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Acquisition of rag & bone | 6 Months Ended
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Aug. 03, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] |
Acquisition of rag & bone | Acquisition of rag & bone On April 2, 2024, the Company completed the acquisition of the operating assets and liabilities of rag & bone, a lifestyle and apparel fashion brand. This included the direct operation of 34 stores in the U.S. and two stores in the U.K. Concurrent with the closing of the acquisition, (i) a joint venture owned 50% by each of the Company and global management firm WHP Global (the “Joint Venture”) acquired rag & bone’s intellectual property and (ii) the Company, through Guess Europe Sagl, a wholly owned subsidiary of the Company, entered into an Intellectual Property License Agreement (the “License Agreement”) with the Joint Venture granting the Company the exclusive right to use rag & bone intellectual property to manufacture licensed products worldwide and to sell licensed products in specified territories in exchange for payment of royalty fees by the Company to the Joint Venture. The Company paid total cash consideration of approximately $57.1 million at closing for both the operating assets and its 50% interest in the licensing assets. In addition, there is potential for incremental earnout consideration to the sellers, of which the Company could be responsible for a maximum of $12.8 million, based on preset levels of sales and EBITDA performance of the rag & bone operations in its fiscal year ending January 4, 2025. The Company recorded a $2.0 million payable with respect to the potential earnout payment during the quarter ended May 4, 2024 based on its assessment of the fair value measurement of such earnout as of April 2, 2024. There was no material change in the assessed fair value of the potential earnout as of August 3, 2024. The transaction is intended to provide the following strategic and financial benefits: •Leverage the Company’s powerful infrastructure to accelerate rag & bone growth and drive synergies; •Expand the Company’s global lifestyle brand portfolio with the rag & bone brand, allowing the Company to reach a very attractive customer base that is complimentary to that of the Guess and Marciano brands. Purchase Price Allocation The rag & bone acquisition was accounted for as a business combination in accordance with ASC Topic 805. Consistent with ASC Topic 805, rag & bone was consolidated into the Company’s condensed consolidated financial statements starting on the acquisition date. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. There are various estimates and judgments related to the valuation of identifiable assets acquired and liabilities assumed. These estimates and judgments have the potential to materially impact the Company’s condensed consolidated financial statements. The purchase price allocation as of the acquisition date was based on a preliminary valuation and is subject to change as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. For the three months ended August 3, 2024, purchase price allocation adjustments were immaterial. The purchase price consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows (in thousands):
| Apr 2, 2024
Cash and cash equivalents | $ | 2,083 |
Accounts receivable | 23,582 |
Inventory | 52,105 |
Other current assets | 10,900 |
Total current assets | 88,670 |
Property and equipment | 12,605 |
Operating lease right-of-use assets | 38,821 |
Other assets | 61,840 |
Total assets acquired | $ | 201,936 |
Accounts payable | $ | 23,752 |
Accrued expenses | 11,923 |
Current portion of operating lease liabilities | 16,588 |
Total current liabilities | 52,263 |
Long-term operating lease liabilities | 44,496 |
Total liabilities assumed | $ | 96,759 |
Fair value of net assets acquired | $ | 105,177 |
Cash | $ | 57,064 |
Earnout consideration | 2,040 |
Vendor consideration | 46,073 |
Fair value of acquisition consideration | $ | 105,177 |
The Company recorded an allocation of the purchase price to the tangible assets acquired and liabilities assumed based on their fair values at the acquisition date, including the fair value of the equity method investment in the Joint Venture. The fair value of inventories, which is primarily made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The fair value of intangibles reflects the rag & bone wholesale customer relationships, which is reported in other assets on the Company’s condensed consolidated balance sheets and will be amortized over a ten-year period reflecting the economic life of such relationships. In the acquisition, the Company assumed off-market leases for retail stores, which will be unwound over 3.5 years. The Company considers the difference between the total fair value received, inclusive of the deferred tax asset recognized by the Company associated with the transaction, and consideration paid, to be a vendor consideration liability, which reflects