Guess? Inc (GES) 2002 Q4 法說會逐字稿

Please standby, we're about to begin.

Good day everyone, and welcome to today's Guess?

Conference call.

Today's call, including the question-and-answer portion is being recorded and is being made available to the public.

Statements made in this conference call, including, but not limited to those related to the company's expected results and operations, plans to reduce costs and estimated charges, proposed retail expansion, future success of products, and e-commerce or forward-looking statements and are made pursue to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Forward-looking statements are only expectations and involve known and unknown risks and uncertainties, which may cause results to differ materially from those discussed in this call.

You should refer to the company's most recent annual report on the Form 10-K for the fiscal year ended December 31, 2001, and Form 10-K, and its periodic and current result on Form 10-Q and 8-K filed under the Securities Exchange Act of 1934 for additional information about certain factors that could affect actual results.

At this time, for opening remarks, I'd like to turn the conference over to Mr. Carlos Alberini, President and Chief Operating Officer of the company.

Please go ahead, sir.

Thank you very much, and good afternoon.

Thank you for joining us today to discuss Guess? 2002 fourth quarter and full year financial results.

Joining me is Fred Silny, Senior Vice President and Chief Financial Officer for the company.

I will now briefly review with you the contents of the press release we issued today.

We will then open the call for your questions.

Let me start with the fourth quarter.

We announced today that before the fourth quarter ended December 31, 2002 did reported a net loss of $4.6m or a diluted loss of 11 cents per share.

This compares to our net earnings of $1.4m of diluted earnings of 3 cents per share for last year's fourth quarter.

The 2002 fourth quarter results include restructuring, impairment, and severance charges of $8.5m or $6.1m after taxes.

Excluding this charges, net earnings for the fourth quarter of 2002 were $1.5m or diluted earnings of 3 cents per share.

The 2001 fourth quarter included severance charges totaling $0.5m or 0.3m net of taxes.

Excluding these charges, net earnings for the 2001 fourth quarter were $1.7m or diluted earnings of 4 cents per share.

There is no question that the economic environment, particular in the retail remains uncertain.

Due to a series of both economic and political development, consumer confidence continues to weaken considerably.

In order to best position our business within this difficult climate, we have maintained our focus on improving our financial performance by moving forward with initiatives that should contribute to long-term profitable growth.

We continue to strengthen our balance sheet, and to aggressively manage cost at all levels, redirecting resources to where they will have the greatest impact on the business.

We made progress to this end and on several fronts during the fourth quarter.

I would like to share with you few highlights.

First and foremost our brand continues to be very strong, both domestically and internationally.

Our product offering continues to improve, especially our men's line, which forced the same-store sales growth in our stores in the fourth quarter for the first time in three years.

Second, we have continued to lower overall borrowing levels to $81.6m at the end of 2002 compared to $87.7m at the end of 2001, as a result of our efforts to maintain our inventory at 2001 year-end level, despite opening 24 new stores.

Our strive will allow us to keep our inventory very clean, and enable us to produce products, specifically for our factory stores in the New Year.

During the period, we continued to reposition our capital structure with the completion of our new bank credit facility.

In addition, our previously announced securitization transaction, which is currently being marketed to investors, will be used to repay in parts the $80m of subordinated debentures during August, 2003.

Third, we are investing in a state of the art supply chain system to pay operating efficiencies through further automation.

The system has been implemented in Canada already.

We expect to benefit from the full implementation of the system in the U.S., beginning in the second half of 2003 and beyond.

Moreover, we are in the process of completing the operation and financial integration of our Canadian business.

And lastly, during the fourth quarter, we began implementing initiatives to further reduce our cost structure as we have previously announced.

In connection with these actions, we've recorded an $8.5m pre-tax charge related to clothing or impairing certain under performing stores, the elimination of excess facilities and further reduction of our corporate staffing levels.

In spite of these accomplishments, our fourth quarter results continue to reflect the weakness in the recent marketplace.

Total revenue for the period declined 8.7% to $167.4m from 183.4m in the last year's fourth quarter.

