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GES > SEC Filings for GES > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for GUESS INC


1-Apr-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Unless the context indicates otherwise, when we refer to "we," "us," "our" or the "Company" in this Form 10-K, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.
Business Segments
The Company's businesses are grouped into five reportable segments for management and internal financial reporting purposes: Europe, North American Retail, Asia, North American Wholesale and Licensing. Information regarding these segments is summarized in Note 15 to the Consolidated Financial Statements. Management evaluates segment performance based primarily on revenues and earnings from operations. The Company believes this segment reporting reflects how its five business segments are managed and each segment's performance is evaluated. The Europe segment includes the Company's wholesale and retail operations in Europe and the Middle East. The North American Retail segment includes the Company's retail operations in North America. The Asia segment includes the Company's wholesale and retail operations in Asia. The North American Wholesale segment includes the Company's wholesale operations in North America and export sales to Central and South America. 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. Products
We derive our net revenue from the sale of GUESS?, MARCIANO, GUESS Kids 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.
Recent Global Economic Developments
Economic and market conditions have continued to be volatile and uncertain in many markets around the world and consumer behavior remains cautious. In North America, the relatively weaker levels of consumer confidence and the highly promotional conditions among retailers may persist for some time. In Europe, sovereign debt issues, government austerity programs, and bank credit issues continue to affect the capital markets of numerous European countries, resulting in reduced consumer confidence and discretionary spending in those countries. These circumstances have had, and are expected to continue to have, a negative impact on our business, particularly in our more mature markets in Southern Europe. These conditions could have a greater impact in our multi-brand wholesale channel, particularly in Italy, where many customers are relatively small and not well capitalized.
The Company experienced some inflationary pressures on raw materials, labor, freight and other commodities, including oil, in fiscal 2012 and during the first half of fiscal 2013.
Foreign Currency Volatility
We continue to experience significant volatility in the global currency markets. Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the euro, Canadian dollar and Korean won), currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts.
During fiscal 2013, the average U.S. dollar rate was stronger against these currencies versus the average rate in fiscal 2012. This had an overall negative impact on the translation of our international revenues and earnings for the fiscal year ended February 2, 2013 compared to the prior fiscal year.


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In addition, some of our transactions that occur in Europe, Canada and South Korea are denominated in U.S. dollars, Swiss francs and British pounds, exposing them to exchange rate fluctuations when converted to their functional currencies. Fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. On average, the euro was weaker versus the U.S. dollar during fiscal 2013 than during fiscal 2012, increasing the cost of U.S. dollar denominated purchases of merchandise in our European operations. If the euro continues to weaken versus the U.S. dollar in fiscal 2014, our product margins in Europe could continue to be unfavorably impacted. The Company enters into derivative financial instruments to offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as cash flow hedges and forward contracts not designated as cash flow hedges, refer to "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Strategy
International Growth. Despite the difficult economic conditions described above, our key long-term strategies remain unchanged. Global expansion continues to be the cornerstone of our long-term growth strategy. Our combined revenue outside of the U.S. and Canada represented approximately half of the total Company's revenue in fiscal 2013, compared to one-fifth in fiscal 2005. We expect to continue to expand in both our existing European and Asian markets. At the same time, we plan to develop key markets such as Brazil, China, Germany, India, Japan, the Middle East, Mexico and Russia.
Our goal is also to drive growth by enhancing the productivity of our existing operations. During the first quarter of fiscal 2014, the Company implemented plans to streamline its operational structure and reduce expenses in both Europe and North America. We will continue to regularly assess and implement initiatives that we believe will build brand equity, grow our business and enhance long-term profitability in each region.
Europe. In Europe, over the long-term, we will continue to focus on developing new markets in Northern and Eastern Europe where our brand is well known but still under-penetrated while expanding on our past success in Western and Southern Europe. We have flagship stores in key cities such as Barcelona, Dusseldorf, London, Milan and Paris. Together with our licensee partners, we opened 98 stores during fiscal 2013. In addition, we also acquired 26 stores from one of our European licensees. During fiscal 2014, we plan to continue our expansion in Europe, primarily in Northern and Eastern Europe, by opening 70 stores in total, about one-third of which will be operated directly by us. During fiscal 2014, we plan to strategically reduce our store openings in Southern Europe so we can focus on improving the performance of our existing stores.
North American Retail. In North American Retail we plan to increase retail sales and profitability over the long-term by improving the productivity and performance of our existing stores, increasing our mix of product offerings at lower price points and shortening our supply chain calendar to allow more flexibility to react to the latest trends. We will also continue to emphasize our e-commerce channel as we develop our omni-channel retail strategy. During fiscal 2013, we opened 33 retail stores in the U.S. and Canada. In fiscal 2014, we plan to reduce our store openings to 17 retail stores in total across all concepts as we focus on improving the performance of our existing stores. In addition, we plan to remodel key existing locations as part of the roll-out of our new store designs.
Asia. We see significant market opportunities in Asia and we have dedicated capital and human resources to support the region's growth and development. We and our partners have opened flagship stores in key cities such as Beijing, Hong Kong, Macau, Seoul and Shanghai and we have partnered with licensees to develop our business in the second tier cities in this region. During fiscal 2013, we also partnered with a new licensee in China to help our expansion efforts in the northern part of the country. During fiscal 2012, we launched our newer G by GUESS store concept in South Korea, where we had 67 locations as of February 2, 2013. Our strategy in South Korea, with a combined 345 stores and concessions at February 2, 2013, is to improve productivity and expand distribution for both our GUESS? and G by GUESS branded locations. We are also in the process of establishing our direct operations in Japan where we expect to have our first flagship store opened by fiscal 2015. We and our partners opened 80 stores and 105 concessions during fiscal 2013 across all of Asia and plan to open between 90 and 100 retail stores and concessions in total across all concepts in Asia during fiscal 2014.


