Guess? Inc (GES) 2003 Q1 法說會逐字稿

Good Day.

And Welcome to today's Guess conference call.

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

Statements made in this conference call, including but not limited to the company's expected results of operations and plans, to reduce costs and estimated charges, or forward looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward looking statements are only expectations and involve known and unknown risk and uncertainties which may cause actual results in future periods and other future events to differ materially from what is currently anticipated.

Factors which may cause actual results in future periods to differ from current expectations include, among other things, the continued availability of sufficient working capital, the successful integration of new stores and existing operations, the continued desirability and customer acceptance of existing and future product lines, including licensed product lines, possible cancellation of wholesale orders, the success of competitive products and the availability of adequate source of capital.

In addition to these factors, the economic and other factors identified in the company's most recent annual report on Form 10K for the fiscal year ended December 31, 2002, including, but not limited to the risk factors discussed therein, could affect the forward looking statements contained herein, and in the company's other documents.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Carlos Alberini, President and COO for the company.

Please go ahead sir.

Thank you.

Good afternoon and thank you for joining us today to discuss Guess' 2003 first quarter financial results.

Joining me is Fred Silny, Senior Vice President and CFO for the company.

I will begin with a review of the first quarter, and April retail sales, and then we will open the call for your questions.

We announced today that for the first quarter ended March 29th, 2003, Guess reported a net loss of $5.8m or a diluted loss of .13 cents per share.

This compares to a net loss of $3.6m or a diluted loss of .08 cents per share for last year's first quarter.

The 2002 first quarter results include restructuring, impairment and severance charges of $.7m or $.4m after taxes.

As we announced in the press release issued today, you will note that last year's results have been revised to conform with changes that we have made in our segment reporting, effective with the first quarter of this year.

The new reporting will better reflect how our three business segments, retail, wholesale and licensing are managed and how each segment's performance is evaluated.

The earnings from operations for each segment now include only those costs that are specifically related to each segment, consisting primarily of store operations, distribution, selling and merchandising, depreciation, amortization and employee compensation directly related to that business segment.

In addition, we are continuing to allocate design and advertising charges to the business segments based on the assessed benefit derived from the respective expenditures.

The new structure excludes from the segment results, corporate overhead costs, or shared costs of the organization.

These costs are presented separately and include, among others, information technology, human resources, accounting and finance, executive compensation, facilities and legal expenses.

Total net revenue for the 2003 first quarter increased 1% to $139.6m from $138.2m in last year's first quarter.

Our results for the period reflect higher levels of promotional activity which negatively impacted our margins.

Within this challenging climate we continue to be focused on pursuing the inventory control and cost management initiatives that we put in place over the course of 2002, as well as revenue initiatives designed to grow the top line.

And we believe we're continuing to improve long-term performance.

Our retail stores, including full price retail, kids, factory outlets, Canada and e-commerce, generated net sales of $83.7m during the first quarter.

An increase of 6.1% from $78.9m in the prior year first quarter.

The revenue benefit of the larger store base, which represented an 8% increase in square footage as compared to the same period last year, more than offset a decrease in comparable store sales of 1.7% in the quarter.

The comparable store sales decrease also reflects the shift of Easter from March in 2002 to April this year, and the fact that for the first quarter of 2003 we had 88 days compared to 89 days for the same period last year.

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

Knit tops, active wear and swimwear all showed improved sales performance over 2002.

We also saw better trends in sales of basic products, especially in our basic active wear category.

We continue to experience significant improvement in men's retail with woven tops driving the business.

Denim pants, both fashion and basic, are also performing well.

We expect these categories to continue to perform well in 2003, based on the demand that we have seen from the male consumer for newness and novelty.

Looking ahead, we plan to make ongoing improvements to our product strategy.

We see excellent opportunities in our bottoms business.

We also believe that our woven business has room for continued growth.

In our wholesale operations, first quarter 2003 revenues declined 8.8% to $45m from $49.4m in the same period in 2002.

The [inaudible] of net revenue decreased in the first quarter of 2003 by $9.4m or 27.3%.

That was partially offset by a $5m increase in international wholesale revenues.

Lower margins on off-price sales, lower initial markup for the period, and higher allowances in domestic wholesale negatively impacted gross margins in our wholesale business.

Our domestic wholesale backlog as of May 3, 2003 was $46.2m, compared to $64.4m as of May 4, 2002, down 28%.

As we discussed in our last call, this reflects the reduction in [doors] excluding kids, from approximately 1400 at the end of the first quarter 2002 to approximately 800 at March 29th, 2003.

