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| GES > SEC Filings for GES > Form 10-Q on 10-Jun-2009 | All Recent SEC Filings |
10-Jun-2009
Quarterly Report
Unless the context indicates otherwise, when we refer to "we," "us" or the "Company" in this Form 10-Q, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
IMPORTANT NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be contained in the Company's other reports filed under the Securities Exchange Act of 1934, as amended, in its press releases and in other documents. In addition, from time-to-time, the Company through its management may make oral forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects and proposed new products, services, developments or business strategies. These forward-looking statements are identified by their use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "continue", and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements relating to the Company's expected results of operations, the accuracy of data relating to, and anticipated levels of, future inventory and gross margins, anticipated cash requirements and sources, cost containment efforts, estimated charges, plans regarding store openings and closings, plans regarding business growth, e-commerce, business seasonality, results of litigation, industry trends, consumer demands and preferences, competition, currency fluctuations and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such difference include those discussed under "Item 1A. Risk Factors" contained in the Company's most recent Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
General
The business segments of the Company are retail, wholesale, European and licensing operations. Information relating to these segments is summarized in Note 7 to the Condensed Consolidated Financial Statements. The Company believes this segment reporting reflects how its four business segments are managed and each segment's performance is evaluated. The retail segment includes the Company's retail operations in North America. The wholesale segment includes the wholesale operations in North America and our Asian operations. The European segment includes wholesale and retail operations in Europe and the Middle East. The licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: information technology, human resources, global advertising and marketing, accounting and finance, executive compensation, facilities and legal.
We derive our net revenue from the sale of GUESS?, GUESS by MARCIANO and G by GUESS men's and women's apparel, and our licensees' products through our worldwide network of retail stores, wholesale customers and distributors, as well as our on-line sites. We also derive royalty revenues from worldwide licensing activities.
We acquired Focus Europe S.r.l. ("Focus"), our former licensee for GUESS by MARCIANO products in Europe, the Middle East and Asia, in December 2006, and its subsidiary, Focus Spain S.A. ("Focus Spain"), in October 2007. We also acquired BARN S.r.l. ("Barn"), our former kids licensee in Europe, in January 2008. Each of these entities is reported in our European segment. G by GUESS is our newest retail concept that was launched in early fiscal 2008 and is included in our retail segment. Our South Korea business, which we have operated directly since January 2007, and our Greater China business, launched in April 2007, are also relatively new businesses for us and are reported in our wholesale segment.
The three months ended May 2, 2009 had the same number of days as the three months ended May 3, 2008.
The Company reports National Retail Federation ("NRF") calendar comparable stores sales on a quarterly basis for our full-price retail and factory outlet stores in the U.S. and Canada. A store is considered comparable after it has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store is removed from the comparable store base until it has been opened at its new size, in its new location or under its new concept for 13 full months.
Executive Summary
Global Economic Developments
As expected, the global economic downturn has continued into fiscal 2010. In particular, real estate and financial lending markets remain suppressed and unemployment levels continue to rise. These and other factors have negatively impacted consumer spending for discretionary items during the current quarter resulting in a significant slowdown in customer traffic and a highly promotional environment. These same conditions have spread to many international markets. If the global macroeconomic environment continues to be weak, or deteriorates further, there will likely be a negative effect on the Company's revenues and earnings across all of our segments for the remainder of the current fiscal year.
In addition, the deterioration in the global economic environment has resulted in significant volatility in the global currency markets. The majority of our international operations are conducted in currencies other than the U.S. dollar, primarily the Canadian dollar, the Euro and the Korean Won. The volatility over the past year has resulted in a substantial strengthening of the U.S. dollar against these three currencies when comparing the rates in the first quarter of fiscal 2010 to the prior year quarter. A relatively stronger U.S. dollar will result in our international earnings translating into lower U.S. dollar amounts. These conditions could negatively impact our results of operations and the Company's ability to generate both revenue and earnings growth. In addition, certain transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars and thus are exposed to exchange rate fluctuations when converted to their local currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and intercompany liabilities. Fluctuations in exchange rates can impact the profitability of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. The Company enters into derivative financial instruments, including forward exchange contracts and currency swaps, to manage exchange risk on certain foreign currency transactions. The Company does not hedge all transactions denominated in foreign currency.
