UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 1, 2000
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-11893
GUESS ?, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
(Address of principal executive offices)
(213) 765-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2000, the registrant had 43,470,035 shares of Common Stock, $.01
par value per share, outstanding.
GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of July 1, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Earnings
(Unaudited) - Second Quarter and Six Months
Ended July 1, 2000 and June 26, 1999 2
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended July 1, 2000
and June 26, 1999 3
Notes to Condensed Consolidated Financial Statements
(Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
JUL 1, DEC 31,
2000 1999
--------- ---------
Current Assets:
Cash $ 7,666 $ 6,139
Investments 2,752 27,059
Receivables:
Trade receivables, net of reserves 52,468 26,829
Royalties, net of reserves 9,225 8,528
Other 4,449 4,316
--------- ---------
Total receivables 66,142 39,673
--------- ---------
Inventories (note 3) 173,711 106,624
Prepaid expenses and other current assets 11,262 8,861
Prepaid income taxes -- 3,004
Deferred tax assets 9,619 9,619
--------- ---------
Total current assets 271,152 200,979
Property and equipment, at cost, less accumulated
depreciation and amortization 147,750 125,688
Other assets, at cost, less accumulated amortization 25,914 42,369
--------- ---------
$ 444,816 $ 369,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of bank debt and long-term debt $ 14,004 $ 7,475
Accounts payable 65,559 61,736
Accrued expenses 24,315 33,824
Income taxes payable (note 6) 174 --
--------- ---------
Total current liabilities 104,052 103,035
Notes payable and long-term debt, less current installments 146,289 83,363
Other liabilities 9,253 14,236
--------- ---------
Total liabilities 259,594 200,634
Minority interest 380 1,047
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 63,477,235 and 63,335,743 shares,
Outstanding 43,446,443 and 43,304,951 shares at
July 1, 2000 and December 31, 1999, respectively 143 141
Paid-in capital 164,202 163,300
Retained earnings 171,957 144,443
Accumulated other comprehensive income (loss) (684) 10,247
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
--------- ---------
Net stockholders' equity 184,842 167,355
--------- ---------
$ 444,816 $ 369,036
========= =========
See accompanying notes to condensed consolidated financial statements.
1
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
--------- --------- --------- ---------
Net revenue (note 7):
Product sales $ 168,661 $ 110,181 $ 347,072 $ 230,122
Net royalties 9,020 9,376 19,453 18,487
--------- --------- --------- ---------
177,681 119,557 366,525 248,609
Cost of sales 100,080 64,522 208,375 139,546
--------- --------- --------- ---------
Gross profit 77,601 55,035 158,150 109,063
Selling, general and administrative expenses 55,387 38,260 107,636 70,540
Severance recovery (costs) relating to
distribution facility relocation (note 5) 1,545 (3,200) 1,545 (3,200)
--------- --------- --------- ---------
Earnings from operations 23,759 13,575 52,059 35,323
Other income (expense):
Interest expense, net (3,493) (2,205) (6,146) (4,538)
Other, net (75) 430 (99) 318
--------- --------- --------- ---------
(3,568) (1,775) (6,245) (4,220)
Earnings before income taxes 20,191 11,800 45,814 31,103
Income taxes (note 6) 8,100 4,783 18,300 12,600
--------- --------- --------- ---------
Net earnings $ 12,091 $ 7,017 $ 27,514 $ 18,503
========= ========= ========= =========
Net earnings per share - basic and diluted $ 0.28 $ 0.16 $ 0.63 $ 0.43
========= ========= ========= =========
Weighted average number of shares
outstanding - basic 43,423 42,939 43,387 42,927
========= ========= ========= =========
Weighted average number of shares
outstanding - diluted 43,865 43,286 43,872 43,237
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
2
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
-------------------------
JUL 1, JUN 26,
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings $ 27,514 $ 18,503
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 15,534 11,534
(Gain) loss on disposition of property and equipment 792 (211)
Minority interest (667) --
Foreign currency translation adjustment 248 (16)
Undistributed equity method (loss) (106) (71)
(Increase) decrease in:
Receivables (26,470) (10,719)
Inventories (67,087) 9,604
Prepaid expenses 603 (4,944)
Other assets (4,899) (307)
Increase (decrease) in:
Accounts payable 3,823 3,687
Accrued expenses (9,930) 5,707
Income taxes payable 174 (210)
--------- ---------
Net cash provided by (used in) operating activities (60,471) 32,557
Cash flows from investing activities:
Net proceeds from the sale of short-term investments 30,999 --
Purchases of property and equipment (37,589) (8,527)
Proceeds from the disposition of property and equipment 25 252
Acquisition of license (357) (250)
Purchase of investment securities (1,478) (17,910)
Increase in long-term investments -- (2,611)
--------- ---------
Net cash used in investing activities (8,400) (29,046)
Cash flows from financing activities:
Repayment of senior subordinated notes -- (5,438)
Proceeds from notes payable and long-term debt 116,379 --
Repayments of notes payable and long-term debt (46,922) --
Proceeds from issuance of common stock 904 392
--------- ---------
Net cash provided by (used in) financing activities 70,361 (5,046)
Effect of exchange rates on cash 37 (26)
Net increase (decrease) in cash 1,527 (1,561)
Cash, beginning of period 6,139 5,853
--------- ---------
Cash, end of period $ 7,666 $ 4,292
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 5,587 $ 6,367
Income taxes 16,577 12,022
========= =========
See accompanying notes to condensed consolidated financial statements.
