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Guess? (NYSE:GES)
Q4 2018 Earnings Conference Call
March 21, 2018 4:45 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Guess? Fourth-Quarter Fiscal 2018 Earnings Conference Call. On the call are Victor Herrero, chief executive officer; and Sandeep Reddy, 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 financial outlook. 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.

Now I would like to turn the call over to Victor Herrero.

Victor Herrero -- Chief Executive Officer

Good afternoon, everyone. Today we reported that our sales, our adjusted operating profit, and our adjusted earnings per share for the fourth quarter all finished above the high end of our guidance. Sandeep will give you more details in a moment, But overall for the 2018 fiscal year, these are the highlights. We increased revenues by 8%, 5% in constant currency.

We increased adjusted operating profict profit by 36%. We expanded adjusted operating margin by 70 basis points, and we increased adjusted EPS by 52%. The 2018 fiscal year marked the beginning of a turnaround for the company. I am convinced that maintaining the focus on the strategic initiatives I outlined on my arrival at the company in August 2015 is now clearly showing in our financial results.

And as you will understand from our guidance, we expect to make continued progress on this front. During the year, we allocated the majority of our capital investment to Europe and Asia, where the returns are superior. Separately, we have materially reduced our footprint and cost structure in the U.S. The U.S.

now comprises 31% of our global business, down from 38% a year ago. Let's look at Europe. European revenues for the quarter grew 40% in U.S. dollar and 24% in constant currency, continuing the momentum we have demonstrated all year from successful implementation of our strategic initiatives to elevate the quality of our sales-and-merchandising organization.

The growth was driven by positive comps, including the e-commerce, up 18% in U.S .dollar and up 6% in constant currency, by new store openings and by an increase on wholesale revenues. Our e-commerce business in Europe continues to grow rapidly. We had a very strong performance over Black Friday weekend, now a big shopping weekend in Europe. And that set us up for a strong performance over the holidays.

The size of our e-commerce business in Europe is rapidly approaching the size of our e-commerce business in the Americas. During the quarter, we opened 15 directly operated stores in Europe, on a net basis, including in Italy, France, Spain, Portugal, Switzerland, Belgium, Netherlands, Russia, and Poland. And we plan to open 60 more stores in Europe this year. I am also thrilled with the continuing strength of our European wholesale business.

After two consecutive seasons of double-digit growth in the wholesale order book, we are on track for our third consecutive season of double-digit growth in the fall/winter 2018 book, extending our progress on the strategic initiatives to revitalize the wholesale channel. European segment margin contracted by 10 basis points due to the one-time cost of moving our European distribution center to Venlo. The new distribution center is expected to be fully operational by the end of second quarter. So we expect margin to resume expansion beginning in the second half of this year.

Moving to Asia. Fourth-quarter revenues were up 40% in U.S. dollar and 33% in constant currency. Revenue growth in the region was driven by positive comps, including e-commerce, up 14% in U.S.

dollar and up 8% in constant currency, and by new store openings. These positive comps were achieved despite the negative impact from the shift in timing of Chinese New Year. During the quarter, we opened 25 stores in Asia, including 16 directly operated stores in China. We opened stores in Shanghai, Suzhou, Hangzhou, and Qingdao in the east; Changchun and Dalian in the northeast; Beijing in the north; Xi'an in the northwest; Wuhan in the center; Chengdu and Chongqing in the west; Guiyang in the southwest; Sanya in the south; Guangzhou in the south-central and Nanchang in the southeast.

And this year we plan to open another 60 stores in Asia, primarily in Mainland China. While we are very excited about our brick-and-mortar footprint that will cover 45 cities in China, what is even more exciting is the progress that we are making there with our digital presence. Our marketplace partnership with Tmall continues to grow at such terrific speed that within a few years the e-commerce business with Tmall alone could be as big as the e-commerce business we currently have in the U.S. We had another very successful 11:11 in China and finished the year with Guess? ranked in the top 100 of all brands both for women's and men's apparel.

