. At Guess, we remain laser focused on what we can control. As a global brand, we have adapted quickly to the changing levels of demand and restrictions across our markets. We are sizing our inventory buys accordingly, adjusting prices to the perceived value of our products, strategically managing promotional activity and increasing labor rates to attract and retain top talent.
We continue to keep cost very tight by eliminating redundancies and increasing efficiencies. We have been relentless in mitigating supply chain disruptions. We are strategically partnering with our vendors to accelerate deliveries when feasible, changing countries of origin when appropriate to increase speed to market and investing in faster transportation modes when it makes sense. Our strategy is working and our results reflect this. I am proud to share with you that we published our latest sustainability report this summer, focused on our three pillars to operate with integrity, empower our people and protect the environment.
Some highlights include reaching gender pay parity, increasing our eco-smart Guess penetration to 20% and receiving approval in our ambitious science-based targets for greenhouse gas reductions. We are confident in our actions here. In fact, we successfully passed a reasonable assurance review by a big firm making Guess the first in fashion to subject our ESG data to such a high level operator. We have increased our environmental quality score with the Independent shareholder services to a 1 out of 10, the highest rating possible, as a result of this work.
Let me now spend a few minutes talking about what’s going on in the different regions and channels of our business. In North America, traffic has improved sequentially each quarter, but remains well below historical levels and we continue to see higher conversion rates and higher average spend. We are in the midst of back-to-school and we have solid demand for denim, activewear and knits. In addition, we have seen sequential sales growth for our dresses category, which was positive to LLY for the first time since that pandemic began.
Both our Guess and Marciano brands are experiencing increases in sales of dressing, apparel and accessories as the customer is returning to social life. We have also been successful with our handbags and wear-now products and our men’s business has been particularly strong. In Europe, we had a stronger start to the second quarter, which leveled off as the delta variant spread in many countries there. Activewear continue to outperform in this region, both for women and men and we saw substantial pop in denim in Q2 as well as improved demand for dresses and outerwear. We are encouraged by the progress that most countries in Europe have made with vaccination levels and we remain optimistic about the recovery of this region in the second half of the year.
In Asia, our customer traffic is the most challenged due to the virus and the trends remain relatively consistent in Q2 versus Q1. The product categories that have performed better in this environment includes sweaters, denim and outerwear. While we have made good progress in several areas of the operation, our challenges with topline performance remain. We are reassessing our team and we are making leadership changes to reorganize the business today.
Our e-commerce business grew 11% in North America and Europe for the quarter versus last year. Growth here was more moderate than prior quarters as we were a lot less promotional. I’m pleased that we continue to significantly improve profitability in this channel. In the back half of the year, we will be strategically investing more in marketing to support further growth in this business.
Our European wholesale business is performing well. We are currently shipping our fall-winter season, which had orders up high-single digits. As I mentioned, some of the products are delayed coming in. So, they will ship in Q3 versus Q2. The spring-summer season campaign is underway and we estimate that the order book will be higher than LLY with strong growth, particularly in our kids and footwear collections. We’re also very pleased with our Americas Wholesale business, which grew 19% in sales and 54% in operating profit versus LLY. Denim had a great quarter and delivered strong performance at Macy’s. We’re also having success in apparel for both men and women and accessories, particularly handbags.
Our global licensing business also recorded significant revenue growth of 18% versus the LLY period. We have a big business here, primarily driven by handbags, eyewear, footwear and fragrances. Regarding our strategic plan, I want to spend a few minutes updating you on our progress with our brand elevation and customer centricity initiatives. I will start with our brand innovation strategy, which touches almost every aspect of our business.
Paul has been driving this very ambitious initiative with our product and creative teams. His strong leadership and the work that the teams put into this to transform our model have been extraordinary and many major milestones have already been conquered. Most significantly, the taste, styling and quality of our products have been elevated and for the first time, we are providing a global assortment that achieves that consistent representation of our brands. We are focused on higher quality and sustainability across the board.
In addition, the new assortments have been priced based on the products perceived value. Our visual merchandising on the images and photography in all the new marketing campaigns, catalogs and websites have been optimized to showcase our brand more effectively. And our product development, marketing, visual merchandising and buying are integrated more closely than ever before. This means that as we identify our biggest product stories, these flow through to our campaigns for windows and floor presentations on websites. We [Indecipherable] deep in these key styles to increase full price selling and maximize sales.
The last important step for elevating the brand is to improve the customer experience across the Guess ecosystem, including our stores, our websites, wholesale distribution and through our licensees. We are mobilizing our field and business units to address this and we plan to upgrade our technology and tools to deliver superior service to our customers. Some examples of these upgrades in store technology include enhanced WiFi networks, extended payment methods and mobile check outs. These projects should be complete by the end of next year.
