Guess? Inc (GES) 2002 Q1 法說會逐字稿

Good day. Welcome to today's Guess First Quarter Conference Call. Today's call including the question and answer portion is being recorded and being made available to the public. Seen on this conference call including but not limited to those related to the company's expected results and operations, plan to reduce cost, proposed retail expansion, future success of product and lines of business. Our forward looking statement that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statement are only expectations and involved known and unknown risks and uncertainty which may cause results different materially from those discussed in this call. You should refer to the company's most recent NOR report on 10K for the fiscal year ended December 31 2001 and it is periodic and current reports on 10Q and 8K have under the Securities Exchange Act of 1934 for additional information about certain facts, it could affect the actual results. At this time for opening remarks and introduction I would like to turn the conference over to Mr. Maurice Marciano, please go ahead sir.

Thank you...Thank you for joining us today to discuss Guess first quarter 2002 financial results. Joining me is Carlos E. Alberini our company's President and CEO and Fredrick G. Silny our Senior. VP and CFO. I will first give a brief review on the quarter then Carlos and Fred will review our operating performance and conventional results in more detail. Carlos will then give outlook for the remainder of 2002 after which we will open the call for questions.

We announced today that for the first quarter in the March 30 2002, Guess reported a net loss of 3.2 million dollars or diluted loss of 7 cents per share excluding restructuring charges reported in the quarter. Including charges which

0.7 million dollars or 0.4 million dollars net of taxes. the net loss was 3.6 million dollars, or a diluted loss of 8 cents per share.

These results were in line with our previous guidance of loss per share in the range of 8 cents to 10 cents before charges and compared to net earning of 2.1 million dollars or diluted earning of 5 cents per share, for the last year first quarter we

that on March 31 2001.

The economic environment is continue to be difficult. Within these we benefited during the quarter from our ongoing cost control initiative and our Guess inventory management, which contributed to improve margin and profitability in our retail business.

However, that the balance of the year will continue to be challenging, particularly for wholesales segment. In spite of these as Carlos will discuss later on we announce our earnings

for the remainder of the year. We are continue making to actively

our business and take steps to best position in the company board in the current environment and for long term profitable board.

Here are few or behind after all those efforts. First and importantly our balance sheet remains strong. We ended the quarter with no borrowing against our domestic credit line, and with 21 million dollars in invested cash. Second we continue to make progress nearing our assortments improving our in store position and taking early mark downs to keep inventory clean and increase turnover. Our inventory management report resulted in reduction of inventories of 50 million dollars compared to 2001 first quarter and reduction of 40 million dollars from 2001-year end.

Third, we reduced our SG&A expenses by 3.5 million dollars or 7 percent during the first quarter 2002 compared to the first quarter 2001. Despite 6 percent increase in our retail square footage vs. a year ago period.

Fourth, our reposition product off line particularly our Guess correction line are being very well received by both our retail and wholesale customer that carry the line. Fifth we are continuing to make present investment in our infrastructure in term of those pipeline systems in order to support future growth.

And on our final note, we before introducing Carlos I would like to announce this month commemorate the 20th anniversary of our company and the Guess brand. We are very proud of what our team has built over the years and we look forward to continuing to build our successes and to promote in Guess' long-term goal as the worldwide brand.

From personal perspective, I can also say that over the past 20 years, they have been opted and announced challenges and opportunities. We will get for the current period just as we have in the past by remaining focused on our customers and true to the Guess brand that

really represents. Our team is committed to long-term goals as well as driving revenue creation for our shareholders. There are many shiny opportunities ahead of these. And with that I would like to turn the call over to Carlos. Carlos.

Thank you Maurice and Good afternoon. I too would like to say how proud we are of the success of our Guess brand over the past 20 years. Guess is powerful global brand with an amazing reach and very high customer awareness level. Guess team has built this wonderful company with great vision, hard work and tremendous passion and dedication. As I already said our team we have outstanding opportunities to improve performance increase profitability and grow this company to take full advantage of this strong position that the brand enjoys today.

We are very focused on improving our operations across all of our business segments through top line growth initiatives, efficiency, margin improvement, and gross management. And we will be

in our efforts to fulfill our vision. Now turning to our results.

