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GES > SEC Filings for GES > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for GUESS INC

Form 10-K for GUESS INC


28-Mar-2014

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: North American Retail, Europe, Asia, North American Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings from operations before restructuring charges, if any. The Company believes this segment reporting reflects how its five business segments are managed and each segment's performance is evaluated. The North American Retail segment includes the Company's retail and e-commerce operations in North America and its retail operations in Central and South America. The Europe segment includes the Company's wholesale, retail and e-commerce operations in Europe and the Middle East. The Asia segment includes the Company's wholesale, retail and e-commerce 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, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information regarding these segments is summarized in Note 17 to the Consolidated Financial Statements. Products
We derive our net revenue from the sale of GUESS?, G by GUESS, GUESS Kids and MARCIANO 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. Global Economic Conditions
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 have impacted the capital markets of numerous European countries, resulting in reduced consumer confidence and discretionary spending in those countries. These circumstances have had, and could in the future have, a negative impact on our business, particularly in our more mature markets in Southern Europe. The impact could be greater in our multi-brand wholesale channel, particularly in Italy, where many customers are relatively small and not well capitalized. We also see evidence of a more cautious consumer in China, where the economy has shown clear signs of slowing, as well as a more volatile environment in South Korea. Foreign Currency Volatility
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 2014, the average U.S. dollar rate was weaker against the euro and the Korean won and stronger against the Canadian dollar compared to the average rate in fiscal 2013. This had an overall positive impact on the translation of our international revenues and earnings for the fiscal year ended February 1, 2014 compared to the prior fiscal year.
In addition, some of our transactions that occur primarily in Canada, Europe and South Korea are denominated in U.S. dollars, Swiss francs or British pounds, exposing them to exchange rate fluctuations when converted to


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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. If the euro weakens versus the U.S. dollar at the time U.S. dollar denominated inventory is purchased relative to the purchases of the comparable period, our product margins in Europe could be unfavorably impacted. Our product margins in Europe for the fiscal year ended February 1, 2014 were not significantly impacted as a result of exchange rate fluctuations compared to the prior fiscal year.
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 hedging instruments and forward contracts not designated as hedging instruments, refer to "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Strategy
International Growth. Global expansion continues to be a key component 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 2014, compared to one-fifth in fiscal 2005. We expect to continue to expand in our existing international markets, particularly in less mature markets like Germany, Mexico, the Middle East and Russia. At the same time, we plan to develop in newer key markets such as Brazil and Japan.
Productivity Improvements. One of our goals is to drive growth by enhancing the productivity of our existing operations. We will continue to focus on expanding on our omni-channel strategy, improving supply chain efficiencies and optimizing global planning and allocation. In addition, we will continue to be opportunistic with our store openings and optimize our existing store portfolio by closing select under-performing stores as lease terms expire or through kick-out clauses. 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. During the second quarter of fiscal 2014, the Company expanded these plans to include the consolidation and streamlining of certain operations in Europe and Asia. 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.
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 and by leaving a larger portion of our buys open prior to each season to improve the efficiency of our speed to market by allowing us to design and produce closer to market delivery. We will also continue to emphasize our e-commerce channel as we execute our omni-channel strategy. In fiscal 2014, we reduced our store openings in the U.S. and Canada as compared to fiscal 2013 as we focused on improving the performance of existing stores. During fiscal 2015, we currently expect to continue with reduced store openings as well as the closure of certain under-performing stores as lease terms expire or through kick-out clauses. In addition, we plan to remodel key existing locations as part of the roll-out of our new store designs. 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. We have flagship stores in key cities such as Barcelona, Dusseldorf, London, Milan, Munich and Paris. During fiscal 2014, we strategically reduced our store openings in Southern Europe as compared to fiscal 2013 so we can focus on improving the performance of existing stores. During fiscal 2015, we plan to continue our retail store expansion primarily in Northern and Eastern Europe as well as the Middle East, but we expect this to be mostly offset by the closure of certain under-performing stores mainly in Southern Europe as lease terms expire or through kick-out clauses. Asia. We see significant long-term 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 flagship stores in key cities such as Beijing, Hong Kong, Seoul and Shanghai, and we have partnered with licensees to develop our business in the second-tier and third-tier cities in this region. In China, where the economy has shown some signs of slowing, we have begun to see evidence of a more cautious consumer. Our strategy in South Korea, with a combined 419 stores and concessions at February 1, 2014, 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