Regarding customer centricity, let me start with our customer base. As you know, we resonate across three distinct customer groups: heritage, Millennials and Generation Z and we develop our product assortment to support the unique lifestyle needs of these customers. With Gen Z, specifically, we have a separate strategy including differentiated product development, marketing and customer engagement. This is our brand partnerships group led by Nicolai Marciano. Product collaborations and events drive this business.
We had great success here pre-pandemic with key collaborations such as J Balvin. But as you can imagine, the pandemic impacted our ability to execute this event-driven marketing campaign. Now, we are able to restart these collaborations. In fact, this past weekend, we had a successful event with Babylon and influential skate and streetwear label on our campus in LA where we hosted over 6,000 people over three days.
Regarding our digital business, we continue to make progress in optimizing our user online experience via the e-commerce platform that we implemented last year. For example, in Europe, we are seeing improved conversion rates, especially from mobile, which represents over 80% of our traffic. Our average web session duration increased over 20%, bounce rate decreased 10% and loading time versus our previous platform is 70% faster. And during the quarter, we implemented some upgrades to the platform resulting in an increase in our add to basket sessions of over 30%.
We continue to work on implementing omnichannel capabilities in Europe as well as upgrade North America’s current capabilities. We plan to complete this project by mid-year next year. The last pillar of our customer centricity strategy is related to customer data capture, segmentation and analytics. We have built out a high-performance platform, but we’re still operating on an extremely limited capacity to process and utilize our customer data. We’re now working on a platform, which includes powerful tools to fuel data collection, consumer insight analysis, personalized marketing and client telling. We can use these tools to maximize sales from our existing customer base, as well as efficiently target new customers. This implementation is underway and will be completed by next year. This will be a game changer, allowing us to use our data to unlock a ton of value.
Now, let me talk about our outlook. When I came back in early 2019, we identified several opportunities for value creation. At that time, the most significant of these were in margin expansion. We laid out a plan to increase operating margin by about 450 basis points to 10% in five years. We used the pandemic as an accelerator to transform our business and not only are we expecting to reach our 10% target this year, but we are now increasing our operating margin target to 12% by fiscal year 2024, when we plan to deliver $2.8 billion in revenue. I’m excited to share with you that this would yield a return on invested capital of over 30%. I’m confident in this outlook and this is why.
We see clear opportunities for revenue growth from category expansions in areas like denim, Marciano, handbags, dresses and outerwear to new store development to digital sales growth. Our margin expansion has come from concrete changes to our business model, including IMU improvements, store portfolio optimization and cost reductions. And while we are currently operating in what might be on abnormally low promotional period industry wide, this company will never go back to the levels of promotional activity that it had pre-pandemic.
Our balance sheet is in a very good position, which allows us to fund our business needs, as well as return value to shareholders. We announced today that our Board has authorized a share repurchase program of $200 million. In closing, when I was invited to come back to Guess, I came back with high expectations, I knew that the company had an amazing global brand with tremendous potential and I felt that I could contribute to realize that potential. But like Steve Jobs said I couldn’t connect the dots looking forward and I had to trust my gut.
When I look back at what happened in the last two and a half years, I couldn’t be more proud of what we have accomplished in the face of a pandemic of my partnership with Paul and of the transformation of our business into a company with an elevated global brand and a strong business model. This is a company that is poised to gain significant market share, a company ready to deliver high return on invested capital fueled by high margins and a capital-light model. A company with an amazing team ready to take the business to the next level of growth and profitability. Today, I am thrilled to connect the dots looking backward and I couldn’t be happier I trusted my gut to come back to my home.
With that, let me pass it to Katie to review our financials in more detail. Katie?
Katie Anderson — Chief Financial Officer
Thank you, Carlos. Good afternoon, everyone. I want to start with something you can’t see in the numbers. Of course, I’m thrilled that we almost doubled operating profit from pre-pandemic levels this quarter, even in the midst of a challenging environment. But first I want to mention how proud I am to be part of this team at Guess. It’s a team that works hard and works smart to execute our strategy and achieve our goals. I wanted to express my deepest thanks to my colleagues and all our associates for their unrelenting efforts during these unprecedented times.
Now, let me take you through the details on the quarter. Second quarter revenues were $629 million, up 58% to last year in U.S. dollars and 51% in constant currency. We were down 8% compared to LOI. This was slightly short of our expectations, as a result of timing in our European wholesale business worth about 4% to LLY, where delays in product receipts moved some shipments a few weeks into the third quarter. Overall, the 8% revenue decline to LLY was driven by the impact of permanent store closures worth roughly 5% of revenue and the shift in wholesale shipments in Europe.