We announced today that net revenue from overall product sales declined 20.1 percent to 128.3 million dollars in the first quarter from 160.5 million dollars in the last years first quarter. Our retail stores, including full price retail kit, facture

Canada and

were doing net sales of 78.9 million dollars at decrease of 0. percent when stores sales decline 4.2 percent for the period.

The decreasing comp stores sales more than offset the revenue benefit of a larger store base vs. the year ago period. Recent sales trend improved over the course of the quarter as you recall we recorded comp stores sales decreased 14 percent and 4.2 percent in January and February respectively.

March result showed improvement with a comp store sales increase of 6 percent. Our company stores had a challenging quarter as we experienced lower customers traffic and sales of basic

experience merchandise decreased considerably however gross margins in effective outlet stores improved month over month during the current period.

I was talking Canada performed very well throughout the first quarter with comparable stores sales gains in the mid-single digits in local provinces. With the young store base we continue to believe that Canada is an excellent market progress. When the process of integrating the Canadian business into our overall operations, we expect the benefit from operating efficiencies and cost reductions in the later part of 2002 and beyond.

The company also reported today retail sales for April 2002, we just anticipated, reflect the shift in the Easter holiday from April last year to March this year. Total retail sales for the five weeks period ended May 4, 2002, were 31.3 million dollars, a decrease of 7.1 percent from sales of 33.6 million dollars for the five weeks ended May 5, 2001.

Comparable store sales for the period declined 10.1 percent. Comparable store sales for full priced retail stores decreased 6.3 percent and comparable store sales at the factory outlet stores decreased 18.6 percent. Now for the combined March/April period, total comparable store sales declined 3.1 percent vs. 2001 comparable period for the combined period comparable store sales in the Company's full priced retail stores increased 1.2 percent and comparable store sales at the factory outlet stores decreased 12.6 percent.

The overall Raymond's retail business in the first quarter benefited from our strategy and now they focus on key point driver. Customers bought

with feminine and detailing which added that of uniqueness this type of product is reconfirming

position of the selling stores, novelty and fashion. The Guess collection of line continues to deliver sales in the period. We believe that this line offers significant progression on going forward.

Of sitting this line this gain excuse me..whether decline in the basics business. Men's retail business improved slightly during the quarter due to fashion down. Sleeveless top did well and top and bottom to be made with natural fabrics also performed well.

Consistent with women the men's basics business trended downward which offset some of the game. In wholesale revenue declined by 39.1 percent in the quarter to 49.4 million dollars. The prior year included approximately 10.5 million dollars of kids' business, that we now licensed out.

Excluding the kids' business from the year ago results wholesale revenues declined by 30.1 percent. We continue to experience

product purchasing by the balance providers in their efforts to entirely control our inventory level in response to lower customer traffic and spending. On a positive node the level of returns during the quarter was lower than in the prior year quarter reflecting clearance department for inventory despite the difficult retail environment.

From an overall standpoint we still success with some fashion Denim programs with unique fabrics treatment to wash it. However the basics business in which uncontemporary hand-in-hand was challenging reflecting the current overall market trend.

Recognizing the current challenges of the wholesale segment we are focusing greater attention and resources on improving performance. We believe merchandizing is key to this effort and we are making changes in our product offering to enhance our deal, price/value proportion, and positive differentiation on the selling

In addition we are reaching out to our departed copartners to explore ways we can work more closely together to increase sales of Guess products includes space productivity and increases inventory turnover. Regarding our licensing business our first quarter revenue increased slightly to 9.9 million dollars from 9.6 million dollars in the first quarter last year.

Revenues improved with the addition of the kid's license we opt that by reduced royalties from some from our international licensees particularly in Asia. Gross profit for retails segment improved by 180 basis points compared to the prior year. The increase reflect the improved inventory position at retail and

.

The average domestic store inventory decreased 7 percent in units per store year-over-year. Of setting the margin improvements in retail stores was that decline in the wholesales margin. Higher sales to the half price channel hire a

adversely impacted the wholesale margin. However, the margin achieved on regular shipment showed improvement vs. the prior year. In total the company's gross profit decreased to 45.1 million dollars for the first quarter, which represents a gross profit margin of 32.7 percent of net revenue, this compares to 34.5 percent margin in the same period of last year.