Our retails stores including full price retail kits, factory outlets, Canada and E-commerce generated net sales of $130.9m during the fourth quarter, an increase of 6.8% from 122.6m in the prior year fourth quarter.

The revenue benefit of the largest store base, which represented a 9.1% increase in square footage as compared to the same period last year, more than offset a decrease in same-store sales of 0.9% in the quarter.

In the women's retail business, our young contemporary line, which is our principle line, showed continued improved performance in the fourth quarter.

Bottom sold well as did woven tops, dresses, and women's outerwear.

We continue to see improvement in sales of basic products, which has been a challenging category for us.

In men's retail, denim pants, both basic and fashion, drove the business this quarter.

Woven tops were also successful with [sexes] categories to continue to perform well in 2003 based on the demand that we are seeing from the [Nelson summer for Munich] and [inaudible].

Looking ahead, we plan to make ongoing improvement to product strategy.

Among other actions, we are realigning our top to bottom ratio, and introducing a new marketing approach in the retail stores, which clearly separates our three main denim sets, thereby enabling the customer to better understand our product styling and complete offerings.

In our wholesale operations fourth quarter 2002 revenues declined by 49.6% to $26.46m from 52.3m in the same period in 2001.

The prior year included approximately $4.8m of kids business that we now license out.

Excluding the kids business from the prior year results, wholesale revenues declined by 44.4% in this 2002 fourth quarter.

Higher allowances in domestic wholesales, and lower margins on off-price sales negatively affected both net revenue and gross margins in our wholesale business.

Our wholesale backlog as of [inaudible] 2, 2003 was $38.4m, compared to 59.3m after February 23, 2002.

This reflects the reduction endorse excluding kids, from approximately 1,500 at the end of 2001 to approximately 900 at the end of 2002.

In terms of trends in our wholesale business, women's bottoms sold well during the quarter.

Men's fashion [wovens] and net were also well received.

However, sales of basic products continues to be weak in the period as consumers shows great earnings to us and latest fashion.

Looking forward with Nancy Shachtman's return as President of our wholesale operations.

We are making further changes in our wholesale product offerings, specially in basic product in both men's and women's line, to enhance the appeal on the price value proposition of the assortments, and to generate positive differentiation on the [sunflower].

We have introduced several new [inaudible] and watches at attractive price points.

This new products are already being well received on a check basis, and we expect to them go after sales in this business over the course of 2003.

In our licensing business, fourth quarter revenues rose to $10.1m from 8.6m in 2001.

The increase is primarily attributable to improved sales from our international licensee.

Gross profit for the fourth quarter decreased 5.43% to $57.1m from 60.3m in the fourth quarter of 2001.

However, as a percentage of revenue, gross margin improved to 34.1%, so 32.9% in the same period of 2001.

The increase is due to higher licensing revenue and improved growth margins in our retail business partially offset by higher occupancy cost due to lower sales productivity, and a lower wholesale margin.

SG&A expense for the forth quarter were $52.8m, a decrease of 2.7% last from year.

The decrease is primarily attributable to lower general administrative expenses partially offset by the cost of operating 22 additional stores versus the year-end of last year.

Interest expense for the fourth quarter was $2.5m compared to 3.2m for the 2001 fourth quarter.

This improvement reflects lower borrowings as a result of the lower average inventory and receivables during the quarter.

As I mentioned, our total outstanding debt was $81.6m at the end of the 2002 compared to $87.7m at the end of 2001.

We ended the third quarter with a total of 249 stores, including those in Canada, of which 182 were full retail and kids stores, and 67 were factory outlet stores.

During the quarter, we opened 7 retail stores and one factory store and we also closed one factory store.

For the year ended December 31st, 2002, the company reported a net loss of $11.3m or a diluted loss per share of 2 26 cents versus net earnings of $6.2m or diluted earnings per share of 14 cents in the comparable 2001 period.

The 2002 results include restructuring impairment and severance charges 9.2m, or $6.2m net of tax and litigation settlement proceeds of $4.2m or $2.9m net of tax.

