Guess? Inc (GES) 2003 Q2 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 being 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 are 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 risks 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 into existing operations, the continued desirability and customer acceptance of existing and future product lines, including licensed product lines, possible cancellations of wholesale orders, the success of competitive product, and the availability of adequate sources of capital.

In addition to these factors, the economic and other factors identified in the company's most recent annual report on Form 10-K for the fiscal 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 public documents.

At this time, for opening remarks and introductions, I would 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?'s 2003 second quarter financial results.

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

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

We announced today that for the second quarter ended June 28, 2003, GUESS? reported a net loss of 5.4 million, or a diluted loss of 13 cents per share.

This compares to a net loss of $6.4 million, or a diluted loss of 15 cents per share, for the last year's second quarter.

The second quarter 2003 results include restructuring, impairment, and severance charges of $0.8 million or $0.5 million after taxes, or one cent per diluted share.

On an operating basis, we reported net loss from operations of $7.1 million for the quarter.

Including the $0.8 million charge.

This compares to a loss from operations of 9.4 million, in the year ago period.

Overall, we were pleased with our customers' response to our product lines during the period.

Our retail stores performed well with strong same store sales growth, increased margins, and effective expense control, delivering a substantial improvement in operating results.

This progress was offset in part by a steeper loss in our wholesale business during the period as a result of lower revenues and a significant decline in gross margin.

Revenue growth in our licensing business contributed to the improved results in the quarter.

Total net revenue for the 2003 second quarter increased by 9.4%, to $131 million, from $119.8 million in the last year second quarter.

This improved sale performance reflects the favorable trends we are seeing in our retail stores, the positive impact we have experienced from our recent product repositioning efforts, and as I said, a good contribution from our licensing business which generated a 16% increase in revenue.

Notably, during the quarter, we achieved an upturn in our women's business and saw continued strong performance in men.

While we are pleased with this progress, the competitive environment remains difficult.

Our wholesale segment, in particular, continues to be challenging, consistent with our overall industry, and as you know, we have been hard at work to turn around this business.

We are encouraged by improved sell through from the retail floor from our recent product delivery, however, we also recognize that within this channel, it will take longer for a sustained improvement to take hold.

We are continuing to collaborate very closely with our wholesale partners but remain cautious in our outlook.

By segment, our retail stores including full price retail, kids, factory outlet, Canada, and e-commerce generated net sales of $95.7 million during the second quarter an increase of 19.7% from 79.9 million in the prior year second quarter.

The increase was driven by a comparable store sales increase of 11.7% on a larger store base, which represented a 9.5% increase in square footage as compared to the same period last year.

As I mentioned, the comparable store sales increase reflects improved results of both the men's and women's lines.

In the women's retail business, our young contemporary line, which is our principal line, generated continued improvement in performance in the second quarter.

Long denims did particularly well, with solid comfortable store sales increases for the quarter.

We also saw better trends in sales of denim, both fashion and basic, which also experienced comparable sales increases.

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

We expect this category to continue to do well in 2003 based on the demand that we are seeing from the male consumer for newness and novelty.

We also see opportunities to further expand our bottoms business and we believe our wovens business has room for continued growth.

In our wholesale operations, second quarter 2003 revenues declined 16.9% to $27.5 million from 33.1 million in the same period in 2002.

Domestic wholesale net revenue decreased in the second quarter of 2003 by $3.8 million, or 15.8%, reflecting the reduction in the number of locations in which our product is offered.

International wholesale revenue decreased by $1.8 million, or 20%, due to lower sales in the Middle East and Asia, and as the second quarter was a particularly difficult period for both of these regions, as you all know.

Our domestic wholesale backlog as of August 2, 2003 was $41.1 million, compared to $51.5 million as of August 3, 2002, or down 20.2%.

As we discussed on our last call, this reflects the reduction in doors, excluding kids, from approximately 1400 at the end of the second quarter of 2002, to approximately 800 at the end of the second quarter 2003.

Our focus at this time remains on building our business and our most profitable doors by working closely with our wholesale partners and long term, reacquiring those stores.

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

We also saw solid performance from nondenim fashion bottoms.

In men's fashion wovens achieved good results.

As mentioned, the department store business continues to be challenging but we are pleased with the positive improvements we are seeing in our product line, and improved sell throughs on the retail floor.

Now turning to our licensing business.

This business continues to perform well with second quarter revenues rising 16% to $7.8 million from 6.8 million in the second quarter of 2002.

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

Overall, gross profit for the 2003 second quarter increased 1.4%, to $41 million, from 40.4 million in the second quarter of 2002.

Gross profit margin declined to 31.3% in the second quarter of 2003, from 33.7% in the same period of 2002.