We also continued to invest in digital and social media communication platforms, like Weibo and WeChat and that engage with existing and future customers of the brand and have a lot of more potential customers we can still attract. In Asia, a market which is growing in importance for us is Japan. After several years of investment, our brand has really started gaining a lot of traction in Japan, as evidenced by the profitability of our stores there. In fact, just last month, we launched a partnership with the Japanese pop group Generations, and the limited-edition collection produced for the partnership sold out very quickly in our pop-up store we opened for the event in Omotesando in Tokyo.

Another important milestone for us in Asia this quarter is that we began to directly operate our stores in Singapore that were previously managed by our distributor. Our brand has a lot of history in Singapore, which is such a gateway city in the region that our presence in Singapore creates value for our brand far beyond the market itself. Finally, we are thrilled that the operating margin of the Asia segment improved 470 basis points in the quarter, making this the fifth consecutive quarter of margin expansion in Asia. As you can see, we are executing very well our strategic initiatives to build a major business in Asia.

Turning to Americas retail. Revenues for the quarter decreased 6% in U.S. dollar and 7% in constant currency. Comp sales, including e-commerce for the quarter, were down 4% in U.S.

dollar and 5% in constant currency. This is a definite sequential improvement from the third-quarter, and more importantly, this improvement was achieved while being less promotional and driving better AURs. We made great progress again this quarter on improving our profit in Americas retail. We achieved these through lower markdowns, better IMUs, store closures, and negotiated rent reduction, all resulting in a 620-basis-points improvement in operating margins.

More specifically, on the store closures, on the rent -- and on the rent reduction, we closed 62 stores this year in North America, and we obtained rent reductions on 88 stores. We now have even more flexibility in our real estate portfolio in U.S. and Canada, as almost two-thirds of our stores have lease expirations or kick-out in the next three years. There will be a trade-off between store closures and rent reductions this year, but we expect to close between 20 and 25 stores, if we do not get sufficient rent reductions.

We are very excited about our collaboration with Camila Cabello over the fall, and our current collaboration with Jennifer Lopez, who is the face of our spring campaign. I'm confident that these celebrity partnerships, along with our strategic initiative to elevate the sales-and-merchandising organization will over time lead to continued improvement in our sales in the Americas. Reflecting on the year, I believe that one of the keys of our continued progress has been implementation of our third strategic initiative, immersing a culture of purpose and accountability through the organization. The company has embraced a truly entrepreneurial spirit, where managers are empowered to make decisions to maximize the value of their business, whether it is an individual store or a business unit.

At the same time, these managers are held accountable for the results that are measured rigorously daily, weekly, monthly, quarterly, and annually. And good performance is rewarded. When I joined Guess? Two years and a half ago, I lay out a five-part strategy, which I have outlined many times during our earning calls. The results that you see today reflect the implementation of that strategy.

One last point about Q4. During the quarter, we repurchased just under 2 million shares for $31 million. As I have told you many times before, we have the financial strength to seize the opportunity when we believe that our stock is trading below its intrinsic value. And now, for the best part, as I look forward to the current fiscal year, I see a lot of opportunity in Europe and Asia, where we will continue to allocate capital for superior returns and where we plan to continue growing sales in double digits, while also expanding margins.

I also expect that the profitability of the Americas will continue to benefit from our cost-reduction, our margin-improvement initiatives. Finally, I see that the tax reform announced late last year will be of material benefit to us. We will have a lower effective tax rate and increased flexibility to repatriate cash from overseas. We plan to invest in profitable growth, pay our dividend, and do share buybacks in that order of priority.