I want to note that our promotions were well below pre-pandemic levels across all of our direct-to-consumer businesses, which is impacting our sales level versus LLY, significantly driving our profit. Let me get into a bit more detail on sales performance by segment. In Americas Retail, revenues were down 6% versus LLY, better than our expectations. This decline was entirely driven by permanent store closures, which were worth about 8% of the sales to LLY. Store comps in the U.S. and Canada were up 5% in constant currency. Same-store sales were solid positive in the U.S., but the recovery in Canada is moving a bit more slowly. Although traffic is still materially negative, from Q1 to Q2, we saw improved trends there.
Our conversion remains high and AUR increased substantially in Q2 with strategic price increases and more full price selling. The gap between the performance of our tourist-centric stores and non-tourist-centric stores is still wide, but narrowed significantly in Q2 versus Q1. This suggests that at least domestic travel is picking up, the total travel still remain significantly below historical levels. In fact, our non-tourist stores in the U.S. and Canada had positive double-digit same-store sales growth this quarter. The profitability that we have brought in the segment is super exciting and worth noting.
Operating margin in Q2 was 20% versus only 3% two years ago and operating profit is 6 times what it was in LLY even on lower sales. This is an incredible base of which to grow in North America. In Europe, revenues were down 5% versus LLY. Our retail business continues to be pressured by pandemic-related traffic declines. Store comps for Europe were down 20% in constant currency, impacted by negative traffic; however, this was partially offset by solid conversion rates and significant AUR increases. Absent the shift in shipment timing, that we mentioned earlier, our European wholesale business continues to show healthy trends with an order book above pre-pandemic levels.
In Asia, revenue was down 43% to LLY, almost half of this decline was driven by permanent store closures. Our store comps were down 30% in constant currency, with negative sales comps in South Korea and China, more moderate than other areas in the region like Japan, Taiwan and Hong Kong, Macau, where they’re struggling more with the pandemic. Our Americas Wholesale sales were up 19% to LLY. We are happy with our momentum in this business. Operating margin expanded almost 600 basis points to LLY here, resulting in a lift of over 50% for operating profit in this segment.
Licensing revenues also outperformed and were up 18% to LLY in Q2 to provide strong performance in our perfume and footwear. And as you know, this is an extremely high margin business, which delivered a 92% operating margin this quarter. Total company gross margin for the quarter was 46.8%, almost 800 basis points higher than two years ago. Our product margin increased 370 basis points this quarter versus LLY, primarily as a result of lower promotions and higher IMU.
Occupancy rate decreased 420 basis points. This quarter we booked over $7 million in rent credits for fully negotiated rent release deals, mostly in Europe. The remainder of the decrease is attributable to lower rent and permanently closed stores. Adjusted SG&A for the quarter was $206 million, compared to $218 million two years ago, a decrease of $12 million or 6%. We continue to benefit from changes to our expense structure and a decrease in expenses related to permanent store closures versus LLY. In addition, there was a one-time benefit of about $4 million from government subsidies, namely in Europe, which was partially offset by higher variable expenses related to the growth of our e-commerce business. Adjusted operating profit for the second quarter was $89 million versus $48 million in Q2 two years ago.
Our balance sheet continues to strengthen. I will take you through some details comparing now to last year, not LLY. We ended the second quarter with $459 million in cash a $131 million higher than last year’s balance at the end of Q2. Inventories were $430 million, up 3% in U.S. dollars and 1% in constant currency versus last year. Inventory management has been a key capability for us and we continue to act swiftly and strategically here. We feel good about our inventory position and believe we have the right assortment to satisfy customer demand.
Year-to-date capital expenditures were $22 million, up from $10 million in the prior year, but significantly below pre-pandemic levels. We generated $18 million of free cash flow in the first half of the year. Our ability to generate cash gives us the runway to invest in our business, as well as return value to shareholders. We announced today that our Board of Directors has authorized a new $200 million share repurchase program. This new program includes the $48 million remaining under the Company’s previously authorized repurchase program and we will use it opportunistically.
So, now let’s talk about our go-forward expectations. The current environment is still uncertain. So, we will not provide formal guidance, but I will walk you through how we’re thinking about both for short and longer term future. Again, I’m going to anchor our commentary to LLY. We are maintaining our revenue expectations for the full year at down mid-single digits. We expect the third quarter to be slightly negative to flat with help from shifted wholesale shipments from Q2. In terms of profit, adjusted operating margin for the third quarter is expected to be about 250 basis points better than LLY. Gross margin is expected to expand by around 600 basis points to LLY, driven primarily by lower occupancy costs, lower promotions and improved IMU.