Excluding the charges and the litigation settlement the net loss for the 2002 was $8m, or a diluted loss of 18 cents per share.

The 2001 results include restructuring, impairment, and severance charges of $5.5m, or $3.2m net of tax.

Excluding these charges, net earnings for the 2001 period were $9.4m or diluted earnings of 21 cents per share.

Total revenues for the period declined by 13.9% to $583.1m compared to $677.6m in the same period last year.

As we announced in our press release today we are moving forward to complete the securitization transaction that we announced on January 16, 2003 under which our indirect wholly owned subsidiary Guess?

Royalty finance LLC, is privately offering $75m of Secured Notes due 2011.

Last fall we closed [inaudible] an $85m of bank credit facility.

According to that term of debt credit facility we had committed to refinance or extend the maturity of the existing subordinated debt by February 28. 2003.

While our intend was to complete this transaction prior to last date due to technical nature of the transaction the process of marketing and completing the securitization has taken longer than we expected.

We now anticipate that the securitization transaction will not close by this 28 and as a result the company and its lender amended the credit facility extending the dead line to April 30, 2003.

No other terms of the credit facility were revised.

With respect to share repurchase program approved by the Board Of Directors in the May 2001, we did not purchase any additional shares during the fourth quarter.

Finally, turning to our future outlook, as we disclosed in our earnings release today after careful consideration we have decided to discontinue the practice of issuing specific earnings guidance and of commenting on the earning guidance issued by others.

However, we will, of course, continue to discuss trends another factors expected to affect our business so that we can conduct your own analysis.

To this end I will now discuss our view of the current business trends and their impact on Guess?.

Based on our current view of the market place and the expected impact of the merchandise initiative that I discussed earlier we anticipate that retail comp stores sales will increase in the low single digit for 2003.

Total retail sales are expected to increase in low teens due mainly to the opening of the 15 new stores during the year and the annualization of the 24 stores that we opened in 2002.

On the wholesale side we anticipate overall revenues to be down in the mid single digit in 2003 with the second half of the year being stronger than that first half both in gross against the same 2002 period.

Although gross margins are expected to increase due to effective inventory management and a team inventory position.

This should result in lower market and fewer sales to off side channel.

Sale, and general administrative expense are expected to about flat with 2002 and in spite of an anticipated increase of 15 new stores.

Inventory level, I expected to increase percentage wise in the mid-single digit.

Capital expenditure for 2003, our plans at approximately $18m including the cost of the opening the new stores.

In closing I would like to say that while we expect business to remain challenging for the rest of 2003, we're confident that we're taking the right step to revitalize performance and increase shareholder value over the normal term.

We continue to focus on improving sales, while property managing cost and inventory.

And we are optimistic that this step will result in improved performance in the near term.

That's all.

We thank you for your interest in Guess?

And we will now be happy to open the line for questions.

Operator.

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question please do so by pressing the star key followed by the digit "1" on your touchtone phone.

If you are using a speakerphone please make sure that your mute function is turned off to allow your signals to reach our equipment.

We will proceed in the order that you signal us and we will take as many questions as time permit.

Once again, star "1" on your touchtone phone to signal for question.

We will pause for a moment.

Our first question today will come from Dorothy Lakner with CIBC World Market.

Thanks and good afternoon everyone.

Hi Dorothy.

Carlos you talked about the men's business and congratulations on positive numbers in the quarter.

Now there are not too many that are -- they're seeing numbers like that.

I just wondered if you could talk about the women's business as well in the fourth quarter and then if you could give us a little bit more color on what Nancy's planning in wholesale business you talked about more of price value equation and some differentiation on the sales floor.

I wonder if you could be a little bit more specific and just talk about the timing as when we might see those changes?

Yes.

Sure.

Well, of course we are very, very excited about the men's products and the results that we're seeing.

And the fourth quarter was probably the first period where we saw growth and not quality for sure but also we saw a lot of very healthy sale through in many of the different categories.