And my vision of our company's future is not just wishful thinking, for the current fiscal year our EPS at the high end of the guidance is projected to increase by 40% over last year's adjusted EPS. This includes $0.15, or 21%, favorable impact from currency. So in summary, operating profit for the Americas retail are expected to improve, and both America -- both Europe and Asia are expected to continue to generate very strong double-digit growth with a lot of runway remaining in both markets. Before I turn it over to Sandeep, I want to briefly address the issue of allegations of improper conduct by Paul Marciano.

I am committed to maintaining a safe work environment in our company. The independent investigation, which is being conducted by independent counsel for the special committee of independent director, is ongoing. As the investigation is still ongoing, we will not take any question or comment further on this matter during this call. Overall, as you can see from our results, this is a very exciting time for the growth of our company.

And I'm laser-focused on the performance. I am proud of the hard work and unwavering dedication from all -- from our associates around the world, and I want to thank them for their efforts in the past year. Sandeep?

Sandeep Reddy -- Chief Financial Officer

Thank you, Victor, and good afternoon. During this conference call, our comments reference certain non-GAAP or adjusted measures. Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures. Fourth-quarter revenues were $792 million, up 18% in U.S.

dollars and 10% in constant currency versus prior year, and this includes the impact of the 53rd week. I would like to highlight that this was our sixth consecutive quarter of revenue growth. Total company gross margin increased 210 basis points to 37.2%, driven by higher IMUs, less markdowns, and lower rents, partially offset by the negative impact of occupancy deleverage from higher European logistics costs related to the start-up of our new distribution center in Venlo. SG&A as a percentage of sales increased by 120 basis points, mainly driven by a reset of performance-based compensation.

During the fourth quarter of fiscal 2018, we recorded non-cash asset impairment charges of $2.5 million related to store impairments. Adjusted operating profit for the fourth quarter was $71 million, an improvement of 31% versus adjusted operating profit last year, primarily driven by sales growth and gross margin expansion offset by the aforementioned reset of performance-based compensation. Adjusted operating margin finished up 90 basis points at 8.9%, with an 80-basis-point favorable impact from currency. Please refer to our press release from today for additional information on operating margins by segment.

Our fourth-quarter adjusted tax rate was 25%, down from 33% last year, as we experienced higher earnings in lower-tax countries. We have excluded the impact of the recent U.S. tax reform from our adjusted results. For GAAP purposes, we recorded an estimated charge of $23 million related to the repatriation of our foreign earnings and a charge of $25 million related to the impact of the reduction in the U.S.

tax rate on our net deferred-tax assets. Adjusted diluted earnings per share finished above the high end of our guidance at $0.62. This represents a 44% increase compared to adjusted diluted earnings per share of $0.43 in last year's fourth quarter. The positive impact of currency on earnings per share in the quarter was $0.04.

Moving on to the balance sheet. Accounts receivable was $260 million, up 15% in U.S. dollars and 2% in constant currency, primarily driven by growth in European wholesale revenues, offset by earlier collections of our royalty receivables. Inventories were $428 million, up 17% in U.S.

dollars and 6% in constant currency versus last year. This marked another sequential improvement in constant currency versus the prior quarter. The net increase in inventory is driven by Europe and Asia to support revenue growth plans as well as early receipts related to the transition to our new distribution center in Venlo. We exited the year with healthy inventory levels in all three regions, positioning ourselves well for the next year.

Free cash flow was $64 million, an improvement of $83 million versus a negative $19 million in the prior year. We ended the quarter with cash and cash-equivalents of $367 million, compared to last year's $396 million. Cash less debt at the end of the fourth quarter was $325 million, compared to $372 million last year. This is after having returned $76 million in dividends and $50 million in cash paid for share repurchases to shareholders in the fiscal year.

Through the end of the quarter, we still had $392 million available of the $500 million share-repurchase plan previously approved by our board. Since the start of our dividend program in 2007, we have returned just over $1.4 billion to our shareholders in the form of dividends and share buybacks. Moving on to the guidance. I should point out that our outlook for the first quarter and full year of fiscal 2019 does not assume any asset-impairment charges.

