Guess? Inc (GES) 2004 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 being made available to the public. Statements made in this conference call including but not limited to the Company's expected results of operations 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 productlines, including licensed product lines, possible cancellations of wholesale orders, the success of competitive products, 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 year ended December 31, 2003 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. Good afternoon and thank you for joining us today to discuss Guess's 2004 first-quarter financial results. Joining us today are Paul Marciano, our Co-Chairman and Co-Chief Executive Officer, and Fred Silny, Senior Vice President and Chief Financial Officer of the Company. I will begin with an overview of our first quarter and then Fred will review our financial performance in more detail, after which Paul will address our outlook for the remainder of 2004 and open the call for your questions.

First we are pleased with the improvement in our performance in the first quarter of 2004. This performance continues the positive trends that we have experienced since spring of 2003. Among the highlight are the strong comparable store sales growth and improved margins that we're seeing in our retail and wholesale segments.

In the first-quarter our overall gross margin improved by 470 basis points over the same period a year ago. We are continuing to manage our business with prudence and discipline. This includes a clear focus on inventory management and capital spending. Our efforts will total in a 10.5 percent decline in inventory levels from first-quarter 2003 even as product sales increased 10.6 percent and 13 net new stores were added to our chain. As a result, our balance sheet is stronger today than a year ago. We ended the quarter with $50 million in cash and equivalence versus 9 million a year ago and our debt levels were at $65.5 million versus $83.9 million a year ago.

Cost control is another area that remains a top priority. Total SG&A expenses were flat for the period. By holding the line on expenses while achieving the benefits of sales leverage in our fixed retail operating costs, we reduced our SG&A rate in the quarter by 280 basis points to 32.6 percent of net revenue.

Let's turn to the results. We announced today that for the first quarter ended March 27, 2004, Guess reported a total net revenue increase by 9.9 percent to $153.3 million from $139.6 million in last year's first-quarter. The higher sales reflect the favorable trends that we're seeing in our regional stores and the positive impact of our country positioning efforts, which have brought fresh excitement to our lines. There are several product categories that posted improved sales during the period including our young contemporary line, our men's product, accessories, and Guess Collection.

By segment, our retail stores including full price retail, kids, factory outlet, Canada, and E-Commerce (ph) generated net sales of $99.5 million during first-quarter, an increase of 19 percent in $83.7 million in the prior year first-quarter. The increase was driven by the comparable store sales increase of 12.8 percent on a larger store base, which represented a 6.6 percent increase in average square footage as compared to the same period last year. The comparable store sales increase reflects results in all three of our main product groups, women's, men's and accessories. We also achieved increased margins in our retail stores and managed the expenses effectively to deliver a substantial improvement in operating results.

In the women's retail business, our young contemporary line generated continued improved performance in the first-quarter. We had strong results with (indiscernible) T-shirts. Non-denim pants also sold very well during the period. We have recently begun introducing new product in the Guess Collection lines, our contemporary line that commands higher price points. To date, we're very encouraged by the performance of this new product and expect this product line to make a significant contribution to our sales growth for the remainder of 2004. Paul will address this in more detail in a few minutes.

In men's we continued to see improvement in our stores. Woven tops continued to drive the business. We are also very encouraged with the improved sales of men's denim pants.

In accessories the sales increases were driven by strong results in watches, handbags, and jewelry. We ended the first with a total of 259 stores including those in Canada, of which 177 were full price retail, 73 were factory outlet stores, and 9 were kids stores. This compares to 246 stores a year ago including 171 full-price retail, 64 factory outlet stores and 11 kids stores. During the core we opened one retail store and closed seven, one of which was a kids store.

In our Wholesale Operations first-quarter 2004 revenues decreased 4.8 percent to $42.9 million from $45 million in the same period in 2003. Domestic wholesale net revenue decreased in the first-quarter of 2004 by $4 million or 16 percent, reflecting lower shipments to our wholesale customers, primarily department stores. A portion of this decrease was due to early shipments of spring product delivered in late 2003 to prepare for a systems conversion at year-end. The impact on revenues was approximately $1.5 million.

Domestically our products were sold in approximately 860 doors at the end of the first quarter of 2004, compared with approximately 750 doors at the end of the first quarter of 2003.