the incentive the Company received to enter into the rag & bone transaction and related License Agreement. As such, a $46.1 million vendor consideration liability was recorded on the Company’s condensed consolidated balance sheets and no goodwill was recognized as of the acquisition date. The vendor consideration liability will be amortized over five years. During the three and six months ended August 3, 2024, the Company incurred $0.1 million and $5.7 million, respectively, of transaction-related costs in connection with the acquisition of rag & bone, which was included in selling, general and administrative expenses in the condensed consolidated statements of income (loss) and comprehensive income (loss). Pro Forma Financial Information For the three months ended August 3, 2024 and the period April 2, 2024 through August 3, 2024, rag & bone’s aggregate net revenue was $63.9 million and $87.2 million, respectively. The following financial information presents the Company’s consolidated net revenues and net loss attributable to Guess?, Inc. as if the acquisition had occurred on January 29, 2023 (in thousands):
| Three Months Ended |  | Six Months Ended
| Aug 3, 2024 |  | Jul 29, 2023 |  | Aug 3, 2024 |  | Jul 29, 2023
Pro-forma net revenue | $ | 732,560 |  |  | $ | 724,824 |  |  | $ | 1,357,745 |  |  | $ | 1,349,565 |
The Company did not have any nonrecurring pro forma adjustments directly attributable to the rag & bone acquisition included in the reported pro forma revenue. These pro forma revenues were based on estimates and assumptions, which the Company believes are reasonable and have been calculated after applying the Company’s accounting policies. They are not the results that would have been realized had the acquisition actually occurred on January 29, 2023 and are not necessarily indicative of the Company’s consolidated net revenue in future periods. Equity Method Investment in and License Agreement with the Joint Venture The Company determined that it does not have a controlling financial interest in the Joint Venture, as the Company does not control the governing body of the Joint Venture and does not have the right to direct the most significant activities of the Joint Venture, which include monetizing the rag & bone intellectual property through licensing arrangements. The Company accounts for its 50% interest in the Joint Venture, through which it exercises significant influence, under the equity method. The Company initially recorded its investment in the Joint Venture at cost which is derived from fair value due to the bundled nature of the rag & bone transaction, and included the acquisition of the rag & bone operating net assets, the License Agreement, as well as the Joint Venture investment. The carrying value of the Joint Venture investment is approximately $44.1 million, inclusive of the Company’s interest held through a non-interest bearing loan of $15.6 million. The carrying value for the Company’s equity investment is reported in other assets on the Company’s condensed consolidated balance sheets. The Company and the Joint Venture entered into the License Agreement concurrent with the overall rag & bone transaction. The License Agreement grants the Company the exclusive right to use rag & bone intellectual property to manufacture licensed products worldwide and to sell licensed products in specified territories. The initial term of the License Agreement is ten years, and the License Agreement automatically renews for up to four successive renewal terms of ten years (unless the Company provides notice of non-renewal). The Joint Venture, through WHP Global, has the right to terminate the License Agreement upon certain breaches by the Company. Under the terms of the License Agreement, the Company will pay the Joint Venture royalties equal to specified percentages of net sales of licensed products, which vary based on sales channel, subject to an annual guaranteed minimum royalty during the term of the License Agreement. The Company records the royalty expenses within cost of product sales. Pursuant to the agreement governing the operations of the Joint Venture, cash earnings of the Joint Venture will be distributed to the Company and WHP Global on a pro rata basis based on their respective equity ownership interests, subject to certain adjustments agreed to between the Company and WHP Global. The Company will subsequently adjust the carrying amount based on its share of the Joint Venture’s net income or loss. The Company’s share of equity income will be included within results from operations in the condensed consolidated statements of income (loss), subject to adjustments for intercompany profits associated with the License Agreement.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 805 -SubTopic 20 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147479907/805-20-50-5 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/805/tableOfContent + Details
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