We anticipate that the adjusted SG&A rate will be at 350 basis points as cost savings are offset by business mix and reinvestments in business expansion initiatives including marketing. And with the rest of the industry, we are seeing some cost pressures, particularly in freight and labor, which are built into these numbers. For the full fiscal year 2022, we are raising our expectations for operating margin and profit. We now expect operating margins to reach approximately 10% for the year versus adjusted operating margin of 5.6% in LLY. This represents margin expansion of roughly 450 basis points to our pre-pandemic business despite a lower revenue base and we are confident in our ability to sustain these profitability levels, as well as deliver top line growth.
As a result, we are raising our operating margin target and our long-term plan to reach 12% by fiscal year 2024 with revenues in that year expected to hit $2.8 billion dollars, consistent with our previous call. This implies an operating income of $335 million in fiscal year 2024, $185 million more than adjusted operating profit in fiscal year 2020. Adjusted EPS is expected to be around $3.50 per share, versus a $1.45 in fiscal year 2020. This would be a record level of adjusted EPS for the Company. Our team is motivated and I’m proud to say that we are running this company for the future, not just for now.
With that, I will conclude the Company’s remarks and let’s open up the call for your questions.
Questions and Answers:
Operator
And thank you. [Operator Instructions] And I see we have our first question from Susan Anderson with B Riley. Please go ahead, your line is open.
Susan Anderson — B. Riley & Co. — Analyst
Good evening. Congrats on a really nice quarter. I was wondering [Technical Issues] I guess I’m curious how much is being driven by the initiatives that were in place pre-COVID versus things that happened during COVID such as the inventory levels driving the lower promotions and the higher merch margin? And then also as we look out to 2024 in the 12% op margin goal, can you maybe talk a little bit about the puts and takes that will get to the 12%? Thanks.
Carlos Alberini — Chief Executive Officer and Director
Yes. Thank you, Susan. Yes, we are very pleased with our performance this quarter. When you look at what made it happen and I think that we were very, very focused on all the things that we had going, coming out of our strategic planning process back in 2019. And unfortunately, we were able to really accomplish even more than what we had originally planned in many areas like product costs, the implementation of the global line, it was completely consistent across the world, the sourcing strategy that we had in place. I was also part of our initial plan and we did a lot more than those original initiatives and I would say that probably the biggest move here has been the elevation of our brand and just going to a completely different business models. There is almost no promotional activity. We are trying to really stay with a value-based pricing model and that is very challenging to do, but I think that Paul and the creative teams and the product teams have worked kind of tirelessly to really accomplish based on a product-by-product basis. And I think that they have done an incredible job and this strategic value-price model, I think is something that is completely sustainable and is going to take us to a completely different place and how the brand is perceived by our customers.
We’ve reduced promotional activity everywhere and we have a big opportunity in the rest of the business model with occupancy, I think that was definitely something we had in the plans. But we have done a lot more than what we had originally planned during the pandemic. We have renegotiated 400 leases and obviously the results are a lot more positive than what we had originally expected. We have done a lot on the expense side of the business as well, increasing efficiencies. A lot of this work is still ongoing. We are not done with that, but we feel that we are on a good path to be able to benefit from that, especially next year and going forward.
And I think that with respect to 2024, we are very, very happy with the 12%. We think that this is kind of like we have very clear line of sight to that. Maybe Katie if you want to fill in with the 12% operating margin.
Katie Anderson — Chief Financial Officer
Yes, sure. So, Susan, the bridge from 10% to 12%, about half of that is coming from sales leverage. So, as we said, we’re still confident in the $2.8 billion top line in fiscal 2024 and half of the margin expansion is coming from that and the other half from further efficiencies that just take more time and these are more back-end loaded in the next few years. So, when you think about, okay, how does that play over the next couple of years, I’d say like a third of the expansion next year and then two-thirds in fiscal 2024 and coming both from gross margin and SG&A.
Susan Anderson — B. Riley & Co. — Analyst
Great. That’s really helpful. And then if I could just add one follow-up on Europe. So, it looks like it was only region that was down and I think you had mentioned that it was solely given the shift of wholesale orders from second quarter into third quarter and I’m not sure, did you quantify that or if not, how much was that? And then also, I’m curious, when the stores did open in Europe, did you see a pickup in sales in Europe as those opened up last quarter? Thanks.
Carlos Alberini — Chief Executive Officer and Director
Yes, so let me start and Katie will chime in as well. Our business in Europe is managing very, very well. We did have significant issues with all the delta variant and how that impacted the entire territory. So, the restrictions and in many cases stores being closed in similar countries, that was a challenge. And I think what we had shared with you during our previous call that the business had started in a very, very strong way. But then we saw the business leveling off during the quarter and I’m talking about the direct-to-consumer business especially retail stores. So, it has been challenging with traffic.