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Capital Allocation
The Company's investments in capital for the full fiscal year 2014 are planned between $80 million and $100 million (after deducting estimated lease incentives of approximately $10 million). The planned investments in capital are primarily for the expansion of our retail businesses in Europe and North America and store remodeling programs in North America.
Other
The Company reports National Retail Federation ("NRF") calendar comparable store sales on a quarterly basis for our 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. The comparable stores sales for fiscal 2013 have been adjusted to compare to the appropriate week in the prior year as a result of the additional week included in fiscal 2013. Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 32.7% to $178.7 million, or diluted earnings of $2.05 per common share, for fiscal 2013, compared to net earnings attributable to Guess?, Inc. of $265.5 million, or diluted earnings of $2.86 per common share, in fiscal 2012. In the fourth quarter of fiscal 2013, the Company settled a tax audit dispute in Italy, resulting in a charge of $12.8 million, in excess of amounts previously reserved, which was partially offset by unrelated tax benefits of $4.0 million, or a net impact of $0.10 per share. In fiscal 2012, the Company recorded a pre-tax settlement charge of $19.5 million (or $17.6 million after considering a $1.9 million reduction to income tax as a result of the charge), or $0.19 per share. The charge related to a settlement agreement with a former third party logistics service provider in Europe to facilitate the transition to a new service provider. Adjusted diluted earnings, excluding the net settlement charges, were $2.15 and $3.05 per common share for fiscal years 2013 and 2012, respectively. References to financial results excluding the impact of the net settlement charges are non-GAAP measures and are addressed below under "Non-GAAP Measures." Highlights of the Company's performance for fiscal 2013 compared to the prior year are presented below, followed by a more comprehensive discussion under "Results of Operations":
Operations

         Total net revenue decreased 1.1% to $2.66 billion for fiscal 2013, from
          $2.69 billion in the prior year. In constant U.S. dollars, revenue
          increased by 1.6%.


         Gross margin (gross profit as a percentage of total net revenue)
          declined 290 basis points to 40.1% for fiscal 2013, compared to 43.0%
          in the prior year.


         Selling, general and administrative ("SG&A") expenses increased 7.4% to
          $792.6 million for fiscal 2013, compared to $738.3 million in the prior
          year. SG&A expenses as a percentage of revenue ("SG&A rate") increased
          by 230 basis points to 29.8% for fiscal 2013, compared to 27.5% in the
          prior year.