The decrease is attributable to the lower wholesale margins, partially offset by improved margins at retail and the margin realized due to higher licensing revenue.

The wholesale margin decline is primarily attributable to lower sales volume, lower initial margins, a higher percentage of losses and offprice sales, and higher markdown allowances.

The low margin performance in this business for the quarter was accelerated by the reduced revenue base reported in the period.

We believe that wholesale margins will improve in the second half of the year, as I will discuss in a few moments.

The improvement in retail margins reflect the increase in comparable store sales resulting in better leverage of our store occupancy costs.

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

In this vein, I would also like to note that expense control remains a key priority for GUESS?

We reported that SG&A expenses for second quarter were $47.2 million, a 5.3% decrease from last year's 49.8 million.

The SG&A rate this quarter was 36% of net revenue, 5.6 points better than in 2002.

This improvement reflects the decreases in certain SG&A expenses resulting from the cost cutting actions that we have taken over the past year, as I just touched on, partially offset by the additional expense of operating 22 net new stores in the second quarter of 2003 versus the same 2002 period.

We were pleased with improvement in the expense rate performance.

Interest expense for the second quarter of 2003 was $2.6 million compared to 2.3 million for the 2002 second quarter.

The increase reflects the 30-day overlap in interest payments between the issuance of the $75 million of secured notes at the end of April, 2003, and the final redemption of the $80 million subordinated notes at the end of May, 2003.

We have also maintained our focus on careful inventory management to ensure our inventory levels are in line with the demand that we are seeing.

In this regard, we are pleased with our inventory position, both in terms of the amount of inventory, and its quality and aging at quarter end.

We ended the second quarter with a total of 254 stores, including those in Canada, of which 187 were full-priced retail and kids' stores, and 67 were factory outlet stores.

During the quarter, we opened 5 retail stores and 3 factory stores, and closed 3 stores, 2 factory and 1 retail.

For the six months ended June 28, 2003 the company reported a net loss of $11.2 million, or a diluted loss per share of 26 cents, versus a net loss of $10 million, or a diluted loss per share of 23 cents in the comparable 2002 period.

The 2003 results include the previously mentioned restructuring impairment and service charges of $0 .8 million, or 0 .5 million net of tax, while the 2002 results include restructuring impairment and severance charges of 0.7 million, or 0.4 million net of tax.

The loss from operations for the six months ended June 28, 2003 were $15.1 million.

This compares to a loss from operations of 13.6 million in the year ago period.

Total revenues for the period increased by 4.9% to $270.6 million, compared to 258 million in the same prior year period.

We also announced today our retail sales results for July.

Total retail sales for the five weeks ended August 2, 2003 were $40.5 million, an increase of 18.1%, from sales of 34.3 million for the five weeks ended August 3, 2002.

Comparable store sales for the period increased 11.6%.

We are pleased with our current trend.

Importantly, in addition to the improvement in our retail stores, we are also seeing stronger sales in our wholesale accounts, so we know that our product is selling well across Canada.

Now, I will provide a brief update on our outlook for 2003.

During our first quarter conference call in May, 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 digits range for 2003.

Based on current sales trends, we now believe retail comparable store sales will increase in the mid single digits for 2003.

We expect total retail sales to increase in the lower teen range, including the opening of approximately 20 new stores during the year, and the annualization of the 24 stores that we opened in 2002.

On the wholesale side, based on the current backlog and retail sales trend, we anticipate overall revenues in the second half of the year to be down in the high single digits in 2003, primarily due to a reduction in doors from last year, which we analyzed during the fourth quarter period.

Accordingly, revenues are expected to decrease in the third quarter, but increase in the fourth quarter versus last year.

We expect wholesale margins to improve in the second half of the year from both current levels and last year's performance.

Retail margins in the second half of the year are forecast to increase over current levels and to be about flat compared with the same period last year.

Overall gross margins are expected to be down year-over-year in the third quarter, and then improving in the fourth quarter with overall gross margin for the entire year down slightly.

Due to the continued contribution from cost cutting initiatives, we now expect selling, general, and administrative expenses for the year to be down in dollars and as a percent of variance from 2002 levels, in spite of the anticipated increase of 20 new stores.

Finally we continue to expect inventory levels to increase percentagewise in the mid single digits by year end, and capital expenditures for 2003 are expected to be below the plan of approximately $18 million, including the cost of opening the new stores.

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

We're encouraged by the results of the actions that we have taken on the product side, and believe that we are taking the right steps for the brand.

As such, we remain optimistic that our efforts will result in improved performance for the year and over the long term.

Before we open the call for questions, on behalf of Paul and Maurice Marciano and the rest of our board, I would like to thank our friend and associate Howard Sokle (ph) for his significant service to our board and our company over the last few years.