Our wholesale business I think is very, very healthy and in spite of all the issues with the virus, the market continues to see Guess as a great brand and we are seeing investments from our customers, retail customers in the wholesale business to doubling down with us and making significantly more investments with the brand. So, we are seeing that business to continue to grow and that is true for the season that we closed, that’s the season that is in the works right now, which is spring-summer. And the great thing about retail is that during the last few days, I know it’s only a few days, but they are important days because the clearance period in Europe is closing and we are seeing that the business is starting to pick up. This is when people come back from vacations and they are getting ready for back-to-school as well. So, we are excited about that. Again, it’s kind of early to tell, but we have a lot of confidence in Europe as a business, as a region for us, as you know it’s more than 50% of our business, very critical and the second half of the year is very important in terms of both top line and profitability. Katie.
Katie Anderson — Chief Financial Officer
Yes, sure. So, Susan, the — I’ll start with the shift in wholesale. So, that was about $25 million. So, we had that shift as Carlo said the order book is still up and then this adds — the retail business in Europe in — with the traffic is little bit lower than North America, but conversion is high, AURs up in the mid teens. And again, as Carlos said, we’re seeing some green shoots over the last few days.
Carlos Alberini — Chief Executive Officer and Director
And I think that the important thing here too is that a lot of this we are doing a strategically because we decided to not participate in aggressive promotions and even the way we bought the product is in a way that is a lot more than the way the company was being serviced before. So, of course, if you stop promoting, you are going to see some type of impact on the top line, but we are very happy and you can see the results in our bottom line. This is all re-setting a new baseline for this company in terms of selling at full price and we couldn’t be more excited about that because we think that going forward, we’re going to see the benefits time in and time out, and more importantly, how the customer perceives the brand, as a brand that if you don’t buy it today, you may not find that product. So, that is very critical in our entire business model and formula.
Susan Anderson — B. Riley & Co. — Analyst
Great. That’s very helpful. Thanks so much. Good luck for the rest of year.
Carlos Alberini — Chief Executive Officer and Director
Thank you.
Operator
And thank you. We have our next question from Janine Stichter with Jefferies. Please go ahead.
Janine Stichter — Jefferies — Analyst
Hi, everyone. I wanted to ask about the 3Q sales guide flat to down slightly with the benefit of the Europe’s shipment timing. Is there anything else to read into that? I’m just curious if you’re seeing any impact from the delta variant in the U.S. specifically?
Carlos Alberini — Chief Executive Officer and Director
We are having a tough time with the audio here. Can you repeat the question? Sorry.
Janine Stichter — Jefferies — Analyst
Sure. Let me try one other thing. Can you hear better now?
Carlos Alberini — Chief Executive Officer and Director
Yes. It’s better.
Janine Stichter — Jefferies — Analyst
Can you hear me better now?
Carlos Alberini — Chief Executive Officer and Director
Yes.
Katie Anderson — Chief Financial Officer
Yes.
Janine Stichter — Jefferies — Analyst
Okay, great. I just wanted to ask about the 3Q sales guide for flat to down slightly with the benefit of the Europe shipments. I just wanted to see if there was anything else that you would call out other than obviously some uncertainty with delta in Europe, anything you’re seeing from the variant in the U.S.? And then then more broadly if you think about that $2.8 billion revenue target, how to think about the timing of the return to growth? And maybe talk a little bit more about some of the marketing investments that you spoke to in the back half of the year. How you see that playing into a point where the brand can return to growth versus two years ago? Thank you.
Carlos Alberini — Chief Executive Officer and Director
Okay, Katie. Why don’t you just go ahead?
Katie Anderson — Chief Financial Officer
Yes, sure. So Q3 and really the [Technical Issues] We had a shift — wholesale shift out of Q2 into Q3. So, we’re still maintaining our full year down mid-single, but next quarter is going to benefit from that. and I just want to remind you that last year we changed the cadence of the whole core business in Europe, so we’ve centered our shipments for fall-winter into Q3 and this shift was a lot bigger than the shift that we’re seeing this year. So, that’s why we’re expecting our results in the third quarter to be below prior year, but above LLY. So, for the full year, Janine, we’re saying — we’re thinking mid single digit decline to LLY in revenue and there’s some puts and takes if e-commerce up, traffic is down with the pandemic, but really the crux of the change is the permanent store closures. So that’s worth about 5% of sales, so about $125 million in sales. And we’ll take that $15 million of operating profit here and on an annualized basis, that’s $140 million of sales and $20 million of operating profit. So, once we go through all the puts and takes here we’re thinking the core business is pretty flat.