3
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2000
(in thousands)
(unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Guess ?, Inc. and its subsidiaries (the
"Company") contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the condensed
consolidated balance sheets as of July 1, 2000 and December 31, 1999, the
consolidated statements of earnings for the quarter ended and six months
ended July 1, 2000 and June 26, 1999, and the statements of cash flows for
the six months ended July 1, 2000 and June 26, 1999. The accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission ("SEC"). Accordingly, they have been condensed and do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The results of
operations for the quarter ended and six months ended July 1, 2000 are not
necessarily indicative of the results of operations for the full fiscal year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
Effective January 1, 2000, we changed our quarterly reporting period to end on
the Saturday nearest the calendar quarter end. Previously, our quarterly
reporting period ended on the last Saturday of the quarter. This change in
reporting period did not have an impact for the second quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the six months ended
July 1, 2000.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the July 1, 2000 presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
represents net earnings divided by the weighted average number of shares
outstanding, inclusive of the dilutive impact of potential common stock. During
the quarter and six month periods ended July 1, 2000 and June 26, 1999, the
difference between basic and diluted earnings per share was due to the dilutive
impact of options to purchase common stock. Options to purchase 373,176 shares
of common stock at $27.31 per share during the six month period ended July 1,
2000 and options to purchase 812,936 shares of common stock at prices ranging
from $8.93 to $13.13 during the six month period ended June 26, 1999 were not
included in the computation of diluted earnings per share because the exercise
prices were greater that the average market price of the common stock.
Therefore, the options are antidilutive.
BUSINESS SEGMENT REPORTING
The Company reports segment information under Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." The business segments of the Company are
retail, wholesale, and licensing operations. Information relating to these
segments is summarized in note 7.
4
COMPREHENSIVE INCOME
The Company reports comprehensive income under SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net earnings, unrealized
gains on investments available for sale and foreign currency translation
adjustments. A reconciliation of comprehensive income for the quarter and six
month periods ended July 1, 2000 and June 26, 1999 is as follows (in thousands):
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- ----------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
-------- -------- -------- --------
Net earnings $ 12,091 $ 7,017 $ 27,514 $ 18,503
Unrealized loss on investments, net of taxes (6,900) -- (11,415) --
Foreign currency
translation adjustment 320 25 484 16
-------- -------- -------- --------
Comprehensive income $ 5,511 $ 7,042 $ 16,583 $ 18,519
======== ======== ======== ========
FUTURE ACCOUNTING CHANGE
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It is effective, as amended by SFAS 137,
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company believes the adoption of SFAS 133 will not have a material impact on our
financial reporting.
(3) INVENTORIES
The components of inventories consist of the following (in thousands):
JUL 1, DEC 31,
2000 1999
-------- --------
Raw materials $ 9,202 $ 8,514
Work in progress 13,387 6,740
Finished goods - retail 63,566 45,750
Finished goods - wholesale 87,556 45,620
-------- --------
$173,711 $106,624
======== ========
At July 1, 2000 and December 31, 1999, total inventories included $14.2
million and $9.4 million of inventories from Guess? Canada Corporation, the
Company's licensee for retail and wholesale operations in Canada,
respectively. The Company holds a 60% ownership interest in Guess? Canada
Corporation.