International wholesale revenue was up $1.9 million or 9.5 percent, compared to the first quarter of 2003, partially offsetting the decline in domestic wholesale revenue. In spite of the lower wholesale revenues, operating income for the segment increased significantly to $4.1 million from $0.3 million in the first quarter of 2003. This increase was driven by sales and margin improvements in our international wholesale business and improved margins in our domestic wholesale business due to improve results on off-price sales.

In terms of trends, we saw solid performance from basic denim and fashion woven tops and bottoms in our young contemporary line. Fashion wovens were also particularly strong in men's.

Our domestic wholesale backlog as of April 24, 2004 was $43.8 million, compared to $47.8 million as of April 26, 2003, or down 8.3 percent. On the domestic side of the business, in men's we will continue to build on the strength of our woven tops while we add additional sales to our bottoms.

For the women's line, we continued to increase our basic percentage while making our fashion offerings more dressy and feminine. We are also adding a premium assortment in select doors. Last, we're increasing the placement of the immediate staffs.

Now turning to licensing, this business continues to perform well with first-quarter revenues of $10.9 million, flat with the first quarter of 2003. Operating earnings were up slightly to $9 million from $8.9 million in last year's first quarter.

Let me now turn the call over to Fred to review the financial results in more detail.

Thank you, Carlos, and good afternoon. Before I discuss our financial results in more detail, let me describe the contents of the press release just issued. In addition to the actual release on Pages 1 and 2, Page 3 contains the consolidated statements of operations for the first quarter of 2004 compared the same period last year. Page 4 contains segment data for our wholesale, retail, and Licensing Operations. Page 5 contains the comparative balance sheets. Page 6 contains cash flow data, and finally, page 7 provides retail store data.

Now turning to the specifics of our performance for the quarter, we announced today that for the first quarter ended March 27, 2004, Guess reported net earnings of $0.8 million or diluted earnings of two cents per share. This compares to a net loss of $5.8 million or a diluted loss of 13 cents per share for last year's first quarter. As Carlos mentioned, net revenues for the first quarter increased 9.9 percent to $153.3 million from $139.6 million in the 2003 first quarter. Overall, gross profit for the 2004 first quarter increased 27 percent to $52.5 million from $41.3 million in the first quarter of 2003.

Gross profit margin increased to 34.3 percent in the first quarter of 2004 from 29.6 percent in the same period of 2003. The increase is attributable to improved margins at both retail and wholesale. The improvement in retail margins reflects better product margin and as a result of the increase in comparable store sales, improved leverage of our store occupancy costs. The improved margins in wholesale reflect stronger performance in our full priced domestic also business, improved results in off-price sales, and better performance in our international wholesale business.

As we have discussed, expense control remains a key priority for Guess. We reported that SG&A expenses for the first quarter were $49.9 million, a one percent increase from last year's $49.4 million. The SG&A rate this quarter was 32.6 percent of net revenues, 280 basis points better than our SG&A rate in the same quarter of 2003, which represented 35.4 percent of net revenues. This improvement reflects the positive impact of the cost-cutting actions we have taken over the past year and expense leverage on sales growth in our retail business, partially offset by the additional expense necessary to operate 13 net new stores in the first quarter of 2004 versus the same 2003 period.

We expect SG&A expenses for the full year 2004 to increase in dollars in the mid to high single digits and to decrease as a percent of revenues from 2003 levels in spite of the expenses necessary to support the new stores.

Earnings from operations improved by $10.7 million to $2.6 million in the first quarter of 2004, compared with a loss from operations of $8.1 million in the 2003 period. The retail segment represented $4.8 million of the improvement, reflecting the strong comparable store sales growth, improved margins, and an effective expense leverage.

Income from operations for the wholesale segment increased by $3.8 million. Corporate overhead decreased to $8.8 million from $10.8 million in the 2003 first-quarter. Interest expense for the first quarter 2004 was $1.4 million, compared to $2.1 million for the 2003 first quarter, reflecting the lower interest rate on the secured notes we issued at the end of April 2003, and lower debt levels in the period. Compared to a year ago, we have lowered our debt levels by $18.4 million and increased our cash position by $41 million. We expect interest expense for the full year to be approximately $6 million in 2004 and the tax rate is expected to be 43 percent.