So it was a long process to reposition the whole line, as you know we have been working on this for over a year, may be a year and half and I think that we are now starting to see the result.

So we are very, very excited about that and we think that our product is second to [inaudible] in the marketplace right now.

We just came from [Magic] and they reviewed our rating on the line.

So, we are very excited about that.

With respect to women, we did have some bright spots during the period.

Obviously the women's business overall did not come positively and that is what [inaudible] become doubt in our regional stores and one of the areas that was very challenging for us was what we called the debt collection line.

Debt collection is a big part of the business but has been very successful during the previous year and we were up to get some tough numbers.

Also this year [inaudible] did not produce such effectively.

And then in the YC what we call the [Yensen] temporary line, we had some successes in bottoms.

Some of the basic products sold better, but still not enough to compensate losses in some of the other categories.

And then with respect to the rest of the stores we had very good performance in accessories once again.

Our business in accessory has seemed very, very healthy.

And but again not enough to compensate for the losses in the women side.

With respect to your second question.

We are actually excited.

Nancy has been making tremendous contribution, you know her, she has a lot of energy and she is very focused on turning this business around.

We have redesigned the whole QR program and put new products into the [inaudible] product that is one of the great initiatives for us to rebuild basics and rebuild the problem in [inaudible] that as we have lost.

Some of the early sales through are very good and I am very excited about that, but it is probably early to bring victory here.

With respect to, so there are lot of...

That's already in place.

It was just being put in place.

Okay.

So, when we talk about the fourth quarter that was not in place.

At that point, we were just testing and going into 2003 some of this programs are in place just as we see that is correct, and that's how we can tell that early [inaudible] are encouraging.

That also applies to men to certain extent.

She has brought some -- some new pants into the men lines to and also what we are seeing in wholesale that the customers trying to cut short with a novelty and some of the same stock that have been selling very well in our retails stores and now trying to sell well in wholesale.

So there is a lot of that obviously the Guess? customer come to Guess store looking for what we have in kind of take a little longer for the departmental store customers who are to find the new direction and to be alike in that kind of a trend so and we're trying to see that success right now.

And Carlos, should we anticipate even fewer doors in wholesale for '03 or should we assume that reduction is done for now and that we might actually see some rebuilding in the second half of the year?

Yeah, that's our hope, of course, this business operates on a season-by-season basis that you know, but we have seen tremendous support for this space that we are occupying right now.

And also in terms of backlog numbers you gave, given the way retailers are acting right now, which is generally I think to wait as long as possible before ordering, is that necessarily a good way of looking at the business?

I think that once -- again our hope is that we're going to do a lot of business with what we call injections and immediate to season and also based on re-orders, but that's not something that can be guaranteed, of course. [Inaudible] historically.

But you are already seeing more in season what -- could you give us some idea of the proportion of the business that you are doing on forward orders, ordering ahead of time versus the end season and re-order business that you are doing?

Yeah, I do not have those numbers at hand, but I think it will be fair to say that the expert [inaudible] that it will be higher than it was a year ago.

Okay.

Thank you.

You are very welcome.

Once again as a reminder to our audience, if you do wish to signal for question, please press star "1" on your touchtone phone at this time.

Our next question comes from Andrew Ebersole with KDP Investment.

Good afternoon, I have a couple of questions.

First, are the anticipated proceeds from the securitization transaction still targeted at 75m or do you think that's going to come in longer than expected?

No the transaction that we are marketing is $75m transaction.

So you know we have to know -- know other elements right now.

How this profit grows, we still expect to complete that transaction at this toward design, which is of $75m and that is what this rating agencies rated so forth.

The way this transaction is being sold can you give an indication of may be how much -- how much of the commitment you got under that $75m or do you not know at this time?

No, that is something that we cannot share with anybody at this point.

Okay, could you discuss a little bit further the circumstance behind the recent decline indoors may be given some indication of how much of that was rationalization on yearend for some under performing stores and how much of it was from the coming from the vendor and then also can you talk about the timing of that doors reduction whether or not it to an extent happened early in the year or towards the end of the year?