(4) INVESTMENTS
At July 1, 2000, short-term investments consisted of marketable securities
available for sale. At December 31, 1999, short-term investments consisted
primarily of interest bearing deposit accounts.
(5) SEVERANCE COSTS
In accordance with the requirements of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," the Company recorded a
$3.2 million charge, in the second quarter ended June 26, 1999, for future
severance costs related to the relocation of its distribution operations from
Los Angeles to Louisville, Kentucky. As a result of employee transfers and
attrition, the severance costs actually incurred for Los Angeles - based
employees were $1.7 million which has resulted in a recovery of $1.5 million of
the severance charge in the second quarter ended July 1, 2000.
5
(6) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
(7) SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," the Company's reportable business
segments and respective accounting policies of the segments are the same as
those described in note 2. Management evaluates segment performance based
primarily on revenue and earnings from operations. Interest income and expense
are evaluated on a consolidated basis and are not allocated to the Company's
business segments.
Net revenue and earnings from operations are summarized as follows for the
quarters and six months ended July 1, 2000 and June 26, 1999 (in thousands):
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
--------- --------- --------- ---------
Net revenue:
Retail operations $ 84,793 $ 61,049 $ 162,565 $ 112,523
Wholesale operations 83,868 49,132 184,507 117,599
Licensing operations 9,020 9,376 19,453 18,487
--------- --------- --------- ---------
177,681 119,557 $ 366,525 $ 248,609
========= ========= ========= =========
Earnings from operations:
Retail operations $ 7,722 $ 6,791 $ 6,601 $ 6,798
Wholesale operations 9,093 (882) 29,845 13,149
Licensing operations 6,944 7,666 15,613 15,376
--------- --------- --------- ---------
$ 23,759 $ 13,575 $ 52,059 $ 35,323
========= ========= ========= =========
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the quarter ended
and six months ended July 1, 2000, are not necessarily indicative of the
results that may be expected for the full fiscal year.
(8) BANK CREDIT FACILITY
On December 3, 1999, the Company entered into a $125 million Credit Agreement
("Credit Facility") with The Chase Manhattan Bank. The Credit Facility provides
the Company with a revolving credit facility, which includes a $50 million
sub-limit for letters of credit. The Credit Facility accrues interest at LIBOR
plus 100 basis points, the Prime rate, the base CD Rate plus 100 basis or the
Fed Funds rate plus 50 basis points depending on the duration and type of loan
facility. The Credit Facility expires on October 31, 2002. At July 1, 2000, the
Company has $63.8 million outstanding borrowings under the Credit Facility, $4.4
million in outstanding standby letters of credit and $28.6 million in
outstanding documentary letters of credit. At July 1, 2000, the Company had
$28.2 million available for future borrowings under such facility. The Credit
Facility contains various restrictive covenants requiring, among other things,
the maintenance of certain financial ratios. As of July 1, 2000, the Company was
in compliance with all such covenants.
(9) COMMON STOCK
On May 24, 2000, the Company filed an amended registration statement to sell up
to $200 million shares of common stock at any time and from time to time. To
date, no shares have been sold under this registration statement.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act").
Forward-looking statements may also be contained in the Company's other reports
filed under the Exchange Act, in its press releases and in other documents. In
addition, from time to time, the Company through its management may make oral
forward-looking statements.
Forward-looking statements generally relate to future events or future financial
performance, and include statements dealing with current plans, intentions,
objectives, beliefs and expectations. Some forward-looking statements can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "potential,"
"optimistic," "aims," or "continue" or the negative of such terms or other
comparable terminology. Certain statements in this Form 10-Q, including but not
limited to those relating to the Company's expected results, the accuracy of
data relating to, and anticipated levels of, its future inventory and gross
margins, its anticipated cash requirements and sources, the operations of its
new distribution center and its business seasonality, are forward-looking
statements.
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, possible cancellations of wholesale orders,
the success of competitive products, the success of the Company's programs to
strengthen its inventory cost accounting controls and procedures, the success of
technology to be used in the Company's new distribution center 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, 1999, 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.
OVERVIEW
We derive our net revenue from the sale of Guess men's, women's, girls' and
boys' apparel and our licensees' products through our network of retail and
factory outlet stores located primarily in the United States; from the sale of
Guess men's, women's, girls' and boys' apparel worldwide to wholesale customers
and distributors; and from net royalties via worldwide licensing activities.