The Company
Net earnings attributable to Guess?, Inc. was $32.5 million, or diluted earnings of $0.35 per common share, for the three months ended May 2, 2009, compared to net earnings attributable to Guess?, Inc. of $47.8 million, or diluted earnings of $0.50 per common share, for the three months ended May 3, 2008. The adoption of the new accounting pronouncement, FSP EITF 03-6-1, during the three months ended May 2, 2009 negatively impacted diluted earnings per common share by $0.01 for each of the quarters ended May 2, 2009 and May 3, 2008 (adjusted as required by FSP EITF 03-6-1), respectively. Refer to Note 2 of the Condensed Consolidated Financial Statements for further information.
Total net revenues decreased 9.8% to $441.2 million for the three months ended May 2, 2009, from $489.2 million for the three months ended May 3, 2008. The decrease in total revenues was primarily driven by the unfavorable translation impact of changes in foreign currency exchange rates on revenues of $44.8 million across all our major international operations. All our segments reported lower revenues in the three months ended May 2, 2009 compared to the same prior year period. The European segment represented the largest decline in revenues primarily due to the unfavorable impact of the stronger U.S. dollar when translating the Euro denominated revenues into U.S. dollars and a shift in revenues into last year's fourth quarter as a result of earlier wholesale deliveries.
Gross margin (gross profit as a percentage of total net revenues) declined 500 basis points to 40.2% for the three months ended May 2, 2009, compared to the same prior year period. The decline was primarily attributable to lower product margins in our European segment, including the unfavorable impact of the stronger U.S. dollar on product purchases, and occupancy deleverage in our retail and European segments.
Selling, general and administrative ("SG&A") expenses decreased 10.9% to $129.5 million for the three months ended May 2, 2009 compared to $145.3 million for the three months ended May 3, 2008. The decrease was primarily driven by the favorable impact of the strengthening U.S. dollar when translating foreign denominated expenses into U.S. dollars, cost reductions in marketing and advertising spending, and lower volume related expenses. SG&A expense as a percentage of revenues ("SG&A rate") decreased 40 basis points to 29.3% for the three months ended May 2, 2009, compared to the prior year quarter, primarily driven by cost savings initiatives.
Earnings from operations decreased 36.7% to $48.0 million for the three months ended May 2, 2009, compared to $75.9 million for the same period a year ago. Operating margin declined 460 basis points to 10.9% for the three months ended May 2, 2009 compared to the prior year quarter due to the lower gross margin partially offset by the lower SG&A spending as a percentage of net revenues. The decrease in earnings from operations included an unfavorable currency translation impact of $6.5 million for the three months ended May 2, 2009 compared to the prior year quarter.
Other income, net, (including net interest income) totaled $1.4 million for the three months ended May 2, 2009, compared to other expense, net, of $0.4 million for the three months ended May 3, 2008. The current quarter's amount includes mark-to-market gains related to our insurance policy investments, partially offset by mark-to-market losses related to the revaluation of foreign currency forward contracts and other foreign currency transactions during the three months ended May 2, 2009.
Our effective income tax rate decreased 300 basis points to 33.0% for the three months ended May 2, 2009, compared to 36.0% in the prior year quarter primarily due to a higher estimated proportion of annual earnings in lower tax jurisdictions.
The Company had $312.6 million in cash and cash equivalents as of May 2, 2009, up $52.2 million compared to $260.4 million as of May 3, 2008. Total debt, including capital lease obligations, as of May 2, 2009, was $45.0 million, down $21.0 million from $66.0 million as of May 3, 2008. Accounts receivable decreased by $38.2 million, or 12.1%, to $277.4 million at May 2, 2009, compared to $315.6 million at May 3, 2008. Changes in currency translation rates reduced the trade accounts receivable balance at May 2, 2009 by approximately $36.9 million compared to the prior year quarter end. Inventory remained relatively flat at $203.4 million as of May 2, 2009, compared to $202.8 million as of May 3, 2008. The inventory balance at May 2, 2009 includes a negative translation impact of approximately $18.1 million due to currency fluctuations compared to the prior year quarter end.