Howard has decided to step down as a director.

We appreciate his counsel and contribution and we wish him the very, very best in his future endeavors.

We have initiated a search to identify a successor to Howard who will serve an additional independent director of the company.

With that, as always, we thank you for your interest in GUESS? and we would now be happy to open the lines for questions.

Operator?

Thank you, Mr. Alberini.

At this time ladies and gentlemen, if you would like to ask a question, please press the star key, followed by the digit one on your touch-tone phone.

Once again, if you would like to ask a question at this time, please press star one.

We will take our first question from Margaret Whitfield with Brean Murray.

Good afternoon.

Hi, Margaret.

Hello Carlos.

I am wondering if you can elaborate on your comments about possible improvements in gross margins through initiatives and sourcing and mix?

Yeah, sure, we are, as a company, very focused on improving gross margins.

We think that we have opportunities in the buying and planning activities.

We also think that the product is obviously selling better and that would result in improved turn, and once that happens, obviously, the market management becomes an opportunity for us, as well.

We are working on reducing costs.

We're working on our line development process and trying to incorporate more in the mix of shipping the bulk, as opposed to airing goods.

We think that this particular quarter, the fact that the revenue side and wholesale was so low, really had a significant impact on margin.

And we think that as we continue to grow that business, and we anticipate it will begin to happen in the fourth quarter, then we have an expense base and a cost base that is highly leveragable from where we are right now.

And lastly, we think that this past quarter, we did have some advance of our international business in margin, and we think that that is also something that will improve in the future as we look at our forecast for the remainder of the year.

What was the level of offprice sales in the period?

It was slightly higher than last year.

But we continue to see, you know, pretty steep losses every time that we have to sell excess inventory to the offprice channel.

We think that that is not going to change.

So the way we can improve our margins is by reducing the level of offprice sales, and this goes back to my first comment about buying better, and doing a more accurate job on planning the levels of inventory that will eventually sell, at full price or at markdown price, still with healthy margins.

And earlier, you gave us the U.S. wholesale and the international, you know, the decline was, you know, you gave the percent.

Could you give us the absolute dollars within U.S. and international, within wholesale?

We are not disclosing that, Margaret.

Or rough percentages, how much of the U.S. versus international?

Well, you know, the U.S. was down --

Significantly?

Right.

So I think, you know, you can work backwards, but you know, we don't want to start giving that kind of numbers and make disclosures not consistent between periods, so you will have to bear with us on that.

Okay.

And your projections that you just gave, does this suggest a slight level of profitability for the year overall?

I, of course, haven't had a chance to work the new numbers.

You know that we stopped giving results guidance, but you know, I'm sure that you will get to the right number once you do your math.

Okay.

And finally, in terms of the wholesale business, could you give us an update as to whether or not, you know, you expect to make any progress in terms of additional doors over the balance of this year?

Or early next year?

Yeah, we did make some comment, that we anticipate that the annualization of the doors that we lost happens during the fourth quarter, and from there on, we think that we can start growing that business again, including this fourth quarter.

You know how that works.

The product sells better, obviously, our wholesale partners are going to start looking at the brand even more positively, and then we should start seeing some increase in number of doors.

But right now, we don't have significant visibility on that.

Okay.

Thanks.

Thank you.

As a reminder, ladies and gentlemen, that is star one for questions.

We will go next to Dorothy Lakner with CIBC World Markets.

Thanks, good afternoon, everyone.

Hi, how are you?

How are you, Carlos?

Sorry.

Wanted to go back to the wholesale business for a moment.

I was just curious, on the one hand, about the comment you made on women's basic selling well, and I just wondered if you could talk a little bit, I know have you in the past, about the difference of the kind of merchandise you're selling at wholesale versus retail, where, obviously, you've got some wind at your backs in terms of the comps.

And then if you could also comment on the composition of the comps, talk a little bit about the traffic that you're seeing, units per transaction, and maybe, what the average ticket looks like now that the product is selling better.

It certainly does look better when I go into the stores.

Thanks.

Okay.

Sure.

Well, with respect to your first question, Dorothy, we still see tremendous consistency in what sales were in our stores, and what sales were at the wholesale level, you know, with the retailers.

And basics have been very, very strong for both businesses.

Which is a great thing to see.

We in terms of -- and this also applies to men's.

We are seeing that, as we have in the past, that our stores, you know, have the capability of selling higher priced product.

But that being said, I think that the, you know, the mass of the whole business is still happening in those mid price points and very strong in both businesses, or in both channels.