Carlos Alberini — Chief Executive Officer and Director
Janine with respect to your question about revenue and the $2.8 billion, we have a lot of confidence in this number. When you think about where we plan to land at the end of this year with the color that we gave today about being down mid-single digits, the implied growth rate that we are baking into the $2.8 billion, you’re talking about a 5% CAGR and when we think about the fact that we are resetting the business line on revenues this year because of not being promotional and we haven’t been promotional in the entire year, we feel that that number is more than achievable.
If you think about the big drivers, the first one is same-store sales growth and the existing distribution that we have in stores. We see a great opportunity for category expansion in areas like denim, Marciano, handbags, dresses, outerwear and that is just to name a few. We have a lot of very, very great opportunities with multiple product categories right now and we are seeing that the business is picking up when we present the new product. So, very excited about that. Even brand partnerships we think that they are big opportunities with product capsules and collaborations as we used to do pre-pandemic and we think that there is a big opportunity in multiple markets with that.
Then on a second big, big level is about new store development. We think that there are significant opportunities now in the market. There is a lot of space available and rents are becoming very attractive again. We think that stores are the best vehicle for us to showcase our assortment and experience the brand and we feel that this is a key pillar for our omnichannel ecosystem. So, we are super excited about starting to reopen stores in fact this year globally [Technical Issues] we’re going to be opening in the next few months and we have opened some of them. Many of this are pop-up locations. We are going to test some new concepts, I’m talking about Marciano stores, accessory stores, athleisure stores and we are very clear about this because we think that the risk is very minimum and the opportunities are very high. We are going with very limited lease terms, but with the opportunity to be able to renew or solidify the lease terms if this does work well for us.
We have room for growth in many countries, just that there are a few examples. Russia is a good one. We have roughly 50 stores right now and it’s a huge market. Germany, we only have 28 stores. They are also big opportunity for further growth. China, of course, a big country and a big market and we have closed a lot of stores, but we are now left with about a 100 stores. France, 42 stores and even in U.S. and Canada, we are seeing that in many of the markets where we used to have a strong store presence and now we are gone and we see opportunities to go back and we have a pretty good idea of what to expect from those locations.
We are also thinking about the whole idea of continue to gain market share in wholesale. We have talked about this in Europe, quite a bit, but we are seeing it also in the Americas. And we see that the Licensing channels will have a very similar opportunity to gain market share because the brand has so much strength and momentum.
And the last but not least, probably should be at the top of this list for us is e-commerce. Our e-commerce business is a big opportunity, continues to be. We are retooling the entire platform, both the platform that we put in place last year is working very well for us in both North America and Europe, and we see a big opportunity with the customer analytics and that’s we have been working on this non-stop. Omnichannel capabilities in Europe were non-existent and now we are rolling them out and all of this should be complete by next year. So, we fully expect that by fiscal year 2024, we’ll be reaping the benefits of this. So, overall, we see a lot of opportunities and this numbers may prove conservative, but the great thing is that even with low numbers, we can see a great opportunity for return on invested capital growth. This number was 12% before. We are talking about over 30% in fiscal year 2024 and that is great.
And the last question you had was about advertising and marketing. Last year, we stopped investing in non-digital completely. We plan to resume all this year, both here, in North America and in Europe. The brand is in a very good position to make investments to showcase the assortment. We want to invest in brand partnership events. We just did one this past weekend. It was a huge success, over 6,000 people came here and I think it’s the type of customer events that really drives that younger customer closer to the brand. We are spending more money in direct mail. We are seeing great success with this. So, we are expanding not only the number of pieces that we send out, but also the frequency and how far we go with customers that we have in the customer base and and we are seeing great traction with that. We are advertising in multiple magazines in Europe. You will not believe this, but there are over 120 magazines where you’re going to see Guess ads this season.
And also we just completed the cloud solutions from Salesforce for Customer 360 implementation and this is giving us the ability to deploy much more personalized and more efficient marketing. So, we have a lot of ideas where to spend money and we think that this is going to be a huge investment for the brand. While one of the high priorities here is that we did so much with the product, the product looks amazing, but now we have to show it and that’s why we think that the investment in marketing is absolutely appropriate and we are excited to see how the customer respond so far. The early signs have been very positive.
Operator
And thank you. We have our next question from Omar Saad with Evercore ISI. Your line is open.
Warren Cheng — Evercore ISI — Analyst
Hi, good afternoon. This is Warren Cheng on the line for Omar. I had a question on some of the initiatives you’re doing on lower promotions and also investing in quality and taste and style — and styling. What impact is that having on the customer, the new customers coming into the brands and the existing customers? Are there any demographic changes that you can see at the customer data that you can share with us?