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operations in Japan where we opened our first store in the first quarter of fiscal 2015. For the year ended February 1, 2014, we and our partners opened 67 new stores and closed 38 stores in Asia, ending the year with 499 stores and 492 concessions.We and our partners plan to open between 90 and 95 retail stores and concessions in total across all concepts in Asia during fiscal 2015. Capital Allocation
The Company's investments in capital for the full fiscal year 2015 are planned between $75 million and $85 million (after deducting estimated lease incentives of approximately $5 million). The planned investments in capital are primarily for store remodeling programs in North American Retail, new store openings in North America and expansion of our retail business in Europe. Comparable Store Sales
The Company has reported National Retail Federation ("NRF") calendar comparable store sales on a quarterly basis for our physical stores in the U.S. and Canada excluding the results of our e-commerce sites. 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.
As a result of our omni-channel strategy, there is less distinction between our brick-and-mortar retail stores and our e-commerce sites and we believe the inclusion of e-commerce sales in our comparable store sales metric is becoming a more meaningful representation of these results. Therefore, beginning in the first quarter of fiscal 2015, the Company will report NRF calendar comparable store sales for our stores in the U.S. and Canada including our e-commerce sites as well as separately disclose the impact of e-commerce sales on our comparable store sales metric. An e-commerce site is considered comparable after it has been operational in a country for 13 full months and would exclude any related revenue from shipping fees.
The comparable store sales for each of the fiscal years presented have been adjusted to compare to the appropriate week in the comparable prior-year period as a result of the additional week included in fiscal 2013.
Definitions and calculations of comparable store sales differ among companies in the apparel retail industry, and therefore comparable store sales disclosed by us may not be comparable to the comparable same store sales metric disclosed by other companies.
Executive Summary
Overview
Net earnings attributable to Guess?, Inc. decreased 14.2% to $153.4 million, or diluted earnings of $1.80 per common share, for fiscal 2014, compared to net earnings attributable to Guess?, Inc. of $178.7 million, or diluted earnings of $2.05 per common share, in fiscal 2013. During the first quarter of fiscal 2014, the Company implemented plans to streamline its structure and reduce expenses in both Europe and North America. During the second quarter of fiscal 2014, the Company expanded these plans to include the consolidation and streamlining of certain operations in Europe and Asia. These actions resulted in restructuring charges for fiscal 2014 of $12.4 million (or $9.0 million after considering the $3.4 million reduction to income tax expense as a result of the charges), or an unfavorable after-tax impact of $0.11 per share. 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. Adjusted diluted earnings, excluding the impact of these charges and the related tax impact, were $1.91 and $2.15 per common share for fiscal years 2014 and 2013, respectively. References to financial results excluding the impact of these charges are non-GAAP measures and are addressed below under "Non-GAAP Measures."


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Highlights of the Company's performance for fiscal 2014 compared to the prior year are presented below, followed by a more comprehensive discussion under "Results of Operations":
Operations

         Total net revenue decreased 3.3% to $2.57 billion for fiscal 2014, from
          $2.66 billion in the prior year. In constant currency, net revenue
          decreased by 4.4%.


         Gross margin (gross profit as a percentage of total net revenue)
          declined 210 basis points to 38.0% for fiscal 2014, compared to 40.1%
          in the prior year.


         Selling, general and administrative ("SG&A") expenses decreased 6.5% to
          $741.1 million for fiscal 2014, compared to $792.6 million in the prior
          year. SG&A expenses as a percentage of revenue ("SG&A rate") decreased
          by 90 basis points to 28.9% for fiscal 2014, compared to 29.8% in the
          prior year.


         The Company incurred $12.4 million in restructuring charges during
          fiscal 2014.


         Earnings from operations decreased 18.9% to $222.6 million for fiscal
          2014, compared to $274.5 million in the prior year. Operating margin
          declined 160 basis points to 8.7% for fiscal 2014, compared to 10.3% in
          the prior year. The restructuring charges of $12.4 million negatively
          impacted the operating margin for fiscal 2014 by 40 basis points.


         Other income, net (including interest income and expense), totaled
          $10.4 million for fiscal 2014, compared to other income, net, of $6.1
          million in the prior year.