The outlook includes the adoption of ASC 606, the new revenue standard that is reflective for fiscal 2019. Also, guidance for revenues and comp sales for the total company and by segment is included in the supplemental table attached to our earnings release. EPS at the high end of guidance is projected to increase by 40% over last year's adjusted EPS. Excluding currency impacts, the top end of our guidance for the year reflects 19% adjusted EPS growth and adjusted operating margin improvement of 40 basis points.

For the first quarter of fiscal 2019, we expect revenues for the quarter to be up 5.5% to 7% in constant currency, driven by expected strong growth in Europe and Asia. At prevailing exchange rates, we estimate that currency will be roughly a 5.5-percentage-point tailwind on consolidated revenue growth for the quarter. Our gross margin is expected to be up due to the IMU improvement from our supply chain initiatives, the favorable impact from foreign exchange, and the impact of adoption of ASC 606, partially offset by temporary pressure from distribution costs related to our move to the new distribution center in Europe. The SG&A rate is expected to be up compared to last year, primarily due to an increased investment in digital marketing and advertising and the adoption of ASC 606.

We are planning an operating margin for the quarter between negative 4.5% and negative 4% with a 40-basis-point tailwind from currency. Loss-per-share is planned in the range of $0.24 per share to $0.27 per share and does not assume any further share buybacks. Excluding currency, the top end of our guidance for the quarter reflects flat adjusted EPS and a 60-basis-point improvement in adjusted operating margin for the quarter. Our tax rate for the first quarter is estimated to be 10%.

We expect consolidated revenues for the year to be up between 5% and 6% in constant currency, it should be noted that we expect an increase in revenues even after closing many stores in Americas, and the negative impact from the 53rd week in the prior year. At prevailing exchange rates, we estimate that currency will be a roughly 2 percentage-point tailwind on consolidated revenue growth for the year. For the full year, we expect gross margins to be up due to improved IMUs in both the Americas and Europe, the favorable impact of currency, and the impact of adoption of ASC 606. The SG&A rate is expected to be up for the year due to increasing investment of digital marketing and advertising and the impact of adoption of ASC 606.

Our tax rate for the year is estimated to be 25%. This includes the benefits to our effective tax rate resulting from the tax reform. We are planning an operating margin between 4% and 4.5%, including the impact of a currency tailwind of roughly 50 basis points, and our guidance assumes foreign currency remains roughly at prevailing rates. Earnings-per-share is planned in the range of $0.86 and $0.98 per share.

The earnings-per-share guidance includes a currency tailwind of roughly $0.15 per share. CAPEX for the year is expected to range from $85 million to $95 million, as we continue to invest in our retail expansion in Europe and Asia and our technology infrastructure to support that long-term growth. The board of directors has approved a quarterly dividend of $0.225 per share payable to shareholders of record at the close of business on April 4, 2018. With that, I will conclude the company's remarks and open the call up for your questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] And from Evercore ISI, we have Omar Saad. Please go ahead.

Omar Saad -- Evercore ISI -- Senior Managing Director

Thanks for taking my question. Congratulations on the great quarter, it's great to see how the fundamental work you put in really starting to inflect to the P&L.

Sandeep Reddy -- Chief Financial Officer

Thank you.

Omar Saad -- Evercore ISI -- Senior Managing Director

Victor, I wanted you to talk about, get an update on your views of what's going on in the North American market. I know obviously in Europe and Asia the brand is clearly strong, but the comps are getting, you're starting to see that incremental improvement in the comps in North America, the campaigns you have been running with J.Lo. and Camila Cabello -- are you trying to feel an inflection of the brand in the marketplace, maybe you can expand on where your thoughts are in North America? Thanks.

Victor Herrero -- Chief Executive Officer

I see some -- of our overall effort, Omar, basically, we have these celebrity endorsements. We started with A$AP Rocky. Later on, we had Joe Jonas, we have Camila Cabello, and for the spring season, we have Jennifer Lopez. And this is an important part of what is happening at this moment and why maybe our trends are improving in Americas in the fourth quarter.