         Earnings from operations decreased 30.9% to $274.5 million for the year
          ended February 2, 2013, compared to $397.2 million in the prior year.
          Operating margin declined 450 basis points to 10.3% for the year ended
          February 2, 2013, compared to 14.8% in the prior year. A $19.5 million
          settlement charge related to the European supply chain negatively
          impacted the fiscal 2012 operating margin by 70 basis points.


         Other income, net (including interest income and expense), totaled $6.1
          million for the year ended February 2, 2013, compared to other income,
          net, of $2.1 million in the prior year.


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         The effective income tax rate increased 310 basis points to 35.3% for
          the year ended February 2, 2013, compared to 32.2% in the prior year,
          driven primarily by the unfavorable impact of the $12.8 million Italian
          tax settlement charge on the effective income tax rate, partially
          offset by unrelated tax benefits of $4.0 million incurred during fiscal
          2013.

Key Balance Sheet Accounts
         The Company had $335.9 million in cash and cash equivalents and
          short-term investments as of February 2, 2013, down $160.0 million,
          compared to $495.9 million as of January 28, 2012.


?               The Company invested $140.1 million to repurchase approximately
                5.0 million of its common shares during fiscal 2013. In fiscal
                2012, the Company invested $92.0 million to repurchase
                approximately 3.2 million shares of its common stock.


?               Dividends paid to shareholders during fiscal 2013, which included
                a special dividend of $1.20 per common share paid during the
                fourth quarter, were $172.8 million compared to $74.4 million
                during fiscal 2012.


         Accounts receivable, which relates primarily to the Company's wholesale
          business in Europe, and to a lesser extent, to its wholesale businesses
          in North America and Asia and its international licensing business,
          decreased by $15.6 million, or 4.6%, to $325.0 million at February 2,
          2013, compared to $340.6 million at January 28, 2012. On a constant
          U.S. dollar basis, accounts receivable decreased $23.6 million, or
          6.9%.


         Inventory increased by $41.1 million, or 12.5%, to $369.7 million as of
          February 2, 2013, compared to $328.6 million as of January 28, 2012.
          When measured in terms of finished goods units, inventory volumes
          increased by 7.8% as of February 2, 2013, when compared to January 28,
          2012.

Global Store Count
In fiscal 2013, together with our partners, we opened 226 new stores worldwide,
consisting of 98 stores in Europe and the Middle East, 80 stores in Asia, 33
stores in the U.S. and Canada and 15 stores in Central and South America.
Together with our partners, we closed 121 stores worldwide, consisting of 63
stores in Europe and the Middle East, 33 stores in Asia and 25 stores in the
U.S. and Canada. In fiscal 2013, we also acquired 26 stores from one of our
European licensees.
We ended fiscal 2013 with 1,690 stores worldwide, comprised as follows:
                                                 Directly
Region                       Total Stores    Operated Stores    Licensee Stores
United States and Canada              512                512                  -
Europe and the Middle East            622                240                382
Asia                                  470                 48                422
Central and South America              86                 32                 54
Total                               1,690                832                858

This store count does not include 413 concessions located primarily in South Korea and Greater China because of their smaller store size in relation to our standard international store size. Of the total 1,690 stores, 1,164 were GUESS? stores, 309 were GUESS? Accessories stores, 121 were G by GUESS stores and 96 were MARCIANO stores.


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RESULTS OF OPERATIONS
The following table sets forth actual operating results for the fiscal years 2013, 2012, and 2011 as a percentage of net revenue:

                                                                Year Ended
                                                       Feb 2,    Jan 28,    Jan 29,
                                                        2013       2012       2011
Product sales                                          95.6  %    95.5  %    95.4  %
Net royalties                                           4.4        4.5        4.6
Net revenue                                           100.0      100.0      100.0
Cost of product sales                                  59.9       57.0       56.5
Gross profit                                           40.1       43.0       43.5
Selling, general and administrative expenses           29.8       27.5       27.0
Settlement charge                                         -        0.7          -
Pension curtailment expense                               -          -        0.2
Earnings from operations                               10.3       14.8       16.3
Interest expense                                       (0.0 )     (0.1 )     (0.1 )
Interest income                                         0.1        0.2        0.1
Other income, net                                       0.2        0.0        0.6
Earnings before income taxes                           10.6       14.9       16.9
Income tax expense                                      3.8        4.8        5.1
Net earnings                                            6.8       10.1       11.8
Net earnings attributable to noncontrolling interests   0.1        0.2        0.2
Net earnings attributable to Guess?, Inc.               6.7  %     9.9  %    11.6  %