We closed the quarter with $81 million of inventory, compared to $91 million at the end of the 2003 first quarter. A significant benefit of our active inventory management including clearing inventory within the store has been improved profitability on off-price sales and lower returns to our warehouse. All these initiatives are contributing to the improved margins.

As you know, last quarter we announced plans to close our existing 10 kids stores and at the time of closing will take an additional charge relating to the rent due over the remaining lease term that cannot in some way be recovered. This charge is not yet quantifiable, but is currently expected to be less than $1 million pretax.

Finally we expect inventory levels to increase percentagewise in the mid to high single digits by year-end compared to year-end 2003.

I would now like to turn the call over to Paul Marciano to review the remainder of our outlook for 2004.

Thank you. Good afternoon. The outlook for 2004 and initiative. During our year-end conference call, we discovered several initiatives that we are taking at Guess. I would like to update you on the progress we have made a few of these initiatives and update our outlook for the remainder of the year.

As Carlos mentioned earlier, we are introducing the new product in our Guess Collection line. We're very excited about the prospects and this significant growth potential for this type of offering. In addition, in the second half of 2004, we are introducing this product line as Marciano. The new assortment commands higher price points. It targets a more upscale contemporary customer and it should result in incremental sales in our existing stores.

In addition, we believe by providing the more unique store environment to the new Marciano line is appropriate given the product differentiation we envision with the new offering. Accordingly, we plan to test a new store concept that will bear the Marciano name. The new format will be a small store, between 2000 and 2500 square feet and would carry exclusively the Marciano line. Two stores tests will be open in the fall of 2004.

Number two, we are also continuing now to expand our new (ph) retail stores in the U.S. and Canada. In addition to the new Marciano's stores, the investment includes opening a partly 26 new stores in 2004 consisting of 9 retail and 17th factory stores. We are also planning to remodel about 12 and relocate about four stores this year.

Capital expenditure for 2004 are expected to be around $30 million and depreciation and amortization is planned to be about $36 million for 2004. With this in mind, we now expect for the full fiscal year 2004 comparable store sales in retail stores to increasing a high single digit range. We expect total retail sales to increase in the lower to mid teens including sales from approximately 30 new stores and the contribution from the 20 stores we opened in 2003.

On the wholesale side, we now anticipate (indiscernible) increasing a middle single digit for 2004 versus last year. Net licensing revenue also are expected to the up in the mid to single digits. Overall, gross margin I expected to improve about 350 basis points in 2004 and reflecting an improvement in both the wholesale business from last year's level.

The trend for the year 2004 that we have just outlined also generally applied to our courtly expectation, except for the increasing margin, which is expected to be lower in the second half of the year than in the first half. Before we open the call up for questions, I would like to say that we continue to be optimistic about our business for the remainder of the year and are pursuing topline growth and margin expansion while carefully managing cost and inventory. We are pleased and encouraged by the results of the action we have taken on the product side and remain optimistic that our actual results will continue to improve performance for 2004 and over the long-term.

With that, as always we thank you for your interest in Guess and would now be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Holly Guthrie of Morgan Keegan.

Thank you. Quick question on wholesale. By the way, congratulations. Just a phenomenal job with everything. The wholesale, the guidance for the year is dramatically different than the first quarter and the net backlog and I was hoping you could just talk to us a little bit about how -- this is the topline. Your earnings improvement was awesome in wholesale, but just talk on sales, how the year you expect it to progress in the wholesale area.

Yes, Holly, we did change our expectations for the remaining of the year based on our recent experience and where the backlog is. Now we continue to operate in the same number of stores that we had anticipated. It's just that the volume of ordering activity is not up to the levels that we had originally anticipated. That being said, of course, we are being conservative and we're trying to really guide you to numbers that we can deliver clearly. We are, Nancy Shachtman, our President of Wholesale is working very hard to really improve all aspects of this business and we have a few initiatives in place that should help us to offset some of the decline.