SG&A expenses decreased by 3.5 million dollars in the first quarter in spite of the 5.7 percent increase in retails square footage due to 11 net more stores in the base compared to the year ago. SG&A expenses, as a percentage of sales was 35.2 percent compared to 30.7 percent last year due to the decrease in wholesale revenue. We continue to see bulk of results of our cost control initiative with

improvement in outlet stores and distribution center. Low administrative cost and reduced discretionary spending. This savings more than offset the increase cost record to support our expansion during the period.

We ended the quarter with 162 retail and kid stores and 66 factory stores including our stores in Canada. For the quarter we open one retail store and try to open 20 to 25 stores over the full year. Now I would like to turn the call over to Fred.

Thank you Carlos and good afternoon. Moving down the P&L from where Carlos left out the company reported a loss from operations for the quarter of 3.5 million dollars before restructuring severance charges which compares the earnings from operation 7.6 million dollars in the first quarter last year.

Including these charges, the loss from operations, was 4.2 million dollars compared to earnings from operations of 7.2 million dollars in the same period last year. Our retail business narrow the operating loss to 5.9 million dollars in the first quarter, compared to an operating loss of 6.7 million dollars in the 2001 quarter.

Our wholesale business posted a loss from operations of 6.7 million dollars in the first quarter vs. earnings from operations of 5.6 million dollars in the 2001 first quarter. The two key contributors for wholesale result were reduced shipments and lower margin due to increase sale to half price channel in effort to keep inventories clean.

Our licensing segment posted earnings from operations of 8.4 million dollars in the current quarter compared to 8.2 million dollars in the same prior year quarter. During the quarter we recorded restructuring charges of 0.7 million dollars related to the

position of two these store locations that the company is not planning to open.

The company expects to sublease these properties during the second quarter. We recorded interest expense in the first quarter of 2.3 million dollars versus net interest expense of 3.2 million dollars in year ago period due to lower volumes in the period. In fact we have been in the investment cash position since last December. We use an effective income tax rate of 43 percent for the quarter and will continue to monitor our effective cash rate throughout the year.

With respect to our balance sheet at the quarter total inventories were down 50.2 million dollars or 37.9 percent reduction from year ago level despite the 5.7 percent increase in retail square footage. This is a significant accomplishment particularly in light of the average business trends we experienced.

Receivables were 46.6 million dollars compared to 59.3 million dollars last year. We have 20.8 million dollars in short term investments compared to 1.2 million dollars a year ago. Total debt at the end of the first quarter 2002 amount 86.4 million dollars compared to 145.5 million dollars in the prior year period.

The company ended the quarter with no borrowings against its domestic credit lines compared to our balance of 48.4 million dollars at the first quarter end last year. During the quarter the company rely primarily on internally generated ones, trade credits, letter to credit to finance this operations in capital.

Cash used in operating activities of the first quarter of 2002 totaled 0.4 million dollars compared to 30.5 million dollars of cash used in the first quarter of 2001. The improvement in operating cash flow is primarily

to reduce receivables and lower inventory levels, partially offset by course planning reduce the accounts payable balance. The decrease in account receivable reflects improved collection and lower wholesale revenues.

In March 30, 2002, the company had available working capital 96.3 million dollars compared to 132 million dollars in march 31, 2001. Capital expenditures amounted to 5 million dollars for the first quarter 2002 compared to 4.8 million dollars during the first quarter 2001.

I will now turn the call back to Carlos to review our outlook for remainder of 2002. Carlos...

Thank you Fred and as Maurice mentioned the difficult confusions we continue to face in our wholesale business have caused that to reassert our expectations for this business for the remainder of the year. As a result we announced revise the expectation taking into account a lower contribution from

For full year 2002, we now expect total revenue to decline in the range 10 percent to 13 percent from 2001 level, with a first half down about 20 percent and decline in the mid-single digits fin the second half of the year. As we discussed on our last call the timing of the women's market and licensing of our kid's line have contributed to a lower wholesale backlog, which is currently down 54 percent year-over-year.

If the market had a curt in April as it did last year and excluding the

we would expect backlog to be done about 30 percent vs. 2001. All considered, we now expect overall wholesale revenues to be down by over 40 percent during the first half and by approximately 35 percent in the second quarter of the year.