And basically, a part of that, I think, we have been less promotional than before. And we are seeing that also, basically, that we are improving our also IMUs, and also, I think that we are doing a lot of efforts in the digital marketing, also in trying to add more capabilities to our e-commerce platform. So I think everything is -- it's not only one initiative that is helping us to improve our numbers in America, I think basically is coming from every part, from marketing, from planning and allocation, from supply chain, and also, as well from all our efforts in digital marketing and in marketing in general.

Omar Saad -- Evercore ISI -- Senior Managing Director

I know you guided to negative low-single-digit comps in North America, but are you getting a sense that positive same-store sales results in North America is a possibility in the coming year or two? Is it too early to say?

Victor Herrero -- Chief Executive Officer

Yes. One thing, Omar, since I've been here, I think that I will resume my -- my mandate with Guess? is consistency. And I think, we've been seeing a good trend at this moment in Europe and Asia for the last, let's say, in Europe for the last 10 quarters and in Asia for the last, let's say, five, six quarters. And I think it's a question of time that we will see these positive comps in North America.

I don't know how long it's going to last, but I think we are in the right path. I'm very happy with where we are going, the direction where we are taking, and basically, I mean, if we need to see something that we've been doing for the last two years and a half, as I mentioned, it's consistency, we are going to continue with this consistency. I defined a strategy plan two years and a half, and we continue telling you that this plan is still valid. And we will continue trying to execute that plan and the strategy behind.

Operator

Thank you. From Cowen, we have John Kernan. Please go ahead.

John Kernan -- Cowen -- Managing Director

Good afternoon, Victor and Sandeep. Congrats on the momentum, very impressive.

Victor Herrero -- Chief Executive Officer

Thank you.

John Kernan -- Cowen -- Managing Director

But just staying on the topic of Americas retail, I think you're guiding to up low-single-digit comps on a constant-currency basis for the first quarter and down low singles for the year. Clearly, the P&L impact has been enormous from the store closures, your operating margin in Americas retail had recovered significantly on the last two quarters. I'm just wondering, as the comps get better and the store closures continue, what we should expect from the North American segment from an operating-margin perspective this year? So can we expect similar type improvement given the comps look like they're at the point of inflection?

Sandeep Reddy -- Chief Financial Officer

Hi, John. So, John, I think what you've seen in the back half of the year is pretty significant margin improvement that we've generated this -- negative comps, I think we are on minus 10 in Q3 of last year and a minus-four in constant currency in the fourth quarter, and despite that we saw margin improvements in both quarters, accelerating to 620 basis points in the most recent quarter. So what we've had in place is those -- all those cost-improvement initiatives that we took on, whether it was IMU, whether it was markdown management, whether it was rent reduction, store closures, and those initiatives should continue to play out as we go through the front half of the year. And I think as we move into the back half of the year, if we can actually get to the comp guidance that we have for the full year, there is a very good chance that we can get to the break-even level on the Americas retail business for the current fiscal year.

John Kernan -- Cowen -- Managing Director

Wow. OK. That would be great to see. In the supplemental information, looks like you're guiding European comps flat for the first quarter, which is obviously a deceleration from the levels you've been running.

I'm just wondering if there is some type of factor in there, whether it's weather or something related to the DC, that could be driving that to obviously you seem up low- to mid-singles for the rest of the year, is there anything odd going on in Europe in the first quarter?

Victor Herrero -- Chief Executive Officer

Yes, you are right that, I mean, we are experiencing severe winter in Europe. And basically, this is maybe affecting a little bit the comps. The important thing is that, I mean, maybe one quarter even we guide flat comps, the important news is that we have been 10 quarters with positive comps in Europe and I feel very confident and very strong about our business in Europe. As I mentioned in my call, basically, the European wholesale business is double-digit for the next book.