Fiscal 2013 Compared to Fiscal 2012
Consolidated Results

Net Revenue. Net revenue for fiscal 2013 decreased by $29.4 million, or 1.1%, to $2.66 billion from $2.69 billion in fiscal 2012. In constant U.S. dollars, revenue increased by 1.6% as currency translation fluctuations relating to our foreign operations unfavorably impacted net revenue by $72.7 million. The increases in revenue from expansion of our retail businesses in Europe and North America, growth in our Asian operations and the favorable impact on revenue from the additional week in the current year were offset by the negative comparable store sales in North America and Europe and lower European wholesale shipments. Gross Profit. Gross profit decreased by $89.1 million, or 7.7%, to $1.07 billion for fiscal 2013, from $1.16 billion in fiscal 2012, due primarily to the unfavorable impact of currency translation on gross profit, lower wholesale sales in Europe and lower overall product margins.
Gross margin decreased 290 basis points to 40.1% for fiscal 2013, from 43.0% in fiscal 2013, due to a higher occupancy rate and lower overall product margins. The higher occupancy rate was driven by negative comparable store sales in North America and retail expansion in Europe. Product margins declined due primarily to more retail markdowns in Europe and North America, the unfavorable impact of currencies on product costs and pricing changes in Canada.
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, generally exclude the wholesale related distribution costs from gross margin, including them instead in SG&A expenses. Additionally, some entities include retail store occupancy costs in SG&A expenses and others, like the Company, include retail store occupancy costs in cost of product sales.
Selling, General and Administrative Expenses. SG&A expenses increased by $54.3 million, or 7.4%, to $792.6 million for fiscal 2013, from $738.3 million in fiscal 2012. The increase in SG&A expenses, which included the favorable impact of currency translation, was due primarily to higher selling expenses and higher global advertising and marketing expenses, partially offset by lower performance-based compensation costs.