Our focus at this time remains on building our business in our most profitable [doors] by working closely with our wholesale partners on longer term [reacquiring lost doors].

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

Men's fashion wovens were also well received.

We're making further changes in our wholesale product offerings, especially in basic products, in both men's and women's lines, to enhance the appeal and the price value proposition of the assortments, and to continue to generate positive differentiation on the selling floor.

Based on the initiatives that we are pursuing, we expect our basic business for both men and women to continue to improve in 2003.

In our licensing business, first quarter revenues rose to $10.9m from $9.9m in 2002.

The increase is attributable to improved performance by both our domestic and international licensees.

Overall, gross profit for the 2003 first quarter decreased 8.3% to $41.3m from $45.1m in the first quarter of 2002.

Gross profit margin declined to 29.6% in the first quarter of 2003 from 32.7% in the same period of 2002.

The decrease is attributable to the lower wholesale markets that I discussed earlier, lower retail margins from increased promotional activity, and higher occupancy cost percentages due to lower sales productivity.

Higher licensing revenue partially offset the gross margin decline.

We are pursuing similar initiatives to improve initial margins in the future, including better sourcing, improved mix, lower transportation costs and some modified pricing.

SG&A expenses for the first quarter were $49.4m, a 1.6% increase from last year's $48.6m.

This increase reflects the additional cost of operating 22 net new stores in the first quarter of 2003, partially offset by decreases in other SG&A expenses resulting from cost-cutting actions that we have taken over the past year.

Interest expense for the first quarter of 2003was $2.1m compared to $2.3m for the 2002 first quarter.

The improvement reflects lower borrowing costs compared to 2002.

We are pleased with our inventory position both in terms of amount of inventory and its quality and ageing at quarter end.

We ended the first quarter with a total of 246 stores, including those in Canada, of which 182 were full price retail and kids stores, and 64 were factory outlet stores.

During the quarter we closed 3 factory stores.

As we announced last week, the company has completed, a $75m securitization transaction.

We are very pleased with this transaction as we have now completely repositioned the company's capital structure at very advantageous terms.

This new financing coupled with the previously announced $85m credit facility provides a solid foundation regarding terms and capacity for the future growth of the company.

It will also lower our cost of borrowings; replacing the 9.5% senior subordinated debt with 6.75% secured notes.

We also announced today our retail sales results for April.

Total retail sales for the 5 weeks ended May 3, 2003 were $36.6m, and increase of 17.2% from sales of $31.3m for the five weeks ended May 4, 2002.

Comparable store sales for the period increased 9.3%.

Comparable store sales for the full price retail stores increased 5.6%, and comparable store sales for the factory outlet stores increased 19.6%.

We are pleased with our current trend, importantly, the product is also selling well in our wholesale accounts.

Before we open it up for questions, let me provide a brief update on our outlook for 2003.

During our fourth quarter conference call in February, we stated that based on our view of the marketplace at that time, and the expected impact of our merchandising initiatives, we anticipated that retail comparable store sales would increase in the low single digit range for 2003.

That remains our view.

However, we now expect total retail sales to increase in the high single digit range, including the opening of 15-20 new stores during the year and the annualization of the 24 stores that we opened in 2002.

On the wholesale side, we continue to anticipate overall revenues to be down in the mid single digits in 2003, primarily due to a reduction in [doors] from last year.

With the second half of the year being stronger than the first half, and posting growth against the same 2002 period.

Overall gross margins are expected to increase as the year continues, due to effective inventory management and a clean inventory position, with the goal of achieving lower markdowns and fewer sales through off-price channels.

Due to a continuing contribution from cost cutting initiatives we still expect some general and expenses to be about flat with 2002, inspired of an anticipated increase of 15-20 new stores.

Finally, we continue to expect inventory levels to increase percentage wise in the mid single digits by year end, and capital expenditures for 2003 are planned at approximately $18m including the cost of opening the new stores.

Before closing I would like to say a few words about our partner and great friend, Armand Marciano.

As you know, Armand has decided to leave Guess after a 6-month leave of absence from the company.

As Maurice and Paul said, it has been a privilege for all of us at Guess to work with Armand over the years, and we thank him for his many contributions.

We'll miss him deeply, and we wish him and his family the very best in the future.

In connection with Armand's request to register his shares, the company filed the registration statement with the SEC yesterday for register for sale 4,645,492 shares owned by the Armand Marciano Trust.