The very bright here is on the international side. We have had great experience in the first quarter with our international business and we think that those trends are going to continue into the second half of the year. So we feel that that can help us offset some of the decline. We also have some other big initiatives on immediates, and I think I mentioned in the presentation that we were planning to place a lot more immediate product as part of our ongoing effort. We have increased our presence in basics. One of the areas where we think we can do a better job is being more fully inventoried for basic product. We've run a little bit out of product in the first quarter and we just put some controls into that to be able to react to quick response orders.

And there are some other initiatives. I mentioned the premium product, the department stores and other wholesale customers are very eager to see us succeed and work and succeed with us, and I think that this is a day-to-day type of effort. Business continues to be challenging but I think we are really addressing all the chances that we see.

Just a few follow-up questions on the Marciano line and the new stores. I missed how many Marciano stores you were going to be opening, and also I had seen a couple pair of Marciano Denim in the stores just a couple of weeks ago and unfortunately they sold pretty quickly but I was wondering if that was just a test or if we can look forward to seeing more in Q2?

Yes, we plan to open between now and let's say August at the end of the year around 5 stores as a test immediately like East Coast-West Coast. And about the pants you saw, you are correct. We sold out pretty quickly and at very high price for the average Guess Jeans that we normally sell, we sold the Marciano Jean at $128 and the reception of expense and design and spot and wash was very strong. So it will be part of the future line of Marciano, yes.

And nobody sees this planned use for the cash -- your cash flow is so strong. Can you talk about debt reduction and any other use for it?

As you know, the debt inventory that we have in place is amortizing facility so by the end of the year we're going to continue to reduce that leverage. And yes, we are very happy with the cash flow generation. We think we have significant growth opportunities and we're planning them. Many of these opportunities are in the new stores of course. But we continue to watch our capital structure very carefully.

Holly, the reduction in the principle secured notes this year will be about $12.5 million, total year.

Great, thank you. Congratulations.

Dorothy Lakner of CIBC World Markets.

Good afternoon, everyone. Congratulations as well. Carlos, just going back to a comment you made earlier about comps being positive in all categories that you have in the stores I believe. Could you give us a little bit more color on that, if not breaking it entirely? And then a second question on wholesale, I think you talked about some of the initiatives to continue to bring that business up. Can you elaborate a little bit more on the things that Nancy is trying to do in the wholesale side of the business?

Dorothy, I will answer the question about retail. This is Paul. We do experience stronger comps in retail stores across all categories, meaning accessories. If you go in our stores you would see; men, women across the board has been a strong comp in the last 12 months I think or 13 months straight and that is what we talk about, all categories mainly.

Are accessories moving up as a percent of the retail business?

Very few percent. I think to date represent maybe 20, between 20 and 24 percent of the total sales.

Okay.

It has not varied that much but in comp it continued to roll when we increased the inventory.

Any changes in the breakdown between men's and women's? I know for awhile you'd been reducing the amount of space you were giving to men's in the stores, but as that picks up has that changed at all?

Again, I will have the same answer that it varies on a very few percent. And the fact that we have now the Marciano line also coming in, but it would vary maybe two or three percent up or down.

Okay.

Dorothy, I think I mentioned most of the initiatives that we are pursuing on wholesale.

Increased basics and --

Increased basics, we feel that our men's business is heading in absolutely the right direction and the product is performing well on the tops and bottoms. Obviously the accessories business is also helping us through increase in the sales and revenues on the licensing side, of course. Nancy is pursuing more feminine styles. I think I mentioned that, more dressy styles. The immediate percentage of basics as a percentage of total business and higher price points in some areas and the introduction of some premium product in some of the top doors.

About how many out of the total doors would that be that you are planning on putting that product into?

It's less than 100.

Okay. And is that mainly in Bloomingdale's?

It is across the different national chains.

Thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions. I will turn the conference back to you for any additional or closing remarks.

Okay, well thank you for your interest in Guess. We remain optimistic about Guess's prospects for improved performance for the remainder of 2004, and we're committed to capitalizing on the strength of our Company and our brand to generate long-term growth. Thank you and have a great day.

That does conclude today's conference. On behalf of Premier Conferencing and Guess Inc., thank you for your participation. Have a wonderful day. You may now disconnect.