Retail
Our retail segment, comprising North American full-priced retail and factory outlet stores and e-commerce, generated net sales of $207.6 million during the three months ended May 2, 2009, a decrease of $4.3 million, or 2.1%, from $211.9 million in the same prior year period. The decrease was driven by a decline in comparable stores sales of 10.0%, which included the unfavorable translation impact of currency fluctuations for the three months ended May 2, 2009, compared to the prior year quarter. This decline was partially offset by a larger store base, which represented a net 9.7% increase in average square footage compared to the prior year quarter. Retail earnings from operations decreased by $4.8 million, or 21.2%, to $18.0 million for the three months ended May 2, 2009, compared to $22.8 million for the same prior year period. In addition, the operating margin decreased by 210 basis points to 8.7% for the three months ended May 2, 2009, compared to 10.8% for the three months ended May 3, 2008. The declines in both earnings from operations and operating margin were driven by the unfavorable impact of the negative comparable stores sales on occupancy costs and slightly lower product margins, partially offset by a lower SG&A rate.
In the quarter, we opened six new stores and closed two stores in the U.S. and Canada. At May 2, 2009, we operated 429 stores in the U.S. and Canada, comprised of 193 full-priced GUESS? retail stores, 104 GUESS? factory outlet stores, 52 GUESS by MARCIANO stores, 35 GUESS? Accessories stores and 45 G by GUESS stores. This compares to 391 stores as of May 3, 2008.
Wholesale
Wholesale segment revenues decreased by $9.2 million, or 12.3%, to $65.9 million for the three months ended May 2, 2009, from $75.1 million in the same prior year period. This decrease was driven by lower sales in our North American wholesale business and the unfavorable impact of currency translation of our South Korean and Canadian businesses. Wholesale earnings from operations decreased by $5.2 million, or 40.9%, to $7.4 million for the three months ended May 2, 2009, compared to $12.6 million in the same prior year period. The decrease in earnings from operations was mainly driven by lower sales volumes in the North American wholesale business, lower North American wholesale product margins and the unfavorable translation impact of the stronger U.S. dollar on the South Korean business. Operating margin decreased by 540 basis points to 11.3% for the three months ended May 2, 2009, compared to 16.7% for the prior year period. The decrease was driven by the lower product margins in our North American wholesale business and higher occupancy costs in Asia.
Europe
In Europe, revenues decreased by $33.0 million, or 18.5%, to $145.7 million for the three months ended May 2, 2009, compared to $178.7 million for the same prior year period. Currency translation fluctuations accounted for $24.4 million of the decrease in net revenue from our European operations. Net revenue was also negatively impacted by a shift of wholesale revenues into the fourth quarter of the prior fiscal year that would have normally occurred in the first quarter of the current fiscal year. At May 2, 2009, we directly operated 66 stores in Europe compared to 40 stores at May 3, 2008. Earnings from operations from our European segment decreased by $16.9 million, or 42.1%, to $23.1 million for the three months ended May 2, 2009, compared to $40.0 million in the prior year period. This decrease in earnings from operations compared to the prior year period was driven by the shift in sales, a lower gross margin and an unfavorable impact of currency translation on earnings from operations, partially offset by lower operating costs. Operating margin decreased 650 basis points to 15.9% for the three months ended May 2, 2009, compared to 22.4% for the prior year period due to the lower gross margin, partially offset by a lower SG&A rate. The lower gross margin was driven by the unfavorable impact of the stronger U.S. dollar on product purchases, lower product margins and higher occupancy costs.
Licensing
Our licensing royalty revenues decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million for the three months ended May 3, 2008. This decrease was driven by lower royalties from watch product sales, partially offset by modest growth in some of our other major product categories. Licensing segment earnings from operations decreased $1.2 million, or 6.1%, to $19.0 million for the three months ended May 2, 2009, from $20.2 million in the prior year quarter.