So we still having a good momentum in Europe. We opened 60 stores in Europe last year, last fiscal year. And I think we will continue performing in a positive way in Europe. We still having a lot of white space in several countries.

I'm very happy and like this -- this is a very good way of showing the relevance and the strength of the brand is that every time we open a new market, there is a lot of expectation from customers. So the brand is still very relevant, very strong. And actually, we are very happy every time we open a market or we take over a market. And it looks like people recognize our brand and people are engaging with our brand.

So very happy about that. Another thing that I forgot to tell you about, that I think that we are doing as well an important push and an important effort to continue being a product-driven company. So we are basically making a lot of efforts in marketing, but at the same time, we try to continue and trying to understand the product that we need to offer -- the product that we need to offer to our customers.

John Kernan -- Cowen -- Managing Director

OK, that's helpful. And then just one modeling question. Store closures in the Americas, this year, did you give that number?

Sandeep Reddy -- Chief Financial Officer

Yes, John. I think we said, it's going to range from 20 to 25 stores. But given the dynamics of what's been going on on rent reductions, this is basically a trade-off between rent reductions and store closures. So it's a bit of a dynamic number as you saw in the past year as well.

John Kernan -- Cowen -- Managing Director

OK, great, thanks, guys, and best of luck.

Victor Herrero -- Chief Executive Officer

Thank you.

Sandeep Reddy -- Chief Financial Officer

Thank you.

Operator

From B. Riley FBR, we have Susan Anderson. Please go ahead.

Susan Anderson -- FBR Capital Markets -- Senior Vice President

Hi, nice job on the quarter. Thanks for taking my question. I guess just a follow-up on the question on the Americas retail with a positive [Inaudible] comp guide for the first quarter. Are you guys just expecting it, not sure if that would continue throughout the rest of the year given obviously the J.Lo.

campaign helped quite a bit in the first quarter?

Sandeep Reddy -- Chief Financial Officer

Yes, Susan. So I think on the first quarter, if you recall, last year in the first quarter was a pretty tough quarter for the sector in general and so we are up against that. And so we feel that it's going to be a bit easier for comparing for us in the first quarter than as we get into the back half of the year, where sequentially we started improving relative to the first quarter. So we still think that we are down in low singles for the year, but I think we [Inaudible] that sequentially it's a significant improvement from where we were for the whole of last year.

Susan Anderson -- FBR Capital Markets -- Senior Vice President

Yes. Great to see the improvement. And then just maybe if you could talk a little bit about the trends that you're seeing in denim, I think has been very strong, and maybe some other products or categories that are working well, I guess, both in the Americas and Europe and Asia, whether it be the logo tees or other areas, and then maybe some areas that need work?

Victor Herrero -- Chief Executive Officer

Yes. Basically, I can tell more or less what I believe is going to be a little bit our trend, and I think it's a market trend during the next coming months. I think that the logo tee will continue being a strong player for us. But regarding denim, for example, I think destroyed denim, and also for us, the stretch denim is very important, the high-rise, middle-rise as well.

And we are also seeing a lot of ruffles in the market, and also cold shoulders, also we see a lot of logo tees, but at the same time, we are seeing a lot of graphics in tees and also, outerwear, very important to have a minimum level of quality because the customer appreciates and they don't have so much price-resistance that they previously they had. So this is more or less what we believe that is going to happen during the next few months.

Susan Anderson -- FBR Capital Markets -- Senior Vice President

Great. That's very helpful. Good luck next quarter.

Sandeep Reddy -- Chief Financial Officer

Thank you.

Victor Herrero -- Chief Executive Officer

Thank you.

Operator

From Jefferies, we have Janine Stichter. Please go ahead.