Carlos Alberini — Chief Executive Officer and Director
Yes, it’s maybe a little early to see just that direct reflection. We are seeing new customers coming into our CRM base, both in North America and Europe. The success has been more pronounced in Europe in terms of seeing number of customer acquisitions. But that being said, we think that probably even more telling is how our existing customer is responding to our assortments and the success is pretty evident. We are seeing that all the key styles that we identified as opportunities for us to really increase quality, increase styling or improve styling, just do a big job with sustainability and tell the customers about that.
All these products are resonating with the customers in a big way. The Marciano brands, for example, just we did a lot to change the ultimate use and wearing off the product for different locations. The customer is responding extremely well to that. We have a whole new line of essentials. Paul has done an incredible job of free skewing and redeveloping the entire assortment for all the brands and all the product categories by the way, just as I mentioned apparel, but we are seeing the same type of impact on accessories, our line of handbags, He always challenges the entire team here to look for other brands that have something comparable in terms of offering and the answer is always the same, no, we cannot find anybody that has this type of style, this type of qualities, this type of details at this price.
So, I feel that the results are very obvious on how the customer is responding and that is probably the most important thing for us. The new customers are –will continue to come as the product is superior.
Operator
Thank you. We have our next question from Dana Telsey with Telsey Advisory Group. Your line is open.
Dana Telsey — Telsey Advisory Group — Analyst
Good afternoon, everyone. two questions. As you think about Asia, what’s the game plan for Asia going forward? I think you had mentioned you’re changing team around. So just wondering the game plan there and what you see is the path to return to growth? None on the product margin piece, which I believed increased around 370 basis points. How much higher do you have in the IMU to go? Does it differ by category? And how you’re planning promotions for the back half of the year? Will it still be very limited to none? Thank you.
Carlos Alberini — Chief Executive Officer and Director
Thank you, Dana. Good afternoon. Well, let me start with the answering your Asia question. Just — let me just say that our business there is — in Asia is concentrated in three big parts in addition to our Southeast Asia business that is with a partner. But we have a meaningful business in Japan, we have a big business in Korea and of course our business in China. And in Japan, I think we know how to win. We have done it before in 2019, I think was our top year. That we were just working with the younger consumer and using special collaborations and capsules and very similar to what brand partnerships does here in North America and globally and with great success and we think that we are going to go back and continue to really focus on that type of business model,
Korea has always been very successful for us. It used to be a licensed business and now we run our own. We have great team there. They have done a great job and it’s very profitable and we continue to refine the model. We — the underwear business was licensed out a couple of years ago and that’s working well. We are taking over some of the business that was in the hands of franchisees and very successfully too. And we continue to optimize the cost structure.
And then China, China has been a challenge for us. We continue to believe in the market in a big way. The Chinese market is a great market for a brand like ours and our brand is relevant there. We have a material young customer base. The market size itself is — I’m not saying anything here new, but $14 trillion in GDP, very, very significant. The middle class is probably the biggest in the world and there is a lot of market share that we think that we could take in our space. We have worked on like five different areas to address this.
The first one is product and I think what we have done a great job, the team has done a great job working on elevating the brand there as well, improving the product assortment. We had a team from North America, who is helping the team over there and we continue to run the business with a lot less clearance and focus more on our full-price model. The second big thing is about the store portfolio optimization. We talked about this. We closed nearly 70 stores in China over the last 18 months and we think that the franchisee model can help us to really leverage expertise from local players, which in many different regions of the market I think would be very, very helpful for us to be successful.
The third big thing is about marketing and frankly we have tried several things. We now believe that localized campaigns and leveraging local celebrities and social influencers is the way to go. It’s just very difficult and very costly to do it, but we are working on that. We think that the Guess Originals capsules model here also work, especially with the younger consumer of course. The fourth big thing is our e-commerce and this has been challenging for us too because we decided to be a lot less promotional on all the business that we had, for the most part required a high level of discounting, which we do not want to support going forward. So this has impacted our e-commerce business.
And the last big thing is about the team and you asked about this. We have done a lot of reorganization during the last few weeks, the leader that was leading this team for personal reasons wanted to go back to Europe and we are supporting that and we have a search out to really look for a great leader to run the team and run the business going forward. So that’s where we are and we have a lot of confidence that we are on the right path.
Operator
And thank you so much. We have our next question from Janet Kloppenburg with JJK Research.
Carlos Alberini — Chief Executive Officer and Director
Hold on a second.
Katie Anderson — Chief Financial Officer
I just wanted to answer, Dana’s question on IMU. Sorry, before we go on. So, you asked how much do we have left. We’ve had a lot progress here over the last few years and it’s really all of the [Indecipherable] category, it’s really all to the board, but mostly in apparel. And as we go forward and we talk about going from the 10% to the 12%, the 200 basis points being half leverage, half efficiencies. So, there’s some IMU in there, but we’ve done a lot over the last two years. And then in terms of promotions, no, we don’t plan higher promotions the back half of the year. Carlos has talked a lot about how we’ve elevated our brand and we’re strategically managing the promotions down. Okay, now we can go to that question.