International Store Count
Outside of the U.S. and Canada, in the three months ended May 2, 2009, together with our partners, we opened 30 new stores, including 19 stores in Europe and the Middle East, 9 stores in Asia and two stores in Central America. We ended the first quarter of fiscal 2010 with 706 stores outside of the U.S. and Canada, of which 501 were GUESS? stores, 46 were GUESS by MARCIANO stores and 159 were GUESS? Accessories stores. Of the 706 stores, 103 were operated by the Company and 603 were operated by licensees or distributors. This store count does not include 162 concessions located primarily in South Korea and Greater China because of their smaller store size in relation to our standard international store size.
Corporate Overhead
Corporate overhead expenses were slightly lower at $19.5 million for the three months ended May 2, 2009 compared to $19.7 million for the prior year quarter.
RESULTS OF OPERATIONS
Three months ended May 2, 2009 and May 3, 2008
NET REVENUE. Net revenue for the three months ended May 2, 2009 decreased by $48.0 million, or 9.8%, to $441.2 million, from $489.2 million for the three months ended May 3, 2008. All segments reported lower revenues with the largest decline in our European segment.
Net revenue from retail operations decreased by $4.3 million, or 2.1%, to $207.6 million for the three months ended May 2, 2009, from $211.9 million for the three months ended May 3, 2008. The decline in comparable stores sales of 10.0%, which included the unfavorable translation impact of currency fluctuations, was partially offset by the benefit of an average of 45 net additional stores during the three months ended May 2, 2009 resulting in a net 9.7% increase in average square footage compared to the prior year quarter. Currency translation fluctuations relating to our Canadian retail stores unfavorably impacted net revenue in our retail segment by $9.1 million.
Net revenue from wholesale operations decreased by $9.2 million, or 12.3%, to $65.9 million for the three months ended May 2, 2009, from $75.1 million for the three months ended May 3, 2008. The decrease was driven by both lower North American wholesale sales and the unfavorable impact of currency translation from our South Korean and Canadian businesses. Our U.S. wholesale business continued to be impacted by the economic downturn as department stores continued to anticipate lower demand and managed their inventories tightly. Our products were sold in the U.S. in approximately 993 doors at the end of the quarter compared to approximately 1,045 doors at the end of the prior year quarter. While our overall Asian wholesale revenues were down in U.S. dollars compared to the prior year period as a result of unfavorable currency fluctuations, we continued to generate revenue growth in local currency in our expanding Asian operations, where we, along with our partners, opened 9 stores and 11 concessions during the quarter. Currency translation fluctuations, relating to both our Canadian and South Korean operations, unfavorably impacted net revenue in our wholesale segment by $9.8 million.
Net revenue from European operations decreased by $33.0 million, or 18.5%, to $145.7 million for the three months ended May 2, 2009, from $178.7 million for the three months ended May 3, 2008. The unfavorable impact of currency translation was the main contributor to the decrease, accounting for $24.4 million of the decrease. The current quarter was also negatively impacted compared to the prior year period by the shift of wholesale revenues into the fourth quarter of the prior fiscal year that would have normally occurred in the first quarter of the current fiscal year. At May 2, 2009, we directly operated 66 stores in Europe compared to 40 stores at the prior year quarter end. European retail revenues increased by 2.1% in U.S. dollars for the three months ended May 2, 2009, compared to the prior year quarter, reflecting the benefit of the new stores, mostly offset by the unfavorable impact of currency translation and negative comparable stores sales.
Net royalty revenue from licensing operations decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million for the three months ended May 3, 2008. This decrease was driven by lower royalties from watch product sales, partially offset by modest growth in some of our other major product categories.
GROSS PROFIT. Gross profit decreased by $43.7 million, or 19.8%, to $177.5 million for the three months ended May 2, 2009, from $221.2 million for the three months ended May 3, 2008. The decrease in gross profit primarily resulted from the following:
† Gross profit for the retail segment decreased by $7.2 million, or 9.5%, to $68.2 million for the three months ended May 2, 2009, from $75.4 million in the prior year period. The overall decline in sales, including the unfavorable translation impact of currency fluctuations, the higher occupancy costs associated with the increased store count and lower product margin were the main drivers of the decrease in gross profit.