In closing, I would like to say that while we expect business to remain challenging for the rest of 2003, we continue to focus on improving sales, while carefully managing costs and inventory.

The actions that we have taken on the product side are beginning to bear fruit, and we are optimistic that our efforts will result in improved performance for the year.

As always we thank you for your interest in Guess, and we will now be happy to open the lines for questions.

Operator?

The question and answer session will be conducted electronically.

If you do wish to signal for a question please do so by pressing the star key followed by the digit one on your touch-tone telephone.

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

We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press star one on your touch-tone telephone to signal for a questions.

We'll pause for a moment to assemble a roster.

Our first question today will come from Margaret Whitfield with Brean Murray Investments.

Good afternoon, Carlos and Fred.

I wondered, on the guidance that was provided, you said the comp hadn't changed, still up low singles and the new store openings were similar, but how come the change in total sales?

Are we closing more stores?

No, we have no plans to close any more stores, but we are revisiting our forecast constantly.

And to see how bold the comparable-the same stores and the new stores are performing.

And based on that, we are seeing the high single digits as opposed to a low double digits as we had originally anticipated.

Okay.

And some of the stores are being opened a little later.

Not a significant deviation from the original plan.

Okay.

Could you give us the store opening schedule by quarter?

We have not done that, and we're not planning to do that.

But we did open many stores in the first quarter, we are opening a bunch in the second quarter, maybe a half a dozen or so.

And then, progressively we'll open more stores in the third and fourth quarter, trying to get most of them in prior to the holiday season, of course.

Okay.

And, the door comparisons, I take it were very difficult year-over-year in Q1.

How does it look in Q2.

I take it-still difficult?

Could you give us-if you're still at 800 doors, where were you last year at the end of Q2.

Yes, it's still a pretty significant drop, and that explains why our backlog looks still in the 27-28% drop relative to last year.

But, as we turn into the second half of the year, the number of doors starts to get normalized.

So by the end of Q3 you will be normalized?

If you hold at 800?

It's a much better comparison than it is right now, yes.

Onto some good news, could you comment on your April comps in terms of how the men's performed versus the women's and if you've changed the allocation of square footage to favor men's?

It used to be 1/3 - 2/3 as I recall, and could you comment on how the Easter shift might have influenced your April numbers?

Thanks.

The men's category continues to outperform the women's.

We are-but remember that the base for men's was significantly depressed based on the drops that we experienced last year in the men's business.

Now, that being said, we think that the allocation of space is still pretty correct, or accurate based on the contributions.

And we continue to see growth in both areas.

With respect to the comps, for men's-we're in the high teens for the whole quarter.

So we see men's performing significantly better than both last year and plan.

What happened in April?

Was it still up at that level?

Well, April was a very strong month, yes.

Definitely.

You can imagine, we posted a 9.3% comp increase overall.

Primarily driven by a very strong comp in factory outlet stores.

But also retail had a very good month as well.

So how were women's-down by a similar amount?

No.

Not necessarily.

No, no.

Because men's represents a very small part of the total.

We're still talking about less than 20% of the total business.

So, even if you have a pretty significant comp, it doesn't drive the whole business.

Have you seen any positive comp in the women's business of late-either in April or in-

Yes.

Yes, we are seeing positive comp in women's, especially in April and -

In full price stores.

In the full price stores-now we have some dynamics there.

We have two lines, as you know Margaret, one is the young contemporary line which has been doing very well, and the other line is the Guess Collections line.

Now, we purposely reduced the presence of Guess Collections for the first quarter, and we now are [inaudible] pretty significantly.

We expect that the Guess Collections line will continue to be at the current levels in terms of proportion to total.

And we expect the young contemporary line to continue to grow.

But the women's was positive in full price stores in April?

In total?

In total-yes.

Okay.

And you're seeing similar favorable trends in wholesale?

Ah, well, the wholesale business has performed significantly better.

Now, remember that there are two parts to this story.

One is what our bookings are, the other one is how that product performs relative to the plans and last year for the retailers that bought the product.

And we are seeing a very good momentum in the sales of the product from retailers to the customers, which is definitely where the good news starts in every case.

So we are very excited about that.

We have had several weeks where the product has increased results over plan.

Finally, could you just comment on what you think the Easter shift impact was upon your comps in March and April?

Yes, I think that instead of answering that question, which is somewhat difficult to estimate because there's also spring breaks that affected the whole calendar between March and April.

I think-the more meaningful number would be to put March and April combined.