Total retail store revenue is forecasted to decline lower single digit in the first quarter of fiscal 2002 and to increase in the low teens range in the second half. We expect our total

to decline in the mid-single digits in the second quarter and to increase low-to-mid single digits in the third and fourth quarters.

Licensing revenues for 2002 are projected to be down about 5 percent year-over-year. Our overall gross margin is expected to increase due to our improved inventory position compared to prior year, which should result in lower mark down and do itself through the out price channel.

We expect margin to improve in the second half as comparable stores sales are expected to be positive, which should result in better level of occupancy. Selling, general, and administrative expenses are expected to be in the mid-to-high 30 percent range for the first half of the year and the low 30 percent range for the second half.

Interest expense for the year is expected to be about 9 million dollars and we anticipate that our overall tax rate will be approximately 43 percent for this fiscal year. Inventory levels are expected remain in the 80 to 100 million dollars range through most balance of the year, peaking in the late third or early fourth quarter in anticipation of foreign holiday shipment.

Capital expenditure for 2002 is planned at approximately 25 million dollars including cost to

20 to 25 years stores and to complete relocations. Once again the company plans to end the year with no borrowings under it. Based on the above promises we now expected diluted earnings per share for this full year to be in the range of 10 to 16 cents. We expect a diluted loss per share of 12 to 14 cents in the second quarter.

We anticipate a return to profitability for both the third and fourth quarters with diluted earnings per share in the range of 11 to 13 cents, and 21 to 23 cents respectively. I would like to

our commitment to long term profitable growth, the actions we have taken to strengthen our balance sheet lower operating cost and improved efficiencies have laid a solid foundation for the future.

Our efforts are now firmly focused on balancing our sales and earnings performance in what continues to be an adverse environment. Retail trends have shown some improvement we would look to build in this progress as we take actions to improve wholesale result.

Working in our favorite is the great strength of the Guess brands as well as our talented and dedicated team. Thank you for your attention today. And we will now open the call for your questions. Operator....

Thank you. Today's question-answer period will be handled electronically. If you would like to ask a question please press the star key followed by digit 1 on your touch phone. Once again if you would like to ask a question please press the star key followed by digit 1. We go first to Margaret Whitfield with Brean Murray.

Good afternoon gentlemen. Commenting your wholesale business, your backlog seems to be worse than I would have thought. Does that represents perhaps a loss of doors or a change in the men's business in terms of space in the stores?

Yes. We have lost some doors, but the loss has not been that significant. What we are seeing is more cautiousness in the buying pattern. So the department stores are running with lower levels of inventory and that has resulted in lower levels of return and cleaner inventories. And also some of the backlog decline relates to the loss of specialty store business.

Could you define you know how much of that decline was specialty books stores as oppose to leading department stores?

No, I don't have those numbers. But there is pretty substantial amount of revenues that were lost due to specialty store business.

OK. And would it represent mainly the men side versus the women's?

Yes, but there were losses in both segments.

OK. But I would think that by the second half we'll anniversary those losses?

Right.

OK. Could you quantify the off price sales in the period?

We have never disclosed that Margret, but it was very significant. You know we've been very aggressive in clearing the inventories just to keep the inventories as clean as they can be. We feel that the inventory position is just amazing. The problem we faced is that because of market condition to clear through off price, the losses have been steeper and steeper. We feel good about the quality of the inventory going forward. So hope and we think that there isn't that kind of excess inventory in the marketplace that was there towards the fourth quarter last year and into the first quarter this year. So, we think that this problem should be relieved in the future.

So the second quarter off-price sales should be well below the first quarter?

It should be below the first quarter.

Below First quarter. OK. And as you comment that this is the 20th anniversary of the brand, I can't help but think that there could be some initiatives either in licensing or international that could take some of the pressure off given what's going on in US department stores and specialty stores. Any thoughts there?

We have put new resources into the international business, and we are doing a lot; we just opened a new store in Italy and you know there is a lot of activity

going on. We feel great about the international business and the opportunities. Our brand is very strong in Europe, and we feel that the opportunities to expand there are very significant. So we continue to put efforts there in resources.

OK. Thank you.

Thank you Margret.