† Gross profit for the wholesale segment decreased by $6.5 million, or 24.5%, to $20.0 million for the three months ended May 2, 2009, from $26.5 million in the prior year period. The decrease in gross profit was primarily due to the decline in sales and the lower product margins in our North American wholesale business and the unfavorable impact of currency translation on our South Korean business due to the stronger U.S. dollar compared to the Korean Won.
† Gross profit for the European segment decreased by $28.6 million, or 29.9%, to $67.3 million for the three months ended May 2, 2009, from $95.9 million in the prior year period. The lower gross profit resulted from lower sales due to the shift of wholesale shipments into an earlier quarter and the unfavorable impact of the stronger U.S. dollar on both the translation of the segment gross profit into U.S. dollars and lower product margins for those products purchased in U.S. dollars.
† Gross profit for the licensing segment decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million in the prior year period.
Gross margin decreased 500 basis points to 40.2% for the three months ended May 2, 2009, from 45.2% for the three months ended May 3, 2008. The decline was attributable to lower product margins in our European, retail and wholesale segments and occupancy deleverage in our retail and European segments.
The Company's gross margin may not be comparable to other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company, exclude the wholesale related distribution costs from gross margin, including them instead in selling, general and administrative expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by $15.8 million, or 10.9%, to $129.5 million for the three months ended May 2, 2009, from $145.3 million for the three months ended May 3, 2008. The decrease was primarily driven by the favorable impact of the strengthening U.S. dollar when translating foreign denominated SG&A expenses into U.S. dollars, cost reductions in marketing and advertising spending and lower volume related expenses. The cost savings initiatives focused on maintaining tight controls over our operating and overhead expenses and focusing our advertising and marketing efforts primarily on promotional events during peak periods. Accordingly, the Company was able to reduce the SG&A rate by 40 basis points to 29.3% for the three months ended May 2, 2009, compared to 29.7% for the three months ended May 3, 2008.
EARNINGS FROM OPERATIONS. Earnings from operations decreased by $27.9 million, or 36.7%, to $48.0 million for the three months ended May 2, 2009, compared with earnings from operations of $75.9 million for the three months ended May 3, 2008. The decrease in earnings from operations primarily resulted from the following:
† Earnings from operations for the retail segment decreased by $4.8 million to $18.0 million for the three months ended May 2, 2009, compared to $22.8 million for the three months ended May 3, 2008. The drivers discussed above that negatively impacted retail revenues and gross profit, partially offset by lower operating and marketing expenses, resulted in the lower earnings from operations. In addition, currency translation fluctuations unfavorably impacted earnings from operations in our retail segment by $1.4 million relating to our Canadian retail stores.
† Earnings from operations for the wholesale segment decreased by $5.2 million to $7.4 million for the three months ended May 2, 2009, compared to $12.6 million for the three months ended May 3, 2008. The decrease was driven by lower revenues and product margins in our North American wholesale business. In addition, currency translation fluctuations, related to both our Canadian and South Korean operations, unfavorably impacted earnings from operations in our wholesale segment by $1.5 million.
† Earnings from operations for the European segment decreased $16.9 million to $23.1 million for the three months ended May 2, 2009, compared to $40.0 million for the three months ended May 3, 2008. The decrease was primarily due to the lower earnings resulting from timing of wholesale shipments and lower product margins. In addition, currency translation fluctuations unfavorably impacted earnings from operations in our European segment by $3.4 million. These factors were partially offset by lower SG&A expenses due to better expense management.
† Earnings from operations for the licensing segment decreased by $1.2 million to $19.0 million for the three months ended May 2, 2009, compared to $20.2 million for the three months ended May 3, 2008. The decrease was the result of the lower royalty revenues discussed above.
† Unallocated corporate overhead was slightly down at $19.5 million for the three months ended May 2, 2009, compared to $19.7 million for the three months ended May 3, 2008.
Operating margin declined 460 basis points to 10.9% for the three months ended May 2, 2009 compared to 15.5% for the three months ended May 3, 2008. The lower gross margin, partially offset by the lower SG&A rate contributed to the operating margin decline.
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