Unless the context indicates otherwise, when we refer to "we," "us" or the
"Company" in this Form 10-Q, we are referring to Guess ?, Inc. and its
subsidiaries on a consolidated basis.
Effective January 1, 2000, we changed our quarterly reporting period to end on
the Saturday nearest the calendar quarter end. Previously, our quarterly
reporting period ended on the last Saturday of the quarter. This change in
reporting period did not have an impact for the second quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the six months ended
July 1, 2000.
RESULTS OF OPERATIONS
Second Quarters and Six Months Ended July 1, 2000 and June 26, 1999.
NET REVENUE. Net revenue for the second quarter ended July 1, 2000 increased
$58.1 million or 48.6% to $177.7 million from $119.6 million in the quarter
ended June 26, 1999. Net revenue from retail operations increased $23.8 million
or 39.0% to $84.8 million in the second quarter ended July 1, 2000 from $61.0
million for the same period in 1999. This increase is primarily attributable to
the opening of 40 new stores since the second quarter of 1999 and a 10.1%
increase in combined comparable store sales resulting from the continued
strength of the retail business by having a smart, fashion-focused product mix,
strong visual merchandising and quicker replenishment.
7
Net revenue from wholesale operations increased $34.8 million or 70.9% to
$83.9 million in the quarter ended July 1, 2000 from $49.1 million for the
comparable period in 1999. Excluding Guess Canada, domestic and international
wholesale operations revenue increased, for the second quarter ended July 1,
2000 from the comparable period in 1999, by $30.3 million to $75.4 million
and by $2.0 million to $6.3 million, respectively. Domestic wholesale
operations net revenue increased primarily due to a stronger domestic demand
for our women's and men's product lines. In addition to the strong demand in
our full priced product lines, off price sales increased to $12.0 million
from $2.6 million from the comparable period in 1999, in order to clear
excess inventory. International wholesale operations net revenue increased as
a result of strong product acceptance in Asian, South American, and European
markets, coupled with increased merchandising training and adding better
performing distributors, which have remodeled their stores to be consistent
with our global branding initiative. Guess Canada contributed an increase in
net revenues of $2.7 million during the second quarter of 2000. Net royalty
revenue decreased $0.4 million or 4.3% to $9.0 million in the second quarter
ended July 1, 2000 from $9.4 million for the comparable period in 1999. The
decrease in net royalty revenue was primarily due to prior year's settlements
and adjustments of $1.9 million for licensees that were brought back
in-house, which was partially offset by an increase in royalty revenue earned
from sales by our licensees in the watch, footwear and small leather goods
product lines.
Net revenue increased $117.9 million or 47.4% to $366.5 million for the six
months ended July 1, 2000 from $248.6 million for the six months ended June 26,
1999. Net revenue from retail operations increased $50.1 million or 44.5% to
$162.6 million for the six months from $112.5 million for the same period in
1999. This increase is primarily attributable to the opening of 40 new stores
since the second quarter of 1999 and a 14.2% increase in combined comparable
store sales resulting from the continued strength of the retail business by
having a smart, fashion-focused product mix, strong visual merchandising and
quicker replenishment. Net revenue from wholesale operations increased $66.9
million or 56.9% to $184.5 million for the six months ended July 1, 2000 from
$117.6 million for the comparable period in 1999. Excluding Guess Canada,
domestic and international wholesale operations revenue increased, for the six
months ended July 1, 2000, by $53.1 million to $159.5 million and by $7.0
million to $18.2 million, respectively. Domestic wholesale net revenue increased
primarily due to a stronger domestic demand for our women's and men's product
lines. International wholesale operations net revenue increased as a result of
strong product acceptance in Asian, South American, and European markets,
coupled with increased merchandising training and adding better performing
distributors, which have remodeled their stores to be consistent with our global
branding initiative. Guess Canada contributed an increase in net revenues of
$7.2 million during the six months ended July 1, 2000. Net royalty revenue
increased $1.0 million or 5.4% to $19.5 million in the six months ended July 1,
2000 from $18.5 million for the comparable period in 1999. The increase in net
royalty revenue was primarily due to an increase in royalty revenue earned from
increased sales by our licensees in the watch, eyewear, footwear and small
leather goods product lines, which was partially offset by us discontinuing
certain licenses that were brought back in-house in the prior year.