We go next to Glen

with GlenHill Capital.

Good afternoon. Can you comment on the wholesale business vs. last conference call? What has been worst than your expectations when you set the matter? I am assuming you were quite conservative when you laid those out a quarter ago?

It's always difficult to predict what the buyers or other buyers are going to do. Not knowing exactly what their trends are for the different brands and the make and so forth. And at any point in time, we may have visibility for the next probably four to six months at best based on the seasons that are open and what we've had backlog for. So because we had lost some revenues last year in wholesale I am sorry.. in 2001, we had anticipated that in the second half of this year we are going to see better trends in that business and that has not yet materialized. We sold.. at the time we get when we gave guidance for the full year that we were very conservative, but then market revealed that we were not as conservative as the reality is going to be.

What happen also this is happen also is that the drop in the QRB [Quick Response Business] has been even more than we anticipated to the point where we basically have to re-invent,..re-advertise and re-invent all that business. We're going to be ready for back to school for that. And for right now we misses is really very very.... we need you know for most of the industry, but I don't want take that as an issue now we just have to be realistic about it you know when ...we need to re-energize the business by introducing the new competition, new styles, etc., and basically put the new products out there. That's what we are in the process of doing now.

The great thing is that our partners and specialty department stores partners with big department stores have expressed over and over that they want to grow with us. They are very supportive and they are willing to work with us very closely to reinvent this part of the business. We are working closely, and we're optimistic. This is just a tough time, and it's a tough time for them and many of our competitors, and we think there is significant opportunity to regain a lot of shares that we lost.

And a different note Carlos. In terms of the cash on the balance sheet, can you use any of that to pay down debt at this point?

Well, we are looking at the several options the only debt that we have to speak of is the subordinated notes that are due next year. We could call some of those notes in their entirety this year without any kind of penalty. We are looking at different options. The answer is yes, we could use that cash to repay some of the debt.

We go next to Andrew

- KDP Investment

.

Good afternoon. I have couple questions. First, you could translate your EPS guidance into an EBITDA number, it appears that what you are suggesting is basically flat EBITDA for the last three quarters of the year compared to a year ago. Can you confirm that?

I think that those numbers.. may be a little higher than last year in terms of the EBITDA for last three quarters you said right?

Yes.

Yes, I think we translated better numbers on the EBITDA basis.

Okay, now your retail numbers appear to be improving, your times appeared to be improving and assuming a flat to slight increase in EBITDA for the last remaining three quarters of the year, which suggests that your wholesale business is going to decline over the last three quarters of the year and I guess to the extent that's true or to the extent that they are only going to remain kind of flat. Then can you explain that given your expectations that you are going to have reduction in the off price sales in that business?

Yes, actually, you are right. We assumed that wholesale would have a difficult time relative to the year before in terms of profitability and it's all a function of volume. Actually our margins we are anticipating will improve. We've seen an increase in initial margins in the wholesale business even in the first quarter. We have no reason to believe that that would not continue. As you said, because we have net excess inventory, we don't anticipate the level of off price sales that we had last year. The big problem that we have or the big challenge now is volume and as we see wholesale shipments going down or net revenues going down by about 35 percent like said for the second half of the year and having a cost structure that we have to support, there's a pressure on the profitability side.

In your press release you talked about, there are opportunities to further lower your cost and improve your productivity. I was wondering may be you could just further quantify or define those initiatives and particularly you know, as it relates to reducing your cost structure in the wholesale business?

We continue to look for ways to become more efficient. We're putting a lot of money into system. This year we are replacing our manufacturing system, and we think that is going to result in further efficiencies. Our distribution facility has been running in an amazing way in terms of productivity improvements over the previous year to the point that with the new facility we're going to spend slightly over what we spent in 1999 which was a very small number considering the amount of fixed costs that we are now carrying. We have $0.5m facility there that could be leveraged tremendously. We are very happy about growth

improvement. In addition to that, in the field we have able, through software again, to manage store-selling expenses much more effectively. So, we think that there is opportunity there and then discretionary spending, you know, we are tightening in every area that we can. Our selling expenses in the wholesale segment since you mentioned, are down considerably and we plan that they will remain down for the rest of the year, but again, you know we need some help from the top line.