         The effective income tax rate decreased 300 basis points to 32.3% for
          fiscal 2014, compared to 35.3% in the prior year. The effective tax
          rate for fiscal 2013 included the unfavorable impact of the $12.8
          million Italian tax settlement charge, partially offset by unrelated
          tax benefits of $4.0 million.

Key Balance Sheet Accounts
         The Company had $508.1 million in cash and cash equivalents and
          short-term investments as of February 1, 2014, up $172.2 million,
          compared to $335.9 million as of February 2, 2013.


               The Company invested $22.1 million to repurchase approximately
                0.9 million of its common shares during fiscal 2014. In fiscal
                2013, the Company invested $140.1 million to repurchase
                approximately 5.0 million shares of its common stock.


               Dividends paid to shareholders during fiscal 2014 were $68.2
                million compared to $172.8 million during fiscal 2013, which
                included a special dividend of $1.20 per common share paid during
                the fourth quarter of fiscal 2013.


         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 $40.3 million, or 12.7%, to $276.6 million at February 1,
          2014, compared to $316.9 million at February 2, 2013. On a constant
          currency basis, accounts receivable decreased $37.7 million, or 11.9%.


         Inventory decreased by $18.8 million, or 5.1%, to $350.9 million as of
          February 1, 2014, compared to $369.7 million as of February 2, 2013.
          When measured in terms of finished goods units, inventory volumes were
          flat as of February 1, 2014, when compared to February 2, 2013.


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Global Store Count
In fiscal 2014, together with our partners, we opened 177 new stores worldwide,
consisting of 89 stores in Europe and the Middle East, 67 stores in Asia, 13
stores in the U.S. and Canada and eight stores in Central and South America.
Together with our partners, we closed 159 stores worldwide, consisting of 84
stores in Europe and the Middle East, 38 stores in Asia, 31 stores in the U.S.
and Canada and six stores in Central and South America.
We ended fiscal 2014 with 1,708 stores worldwide, comprised as follows:
                                                 Directly
Region                       Total Stores    Operated Stores    Licensee Stores
United States and Canada              494                494                  -
Europe and the Middle East            627                263                364
Asia                                  499                 47                452
Central and South America              88                 36                 52
Total                               1,708                840                868

This store count does not include 496 concessions located primarily in South Korea and Greater China, which have been excluded because of their smaller store size in relation to our standard international store size. Of the total 1,708 stores, 1,218 were GUESS? stores, 284 were GUESS? Accessories stores, 112 were G by GUESS stores and 94 were MARCIANO stores. Results of Operations
The following table sets forth actual operating results for the fiscal years 2014, 2013, and 2012 as a percentage of net revenue:

                                                                Year Ended
                                                       Feb 1,     Feb 2,    Jan 28,
                                                        2014       2013       2012
Product sales                                          95.4  %    95.6  %    95.5  %
Net royalties                                           4.6        4.4        4.5
Net revenue                                           100.0      100.0      100.0
Cost of product sales                                  62.0       59.9       57.0
Gross profit                                           38.0       40.1       43.0
Selling, general and administrative expenses           28.9       29.8       27.5
Restructuring charges                                   0.4          -          -
Settlement charge                                         -          -        0.7
Pension curtailment expense                               -          -        0.0
Earnings from operations                                8.7       10.3       14.8
Interest expense                                       (0.1 )     (0.0 )     (0.1 )
Interest income                                         0.1        0.1        0.2
Other income, net                                       0.4        0.2        0.0
Earnings before income tax expense                      9.1       10.6       14.9
Income tax expense                                      3.0        3.8        4.8
Net earnings                                            6.1        6.8       10.1
Net earnings attributable to noncontrolling interests   0.1        0.1        0.2
Net earnings attributable to Guess?, Inc.               6.0  %     6.7  %     9.9  %


Fiscal 2014 Compared to Fiscal 2013
Consolidated Results

Net Revenue. Net revenue for fiscal 2014 decreased by $88.8 million, or 3.3%, to $2.57 billion from $2.66 billion in fiscal 2013. In constant currency, net revenue decreased by 4.4% as currency translation fluctuations relating to our foreign operations favorably impacted net revenue by $28.6 million compared to the prior year. The decrease in revenue was driven primarily by lower European wholesale shipments, negative comparable store