With respect to what we're seeing in our stores, we saw some traffic pressure, but lately, traffic has been better, but what is driving our business is the better conversion rate, and also a lot of regular price business, relative to a year ago, where we were seeing much more of a mix of sale merchandise, as well as the total business.

So regular price business is what has driven the healthy comps that you saw in the last few months.

And what is the pricing like relative to last year?

It looks like, as we've looked at the stores that there is some -- there's lower priced items may be mixed in, and I just wondered, overall, if you could just give us an idea of where the price points stand versus last year.

If we look at initial prices.

Yeah.

No, you know, our margins have been pretty healthy.

You know, the one thing that we do see is that every time that we take markdowns to move clearance merchandise, we have to go deeper than we used to go a year ago.

And I think that that is pretty much what is happening industrywide.

But that being said, because the mix is more affected by regular price business, then our average retail is not significantly lower than it was last year.

Okay.

In fact, it is about flat.

Slightly lower in the last few weeks, but not a significant change.

I'm talking about the retail stores.

In the case of our factory stores, which have been doing phenomenally, the average price is slightly up from last year.

But remember we are producing much more product for those stores than we did a year ago.

Okay.

And then on the wholesale business, just, would you expect to see, before more doors are added, that you're selling more product to the same -- the same doors, you're just getting more product into each of them, and then the doors will gradually be increased later on?

Yes.

We -- you know, really, I know that the results are -- have been under a lot of pressure, especially this past quarter, and that is probably -- doesn't speak fairly about the progress that that whole business has made since Nancy has been back.

You know, really, the product is selling extremely well in the department store, and we are very pleased with that progress.

We think we are on the right track.

And of course, you know, this -- it takes a longer for the impact to be felt on the results.

We are definitely shipping more product into comparable doors and that is how we expect that the fourth quarter is going to be a bigger quarter than it was a year ago, even when the number of doors is very similar to what it was a year ago.

It is just because comp store sales in those doors should be up.

We are very pleased with the sell throughs right now of the product that is on the floor.

And we expect that that will continue.

And you're right, you know, after that, then we should see more doors, but that is not something that we are predicting right now.

Okay.

Thank you.

Thank you, Dorothy.

We will take our next question from Jeff Appel with Avis Capital.

Hi, guys.

I just have a question for you.

We understand that there has been a very large seller in the marketplace that might have been one of the founders and that might be coming to a climax.

Can you shed some comment on that?

And why there wouldn't have been a public offering for that -- those shares?

Well, we -- you know, I'm not sure that we have to comment on this, you know, everything has been public.

There has been, you know, a public release of this request.

This was Armand Marciano.

We filed an S-3 and everything has been, you know, disclosed.

You know, really, I don't think that it will be appropriate for us to determine why he requested for that registration to take place, but it did.

Are any of the other brothers selling shares, also?

No, as a matter of fact, if you look at that public document, the brothers have bought some of those shares.

Any --

The other two brothers.

Any reason why that occurred?

And we understand that he is done?

Or almost close to selling his shares? 5 1/2 million or so?

That is his -- his division.

We really don't know.

Uh-huh.

Are those shares fully in the marketplace or are there still more for sale?

I really don't know.

You will have to deal with it, with the public market to be able to get to that.

I really don't know.

Thank you.

Thank you.

Next we will take a follow-up question from Margaret Whitfield with Brean Murray.

Yes.

I was just wondering if you could give us more color on the July sales, you know, was the number that you reported similar for factory and full price, any differences during the month?

Or any changes in the geographic manner?

You know, we saw some changes, but, you know, really, the sales were somewhat consistent throughout the month, Margaret.

There wasn't, you know, significant swings.

And I think in terms of the regions, you know, some of the regions that are exposed to the warmer weather had, you know, a tougher month than the other ones, California did very well, Hawaii did very well, Texas did well, but Georgia had a very, very tough month, and you know, we speculated here, kind of difficult to know, but we speculated that that was somewhat weather-related.

We did have some cord as part of our product mix, and that was very difficult for the warmer climate.

And how about the men's versus the women?

Were they both positive?

Well, the women's had a tougher month this month relative to the month of June.

Men's continued to be positive.

And this is just -- I'm talking about the retail stores, which would not include factory outlet stores who also had positive results in both men and women.

Okay.

Thank you.

You're welcome, Margaret.

This concludes today's question and answer session.

At this time I would like to turn the conference back over to Mr. Alberini for any additional or closing comments.

Thank you very much.

Again, thank you for your interest in GUESS?

I want to reiterate that we remain optimistic about GUESS?'s prospects for improved performance for 2003.

We are committed to capitalizing on the strength of our company and our brand to generate longer term growth.

Thank you and have a great day.

Once again this does conclude today's conference call.

We thank you for your participation.

You may now disconnect.