I guess so and lastly can you talk about whether or not you have any covenant issues in light of your reduced expectations for the year?

Well, we are in full compliance with the covenant as of the end of the first quarter, and we'll continue to monitor that.

How about based on your expectations for the year and guidance that you suggested? If that were to come to pass, would you need any covenant relief?

For the second quarter but we are talking to the banks. We don't anticipate any issues with that.

Thank you.

we take our question from Dorothy Slakner, CIBC World Market.

Thanks, I wanted to go back to the wholesale business, could you talk a little bit more about how you are able to work with your partners and what kinds of things you might by trying to do before you change the course of that business?

Hai, Dorothy. What we are doing right now, as I mentioned before, is we are reducing the BC business, because that's a business which is really important for both for us and our customers. So that's the business, which normally provides you a consistent margin, season after season, because these are barely rarely going on the markdown [phonetic]. So that's where you generate lots of margin. These and what we're doing also is that we are providing also our customers with the other segments which we call a key item, which is a high-volume item. So we are concentrating the line on all of these key items. We are also giving them extra margin in order to buildup their margin. So these are the initiatives that's we're doing. We're really focusing the line, getting rescues on the floor, and we are having a very very focused and strong message for the customer--the ultimate consumer.

Any changes that you are making to the square footage or the configuration that you have in the department stores, for example?

Right now, we've got to mention little bit before, we got a reduction in number of the doors and for the back to school, we don't expect more reduction and we don't expect more increase either. Rather, the opposite, a lot of department stores right now are experiencing, with having their own floor and experiencing in some of their divisions a kind of a generic floor rather than shopping shops. So bulk of the reduction that we have experienced is coming from that, quite a few doors, it is coming form that as well. On an ongoing basis, I don't know, as these steps

positive or not, they seem to be positive for the department store and we might see more and more of that happening. They thought in that process that this will give them more flexibility in the lines--the different vendors that they are who contract to expand the speed that they need for a particular vendor depending on how the business is doing. But if you

they will look up more like a lifestyle. You see what I mean? So when we are dedicated to a vendor, then the entire floor will be like a lifestyle, okay.

Dorothy, you know, the other, Dorothy I want to add to Maurice's comment is that we have taken a very conservative approach to inventory, as you are aware. We think there are opportunities because the basic business has really migrated into something else, to really take more positions into some inventory, either fabrics or finished goods, as we believe in the key item or in a particular product and to be able to react more effectively during season which is something that during this past season we weren't able to do because of the kind of approach that we took. We think that is going to be a pretty significant opportunity for us because you know, what we see is that

the customer buys and we have had a lot of

especially during the season we think that there are

.

Is that something that you'd be able to do or is back-to-school, this really something longer-term?

Yes, we're going to be ready by back to school. That's a part of the few things I mentioned before. Quite a few of the items, the response we have produced, you know, which were very successful--we feel very comfortable putting it on the queue. That should regenerate all these businesses.

Okay, thank you.

Once again, if you would like to ask a question, please press the star key followed by the digit 1. We will go next to Mark Coffin, RBC Capital Market.

Hi, actually my questions have been answered. Thank you.

You are welcome.

Once again, to ask a question, please press the star key followed by the digit 1on your touchdown phone. There are no further questions at this time. I would like to turn the call back over to Mr.Marciano for any additional closing comment.

Thank you very much. Once again I just want to re-iterate here that we are going to be very very focused on increasing our wholesale business and we are going to have more and more meetings with

merchants from the wholesale business we moved to address their needs for the customers. On the retail business, our focus is going to be on increasing the productivity of our stores as well as expanding. We really believe that we have lot of room to expand our productivity there and it is going to be a major initiative for us. And the last thing that is going to be a big initiative also for us is we are going to improve the efficiency I getting to the market, which means the time to market to move much faster,

we are going which means that we are going to have to, some time, or take a risk in thick

of risk in fabrics to get ready and some time in shifting there some of our resoursing and production in order to go to get much faster into the market and to take advantage of the market and to regain loss of shares from the market. So that is going to be our main focus for the remainder for the year. Thank you very much for listening to us and we will talk to you in the next quarter. Thank you.

That concludes today's conference and thank you for your participation. You may disconnect now.