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The Company's SG&A rate increased by 230 basis points to 29.8% for fiscal 2013, compared to 27.5% in fiscal 2012. The SG&A rate was negatively impacted by deleveraging of expenses resulting from negative comparable store sales in North America and Europe and a decline in European wholesale shipments, increased investments in advertising and marketing and higher store selling expenses due to our international retail expansion, partially offset by lower performance-based compensation costs.
Settlement Charge. During fiscal 2012, the Company experienced a temporary disruption in service with a former third party logistics service provider in Europe and subsequently entered into a settlement agreement with this service provider to facilitate a transition to a new service provider. As a result, the Company recorded a $19.5 million settlement charge in fiscal 2012 related to amounts paid in connection with this agreement. The Company did not have any expenses related to this settlement in fiscal 2013.
Pension Curtailment Expense. During fiscal 2012, the Company recorded a SERP curtailment expense of $1.2 million that did not occur in fiscal 2013. Earnings from Operations. Earnings from operations decreased by $122.7 million, or 30.9%, to $274.5 million for fiscal 2013, from $397.2 million in fiscal 2012. Currency translation fluctuations relating to our foreign operations unfavorably impacted earnings from operations by $6.8 million.
Operating margin decreased 450 basis points to 10.3% for fiscal 2013, compared to 14.8% in fiscal 2012. Operating margin was negatively impacted by lower overall gross margins and a higher SG&A rate, partially offset by the negative impact in the prior year of the $19.5 million settlement charge.
Interest Income, Net. Interest income, net was $0.4 million for fiscal 2013, compared to interest income, net of $1.1 million in fiscal 2012 and includes the impact of hedge ineffectiveness of foreign currency forward contracts designated as cash flow hedges. The decrease in interest income, net for fiscal 2013 compared to the prior year was due primarily to lower average invested cash balances.
Other Income, Net. Other income, net was $5.7 million for fiscal 2013, compared to other income, net of $1.0 million in fiscal 2012. Other income, net in fiscal 2013 consisted primarily of net unrealized gains on non-operating assets and net realized mark-to-market revaluation gains on foreign currency contracts and other foreign currency balances. Other income, net in fiscal 2012 consisted primarily of net unrealized mark-to-market revaluation gains on foreign currency contracts and other foreign currency balances.
Income Taxes. Income tax expense for fiscal 2013 was $99.1 million, or a 35.3% effective tax rate, compared to income tax expense of $128.7 million, or a 32.2% effective tax rate, in fiscal 2012. In fiscal 2013, the Company settled a tax audit dispute in Italy, resulting in a charge of $12.8 million, in excess of amounts previously reserved, which was partially offset by unrelated tax benefits of $4.0 million. These adjustments increased the income tax expense by $8.8 million and negatively impacted the effective tax rate for fiscal 2013 by 310 basis points. The effective income tax rate in fiscal 2012 included the discrete impact of a $19.5 million European supply chain settlement charge and a $1.9 million reduction to income tax expense as a result of the charge. These adjustments unfavorably impacted the mix of taxable income among the Company's tax jurisdictions and increased the effective tax rate for the prior year by 100 basis points. Excluding the impact of these respective adjustments, the effective income tax rate was 32.2% for fiscal 2013, compared to 31.2% for fiscal 2012. References to financial results excluding the impact of the net settlement charges are non-GAAP measures and are addressed below under "Non-GAAP Measures."
Net Earnings Attributable to Noncontrolling Interests. Net earnings attributable to noncontrolling interests in subsidiaries for fiscal 2013 was $2.7 million, net of taxes, compared to $5.2 million, net of taxes, in fiscal 2012. The decrease was due to the purchase of the remaining 25% interest in our now wholly-owned subsidiary, Focus, during fiscal 2013 and lower earnings in our majority-owned European subsidiaries.
Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased by $86.8 million, or 32.7%, to $178.7 million for fiscal 2013, from $265.5 million in fiscal 2012. Diluted earnings per common share decreased to $2.05 per share for fiscal 2013, compared to $2.86 per share in fiscal 2012. The results for fiscal 2013 included the $0.10 per share Italian tax settlement charge net of unrelated tax benefits. The results for fiscal 2012 included the $0.19 per share European supply chain settlement charge. Adjusted diluted earnings,


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excluding the net settlement charges, were $2.15 and $3.05 per common share for fiscal years 2013 and 2012, respectively. References to financial results excluding the impact of the net settlement charges are non-GAAP measures and are addressed below under "Non-GAAP Measures." Information by Business Segment
The following table presents our net revenue and earnings from operations by segment for the last two fiscal years:

                                  Fiscal 2013     Fiscal 2012       Change      % Change
                                            (dollars in thousands)
Net revenue:
Europe                           $   939,599     $ 1,010,896     $  (71,297 )     (7.1 )%
North American Retail              1,116,836       1,117,643           (807 )     (0.1 )
Asia                                 290,655         250,727         39,928       15.9
North American Wholesale             194,373         187,362          7,011        3.7
Net revenue from product sales     2,541,463       2,566,628        (25,165 )     (1.0 )
Licensing                            117,142         121,420         (4,278 )     (3.5 )
Total net revenue                $ 2,658,605     $ 2,688,048     $  (29,443 )     (1.1 )%
Earnings (loss) from operations:
Europe                           $   103,975     $   167,014     $  (63,039 )    (37.7 )%
North American Retail                 78,285         133,184        (54,899 )    (41.2 )
Asia                                  26,525          28,463         (1,938 )     (6.8 )
North American Wholesale              45,008          47,162         (2,154 )     (4.6 )
Licensing                            101,182         108,638         (7,456 )     (6.9 )
Corporate Overhead                   (80,450 )       (87,226 )        6,776       (7.8 )
Total earnings from operations   $   274,525     $   397,235     $ (122,710 )    (30.9 )%
. . .
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