GROSS PROFIT. Gross profit increased 41.1% to $77.6 million in the second
quarter ended July 1, 2000 from $55.0 million in the second quarter ended June
26, 1999. Gross profit rate was 43.7% in the quarter ended July 1, 2000 compared
to 46.0% in the quarter ended June 26, 1999. The decrease in gross profit rate
resulted from higher off-price sales and lower licensing income. Gross margin
from product sales increased 50.2% to $68.6 million in the quarter ended July 1,
2000 from $45.7 million for the comparable period in 1999. Gross margin rate
from product sales for the quarter ended July 1, 2000 was 40.7% compared to
41.4% for the same period in 1999. The decrease in gross margin rate from
product sales for the quarter is primarily due to higher off-price sales.
Gross profit increased 45.0% to $158.2 million in the six months ended July 1,
2000 from $109.1 million in the six months ended June 26, 1999. Gross profit
rate was 43.2% in the six months ended July 1, 2000 compared to 43.9% in the six
months ended June 26, 1999. The increase in gross profit resulted from increased
net revenue from product sales. Gross margin from product sales increased 53.1%
to $138.7 million in the six months from $90.6 million in 1999. Gross profit
rate from product sales for the six months ended July 1, 2000 was 40.0% compared
to 39.4% for the same period in 1999. The increase in gross margin from product
sales for the six months ended July 1, 2000 is primarily due to improved retail
margins and the effect of spreading retail occupancy costs over a higher sales
base, partially offset by higher off-price sales.
8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $55.4 million decreased to 31.2% of net
revenue in the quarter ended July 1, 2000 compared to $38.3 million or 32.0% of
net revenue in the second quarter ended June 26, 1999. The decrease in the SG&A
as a percentage of net revenue for the second quarter is due to our cost
containment programs and a $1.1 million sales and use tax refund partially
offset by the expansion of our organizational infrastructure needed to
facilitate our growth initiatives. During the second quarter of 2000, we also
incurred start-up and other non-recurring pre-tax costs of $2.2 million relating
to the relocation of our distribution operation to Kentucky.
Selling, general and administrative ("SG&A") expenses of $107.6 million
increased to 29.4% of net revenue in the six months ended July 1, 2000 compared
to $70.5 million or 28.4% of net revenue in the six months ended June 26, 1999.
The increase in SG&A as a percentage of net revenue for the six months ended
July 1, 2000 is due to the expansion of our organizational infrastructure needed
to facilitate our growth initiatives offset by our cost containment programs.
During the six months of 2000, we also incurred start-up and other non-recurring
pre-tax costs of $5.3 million relating to the relocation of our distribution
operation to Kentucky. Additionally, at the beginning of the first quarter 2000,
we revised our vacation pay policies to enhance employee benefits, which
resulted in a one-time pre-tax charge of $1.3 million.
SEVERANCE COSTS RELATING TO DISTRIBUTION FACILITY RELOCATION. In accordance with
the requirements of EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," the Company recorded a $3.2 million charge,
in the second quarter ended June 26, 1999, for future severance costs related to
the relocation of its distribution operations from Los Angeles to Louisville,
Kentucky. As a result of employee transfers and attrition, the severance costs
actually incurred for Los Angeles-based employees was $1.7 million which has
resulted in a reversal of $1.5 million of the severance charge in the second
quarter of 2000. The Company successfully completed the transition of all
product lines to the new distribution center during the second quarter of 2000.
EARNINGS FROM OPERATIONS. Earnings from operations increased 75.0% to $23.8
million, or 13.3% of net revenue, in the second quarter ended July 1, 2000
from $13.6 million, or 11.4% of net revenue, in the second quarter ended June
26, 1999. This increase was primarily due to higher revenue and the inclusion
of the severance cost recovery in the second quarter ended July 1, 2000 and
the recording of $3.2 million charge for severance costs in the second
quarter ended June 26, 1999. Earnings from operations increased 47.4% to
$52.0 million, or 14.2% of net revenue, in the six months ended July 1, 2000
from $35.3 million, or 14.2% of net revenue, in the six months ended June 26,
1999. This increase was primarily due to higher revenue and the inclusion of
the severance cost recovery in the six months ended July 1, 2000 and the
recording of $3.2 million charge for severance costs in the six months ended
June 26, 1999.