Janine Stichter -- Jefferies -- Vice President

Hi, congrats on the progress and thanks for taking our question. So on the guidance, it looks like you're expecting good top-line momentum but the flow-through is a little bit less than maybe we were expecting because it sounds like you're investing in some marketing there. Can you give us a little bit more color on the plans for the spend and how you think it breaks out in terms of geographic impact, and then what guideposts you use to measure the efficacy of the spend? Thank you.

Sandeep Reddy -- Chief Financial Officer

Yes. I think Janine, when you look at the guidance that we have for the year, definitely as you said, top-line momentum is expected to continue from last year and essentially, we're guiding to mid-single in the constant currencies from an increase perspective, you will have the 53rd-week impact. And I think when you look at the flow-throughs, yes, we are making investments in digital marketing especially, and I think the key over here is, if you go back to some of the things that we've been talking about all year, we really have been emphasizing the digital-first program. And so this really is key for us in terms of pivoting our spend to connecting with the consumer on the digital frontier.

And we talked about it earlier when we talked about even Weibo and WeChat in China is a big frontier to how we communicate with the consumer. Over here in the Americas, it's basically Instagram is a very key medium to communicate with them as well. And I think everywhere that they have social media, that's a key driver web. And it goes across all the geographies and the approach is pretty uniform depending on the social media platform that is being employed, but the consumer is actually shopping digitally first, and that's how we want to connect with the consumer from a marketing perspective.

Janine Stichter -- Jefferies -- Vice President

Got it. And then just in terms of the Americas, is it fair to say now that you're experiencing some better trends there that you're comfortable refueling that business is little bit more investment than you maybe had in the past?

Sandeep Reddy -- Chief Financial Officer

Yes. I think we're pretty comfortable with the Americas and with the investments, and especially, on the marketing side on the Americas have been very strong regardless of what the trends have been. And that was precisely our point --as far as we're concerned, the brand is there for the long term, the business is there for the long term, and we are going to keep on investing in this market because it's a very important market for us. If we had to close some stores because they were unprofitable, we did.

But the key is to make sure that we keep the brand strong and relevant, so that we come back and connect with the consumer in whichever channel that we do down the line.

Janine Stichter -- Jefferies -- Vice President

Great. Thank you.

Operator

[Operator instructions] From Telsey Advisory Group, we have Dana Telsey. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Good afternoon. As you think about the gross margin came in better than expected, what's the balance of the AUC and AUR that's driving that gross margin? And how do you think about the complexion of gross margin going forward for 2019 -- for this upcoming year? Thank you.

Sandeep Reddy -- Chief Financial Officer

Yes. So, Dana, I think there's a few things inside the gross-margin line. But I think we've talked about this previously as well. I think the IMU improvement is key, and I think really breaking it out into AUR and AUC isn't as relevant as the total IMU improvement because it's a constantly shifting portfolio of products that we're managing the IMU on.

And I think this was a big driver of our margin improvement in the past year. But I think as we -- another piece of business which is quite important, especially in the Americas, was an improvement in our rents that we actually sustained during the course of the year, especially the back half of the year. And that actually helped the gross margin numbers as we moved toward the back half of the year. Going forward into next year, we've talked about some of the drivers.

And I think some of the key drivers are similar. We have IMU improvements and rent improvements, but I think more important is we have a very strong process now in place with planning and allocation inside the company, which is ensuring that we have the right product in the right place at the right time, and this is driving an improvement in the markdown liability that we have. And this discipline has actually have been enhanced more and more with the course of the past year, but I think, we really think we're going to hit our stride this year in a much better way than last year.

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining us. You may now disconnect.

Duration: 43 minutes

Call Participants:

Victor Herrero -- Chief Executive Officer

Sandeep Reddy -- Chief Financial Officer

Omar Saad -- Evercore ISI -- Senior Managing Director

John Kernan -- Cowen -- Managing Director

Susan Anderson -- FBR Capital Markets -- Senior Vice President

Janine Stichter -- Jefferies -- Vice President

Dana Telsey -- Telsey Advisory Group -- Chief Executive Officer

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