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sales in North American Retail and Europe and the impact on revenue from the additional week in the prior year, partially offset by the favorable impact on revenue from expansion of our retail business in Europe.
Gross Profit. Gross profit decreased by $91.0 million, or 8.5%, to $976.1 million for fiscal 2014, from $1.07 billion in fiscal 2013, due primarily to the unfavorable impact from lower wholesale sales in Europe, negative comparable store sales in North American Retail and Europe and lower overall product margins, partially offset by the favorable impact from retail expansion in Europe, net of higher occupancy costs, and currency translation.
Gross margin decreased 210 basis points to 38.0% for fiscal 2014, from 40.1% 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 American Retail and lower wholesale shipments in Europe. Product margins declined due primarily to more markdowns in North American Retail. 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, including rent and depreciation, in cost of product sales. Selling, General and Administrative Expenses. SG&A expenses decreased by $51.5 million, or 6.5%, to $741.1 million for fiscal 2014, from $792.6 million in fiscal 2013. The decrease in SG&A expenses, which included the unfavorable impact of currency translation, was due primarily to lower selling and merchandising expenses in Europe and lower investments in advertising and marketing.
The Company's SG&A rate decreased by 90 basis points to 28.9% for fiscal 2014, compared to 29.8% in fiscal 2013. The SG&A rate was favorably impacted by lower selling and merchandising expenses in Europe resulting from productivity improvements and lower investments in advertising and marketing, partially offset by the negative impact on the Company's fixed cost structure resulting from a decline in European wholesale shipments and negative comparable store sales in North American Retail.
Restructuring Charges. During the first quarter of fiscal 2014, the Company implemented plans to streamline its structure and reduce expenses in both Europe and North America. During the second quarter of fiscal 2014, the Company expanded these plans to include the consolidation and streamlining of certain operations in Europe and Asia. These actions resulted in restructuring charges of $12.4 million incurred during fiscal 2014.
Earnings from Operations. Earnings from operations decreased by $51.9 million, or 18.9%, to $222.6 million for fiscal 2014, from $274.5 million in fiscal 2013. Currency translation fluctuations relating to our foreign operations favorably impacted earnings from operations by $4.4 million.
Operating margin decreased 160 basis points to 8.7% for fiscal 2014, compared to 10.3% in fiscal 2013. Operating margin was negatively impacted by lower overall gross margins and the negative impact of the restructuring charges, partially offset by a lower SG&A rate. The restructuring charges of $12.4 million negatively impacted the operating margin for fiscal 2014 by 40 basis points. Interest Income, Net. Interest income, net was $0.1 million for fiscal 2014, compared to interest income, net of $0.4 million in fiscal 2013 and includes the impact of hedge ineffectiveness of foreign currency forward contracts designated as cash flow hedges.
Other Income, Net. Other income, net was $10.3 million for fiscal 2014, compared to other income, net of $5.7 million in fiscal 2013. Other income, net in fiscal 2014 consisted primarily of net unrealized and realized gains on non-operating assets and net realized and unrealized mark-to-market gains on foreign currency contracts and other foreign currency balances. 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.
Income Tax Expense. Income tax expense for fiscal 2014 was $75.2 million, or a 32.3% effective tax rate, compared to income tax expense of $99.1 million, or a 35.3% effective tax rate, in fiscal 2013. The effective income tax rate in fiscal 2014 included the impact of restructuring charges of $12.4 million and a $3.4 million


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reduction to income tax expense as a result of the charges, or a negative impact of 20 basis points on the effective tax rate. 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. Excluding the impact of these respective adjustments, the effective income tax rate was 32.1% for fiscal 2014, compared to 32.2% for fiscal 2013. References to financial results excluding the impact of these 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 for fiscal 2014 was $4.3 million, net of taxes, compared to $2.7 million, net of taxes, in fiscal 2013. Net Earnings Attributable to Guess?, Inc. Net earnings attributable to Guess?, Inc. decreased by $25.3 million, or 14.2%, to $153.4 million for fiscal 2014, from $178.7 million in fiscal 2013. Diluted earnings per common share decreased to $1.80 per share for fiscal 2014, compared to $2.05 per share in fiscal 2013. The results for fiscal 2014 included the unfavorable $0.11 per share after-tax impact of the restructuring charges. The results for fiscal 2013 included the unfavorable $0.10 per share Italian tax settlement charge net of unrelated tax benefits. Adjusted diluted earnings, excluding the impact of these charges and the related tax impact, were $1.91 and $2.15 per common share for fiscal years 2014 and 2013, respectively. References to financial results excluding the impact of these 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:

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