This happen before -- this happen before Nancy came back pretty much you know this reduction was in the work, but we -- so since Nancy came back, we haven't experienced any reduction of significance.

And going back to Dorothy's question, we do not anticipate further reductions, but, of course, that is a function of performance.

In many cases, this is a decision that is being made between our customer and our team.

But it's all function of profitability and you have to be profitable for both ends for it to work and if it isn't, there is, obvious, a decision needs to be made.

Have you -- can you talk at all about some of the cost reduction initiatives you are implementing at wholesale to try to realign those cost given the decline in revenues?

Actually we are looking at cost reductions across the company, not just in wholesale.

Obviously, in the case of wholesale reductions they have been very significant because of the decline in revenues that we have experienced.

But we have streamlined our whole entire sales operation there.

We have reduced our spending in additional shops.

We have looked at discretionary spending including advertising too with an eye of reducing total cost.

And then most of the charges that we are taking was varied affect that I am talking about 8.5m loan, while they affect primarily the winter operation because we are impairing some assets and closing some under performing stores.

There are also some of those costs that we are incurring to reduce corporate stamping and in many cases that corporate stamping supports the close as well.

We are also looking at couple of facilities and that we want to eliminate or dispose off and bring [tunnels] of people or the operation to consolidate into our facilities that are already existing.

I see.

I know you are not providing any specific guidance, but can you talk a little bit about directionally any way where you see your wholesale operations going from an operating income standpoint.

You guys recorded about a $22m loss this year and you are forecasting year-over-year declines in revenues.

I am just trying to get a sense for where we should see that operating income or loss figure going this year in light of the revenue declines in your cost reduction initiatives?

Yes.

We anticipate that we could see marginal progress in the wholesale business and that would be of again a function of product selling better.

One of the reasons why allowances were very high last year, that impacted our revenue and margins as I said before, was the fact that the product did not sell as expected.

So we had to support the margins in that way.

We think that this product is going to sell better and that is our expectation and based on that we think that the margins could be improved.

In addition to that, last year we did carry some excess inventories.

That excess inventory needed to be sold in the off-price channel and that affect the margin for the wholesale business.

And because of that business model being very different than it used to be that the company made a small margin, when it sold to it to the off-price channel.

That is now no longer the case.

We see losses in many cases when we sold to the off-price channel, related to our cost.

So the better we control inventories and we manage inventories and we eliminate and avoid the creation of that excess inventories, the better those margins for wholesale can be.

And we see at a very significant opportunity this year considering how we made the turn and considering how we are planning the business much more very carefully, not to create that kind of excess.

So we see a potential margin of improvement from those two areas.

Now, of course, with revenues being down it's going to be very difficult to make any significant improvements and incorporate in that segment.

We have cut costs and we see some other opportunities, but it is not going to be a tremendous amount that we can continue to pat to reverse that loss you that you are referring to.

Yes.

Thank you.

You are welcome Andrew.

We do have a follow-up question from Dorothy Lakner.

Hi, yes.

Carlos can you tell us how many stores you are planning on closing this year?

And then just what the square footage increase for '03 would end up being?

Yeah.

Dorothy, there is a very small number of stores that are we planning to close.

It's less then a handful.

We talked about this when we announced the possibility that we are going to place a charge and that hasn't changed.

Those facts have not changed, okay.

With respect to the square footage growth for '03, is we chose this past year with 1,226,000 square feet and now we are projecting to close next year with 1,368,000 square feet.

This is assuming that we will 15 stores that we were talking about.

Great.

Thank you.

You are welcome.

And that by the way includes U.S. and Canada.

At this time sir, we have no questions standing by.

I would like to turn conference back to you for additional or closing comments.

Well, thank you.

Again thank you for your interest in Guess?

We have a good team and attractive business model and an amazing brand.

We are well positioned for the future.

We are dedicated to reinvigorate in the division.

We have no doubt that we can accomplish this.

Thank you and have a good day.

This concludes today's conference call.

Thank you for you participation.

You may disconnect at this time.