And for those two months we had same store sales growth of almost 3%.

Very good.

Thank you.

2.8% to be precise.

Thank you.

Our next question comes from Richard Kien with Kensington Management Group.

Hi, just had a question on the offering, or the shares that are to be sold.

I notice that you did file an S3, but does this mean you are having a public offering in one-or are these shares that are going to be offered from time to time.

This is a shelf registration.

So, once the SEC clears the registration, then those shares will be available to be traded.

But they will be fed into the market and therefore one would assume that there will be an overhang until they're cleared.

Yes, they can be sold from time-to-time.

Fred do you want--

Yes, that's correct, it's a shelf registration.

That's right, these shares will be sold from time-to-time.

Okay, so there's no-but there's no timing that--?

No, it's not a regulatory offering or anything like it.

Exactly.

Okay, thank you.

You're very welcome.

Once again as a reminder to our audience that it is star one on your touch-tone phone to signal for questions.

We'll take our next question from Mary Beth Holland with Gulf Smith and Heron.

Good afternoon.

How much-what is the similarity between the product that's carried in the retail stores versus the wholesale channel?

As a percentage?

It's very similar.

I couldn't tell you the percentage, but we are offering a very similar product to our wholesale partners.

And there are some very specific products that just go into our stores.

One-for the most part-the Guess Collection line-it's offered only to our retail stores.

There's only one account that's currently buying the Guess Collection line other than us, in the retail stores.

And then there may be some specific styles that are not being carried by the wholesale accounts-in many cases if they don't want to buy it, of course-if it is in the line they would not.

So, in many cases even when we pick from the same line there may be some inconsistency between the assortment.

Okay.

And you made a comment about making changes to the wholesale side, even moderating prices.

Maybe you could elaborate on that.

I was wondering-what will be the average price for pair for jeans for men and women this year versus a year ago?

There isn't a significant difference, and what we meant by the comment on looking at the assortment and the pricing and so forth is, we are constantly trying to work with the retailers to offer the kinds of products at the kinds of pricing that they're customers are looking for.

Since Nancy Chapman came back, she has even heightened those efforts, and is working very closely with all the accounts.

And with our design team and merchandising team here, to make sure that we are satisfying those requirements.

We don't see a significant change in pricing.

These efforts have resulted primarily in addressing several new styles at certain price points as opposed to changing the price of the same product.

So what is the average price of a pair of jeans for men and women in the wholesale channel?

Well, $68 would be a very typical price.

Some of our accounts go much higher than that-[$38] would also be a very good price.

And yes, this would be at retail price, of course.

Okay, whom are you hanging with then, at those prices?

Well, we are typically in the junior [floors].

So you have companies such as Polo Jeans and DKNY, Tommy Girls, and there are many other resources that are open in that area of the product line.

Oh, no, I understand that.

I just wanted to get a sense of who was also priced around $58-$78.

Yes, well, the story goes being called as like stansbrands [inaudible].

We compete with all those resources in that $58-$78 price range.

Ok.

And, what was the breakout for the first quarter, the comp between factory and retail?

For the total first quarter?

Okay.

I'll tell you what.

We're going to look for those numbers.

Why don't we go to the next question and we'll come back to you okay?

Okay.

And just the last question is, what do you think is going to be your interest expense for the full year, for the current year?

Well, I think you can work on your model-you know exactly what we are paying, pretty much.

We, full year estimated that interest expense is going to be lower than a year ago.

And I think that number, obviously it becomes even better in the second, third and fourth quarters as we already traded basically, the debt at 9.5% for the new notes at 6.75%.

And did I write this down correctly-the Capex is expected at $80m?

No, no. $18 [inaudible]

Okay, all right.

Okay, I didn't hear that correctly.

Thank you.

Yes.

As a final reminder to our audience that it is star one on your touch-tone phones to signal for questions.

Okay, Mary Beth.

I just wanted to get back to you-I think that the first quarter, the full price retail stores were down 2.6% in comps, and factory stores were up .9% for a total decline of 1.7%.

So, we're ready for the next question, operator.

And we have no other questions standing by, sir.

I'd like to turn the conference back to you for additional or closing comments.

Okay, thank you.

Again, thank you for your interest in Guess.

Let me reiterate that we remain optimistic about Guess' prospects for improved performance over 2003.

And we are committed to capitalizing on the strengths of our company and our brand to generate long-term growth.

Thank you and have a good day.

Thank you for your participation in today's conference call, you may disconnect at this time.