Carlos Alberini — Chief Executive Officer and Director
Yes. Thank you.
Operator
Thank you so much. We have our next question from Janet Kloppenburg with JJK Research. Your line is open.
Janet Kloppenburg — JJKR — Analyst
Hi, everyone and congratulations on the progress and the improved outlook. It’s very exciting. Carlos, this is sort of a big picture question, but you’ve done a lot to elevate the merchandising and the marketing for Guess. And I was just wondering as we look forward now and hopefully coming out of COVID, how confident you are on the team that you have — you’ll have consistency in the merchandising assortments and that you won’t fall back to promotions? It’s tricky for everyone, everyone is saying they’re going to be more disciplined and they’re are not going to promote. We all know if something goes away with the assortments that can change. So, I wonder if you could talk a little bit about your confidence there and perhaps about what the categories of pillars of strength that help us understand that the consistency in productivity improvements can continue? And then secondly, I wondered about the supply chain problems we’re seeing worldwide and how long you think these may last with respect to what’s going on in Southeast Asia and other important sourcing markets? Thank you.
Carlos Alberini — Chief Executive Officer and Director
Yes. Thank you, Janet. It’s good to hear your voice. I — let me start — I really think that we are off to a completely new race here at Guess. I think that definitely the issues that are characterizing the environment right now may be somewhat abnormal. But we are going to play the game in the exactly the same way that we are playing it now, which is we are not going after more sales and more sales if that is going to impact our ability to keep full price selling in line. So, I think the trick here, the key is to really make sure that we never buy more than what we expect based on a reasonable sell through for product at full price. So, then we can always maintain this type of low promotional environment. But at the end of the day, just it all goes back to product. If the product is great, then this is a lot easier to do. If the product is something that people want, that the customer is really excited to get, if the product has the quality that customer expects, the styling, the fits are right.
And I think that you asked about the team. I think we have an incredible team and I think that is completely apparent in every area that touches product. We have a lot of the design is happening with a very collaborative way. And, again, Paul is at the front of this and has been driving the teams to really work together in a way that I have never seen at Guess before. And this doesn’t have borders. This is between regions and everybody is working together in a very collaborative way and that is showing in the product. So, to me, just when you — and we try to do this internally, okay, just what are the biggest opportunities. It’s hard to pinpoint what are — which are the biggest opportunities because we have so many because the product is looking so great in every category.
I’m talking about not only what we do internally, but what’s happening with our licensee partners, who are doing an incredible job, just we are seeing significant momentum in watches, who would have thought that we would see watches coming back after everything that we experienced with Apple Watch and everything else. We are seeing significant momentum in eyewear. We are seeing significant momentum with footwear. We are just — we feel that the product is superior and we think that we are into something that if we control what we can control internally, which is how we buy, how we present the product, how we showcase it, we have big opportunities with omnichannel. These are the things that other companies already have, that we are just developing. So a lot of opportunity for us.
And then with respect to supply chain, it’s hard to say how long this is going to last. I was hoping when this whole thing started that it was going to be a matter of a couple of months to three months. Our product is running about four weeks late and there are some cases where we are just in a more challenging situation than that. What we are hearing from our teams is that at least just think that these conditions are going to prevail for the rest of the year and in many cases going into next year.
Obviously, you read there was this journal today with Vietnam and 3% of the population vaccinated, it’s a very challenging situation for all those, but our team has done a great job in moving around, even sourcing, when we saw that there were concerns about being able to keep our production needs at. And we have done that relatively successfully. Just that you heard that we had — we couldn’t ship everything that was there needed to be shipped in the second quarter and that is moving into the third and we are trying to manage the business knowing that things that are running a lot slower and being smart because we could air everything, but who can afford that. So we have been careful in how we spend our money and trying to meet our customers’ expectations in every case. Thank you, Janet.
Janet Kloppenburg — JJKR — Analyst
Thank you.
Operator
[Operator Instructions] And I see no further questions. I will now turn the call over to Carlos Alberini for closing remarks.
Carlos Alberini — Chief Executive Officer and Director
Yes. Thank you, operator. Well, thank you very much everybody for participating today. We are excited about our momentum, but more importantly we are excited about our future. We think that we have a brilliant future in front of us. We have tremendous opportunity in front to create significant value and we couldn’t be more excited. The team is super excited. Paul and I are super excited. So, please remember that we will be at the Goldman Sachs Conference and we would love to see you there. Have a great rest of the weekend and good night, everyone. Thank you.
Operator
[Operator Closing Remarks]