INTEREST EXPENSE, NET. Net interest expense increased 58.4% to $3.5 million in
the second quarter ended July 1, 2000, from $2.2 million for the comparable
period in 1999. The increase is due to higher outstanding debt in the second
quarter of 2000. Total debt at July 1, 2000 was $156.1 million, which included
$79.6 million of our senior subordinated notes due 2003, $63.8 million of
borrowings under our revolving credit agreement due in October 2002, and $12.7
million of bank debt related to Guess Canada. On a comparable basis and
excluding Guess Canada, the average debt balance for the second quarter of 2000
was $128.9 million, with an average effective interest rate of 9.2%, versus an
average debt balance of $94.7 million, with an average effective interest rate
of 9.1% for the comparable 1999 quarter.
Net interest expense increased 35.5% to $6.1 million in the six months ended
July 1, 2000, from $4.5 million for the comparable period in 1999. The increase
is due to higher outstanding debt in the six months of 2000. On a comparable
basis and excluding Guess Canada, the average debt balance for the first six
months of 2000 was $110.7 million, with an average effective interest rate of
9.3%, versus an average debt balance of $95.7 million, with an average effective
interest rate of 9.7% for the comparable 1999 period.
INCOME TAXES. Income taxes for the second quarter ended July 1, 2000 were $8.1
million, or a 40.1% effective tax rate, compared to $4.8 million, or a 40.5%
effective tax rate, in the quarter ended June 26, 1999. Income taxes for the six
months ended July 1, 2000 were $18.3 million, or a 40% effective tax rate,
compared to $12.6 million, or a 40.5% effective tax rate, in the six months
ended June 26, 1999. Income taxes for the interim periods were computed using
the effective tax rate estimated to be applicable for the full fiscal year,
which is subject to ongoing review and evaluation by us.
9
NET EARNINGS. Net earnings increased 72.3% to $12.1 million, or 6.8% of net
revenue, in the second quarter ended July 1, 2000, from $7.0 million, or 5.9% of
net revenue, in the same period in 1999. Net earnings increased 48.7% to $27.5
million, or 7.5% of net revenue, in the six months ended July 1, 2000, from
$18.5 million, or 7.4% of net revenue, in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended July 1, 2000, we relied primarily on internally
generated funds, trade credit and bank borrowings to finance our operations
and expansion. At July 1, 2000, we had working capital of $167.1 million
compared to $97.9 million at December 31, 1999. The increase was primarily
due to a $26.5 million increase in net receivables, and a $67.1 million
increase in inventories, which was partially offset by a $24.3 million
decrease in short-term investments. The increase in receivables is primarily
due to a 12% increase in wholesale operations sales in the second quarter of
2000 from the fourth quarter of 1999 and a high level of back to school
shipments occurring in June 2000. The majority of the increase in inventory
is the result of significantly increased product sales, substantially higher
wholesale backlog and our retail expansion program, coupled with an
accelerated supply chain associated with global sourcing. Included in the net
cash flow for six months ended July 1, 2000 was the funding of approximately
$7.5 million of distribution center and new store construction costs that
were accrued in accounts payable at December 31, 1999.
On December 3, 1999, we entered into a $125 million Credit Agreement ("Credit
Facility") with The Chase Manhattan Bank. The Credit Facility provides us with a
revolving credit facility, which includes a $50 million sub-limit for letters of
credit. The Credit Facility expires in October 31, 2002. At July 1, 2000, we had
$63.8 million outstanding borrowings under the revolving credit facility, $4.4
million in outstanding standby letters of credit and $28.6 million in
outstanding documentary letters of credit. At July 1, 2000, we had $27.5 million
available for future borrowings under the Credit Facility. The Credit Facility
contains various restrictive covenants requiring, among other things, the
maintenance of certain financial ratios. As of July 1, 2000, we were in
compliance with all such covenants.
Capital expenditures, net of lease incentives granted, totaled $37.6 million
in the six months ended July 1, 2000. We estimate our capital expenditures
for fiscal 2000 will be approximately $80.0 million, primarily for the retail
store expansion and remodeling, shop-in-shop programs, information systems
and general operations.
We anticipate that we will be able to satisfy our ongoing cash requirements for
the next twelve months for working capital, capital expenditures and interest on
our senior subordinated notes, primarily with cash flow from operations,
supplemented by borrowings under our Credit Facility.
WHOLESALE BACKLOG
We generally receive wholesale orders approximately 90 to 120 days prior to the
time the products are to be delivered to department and specialty stores. As of
July 2, 2000, unfilled wholesale orders increased 61.4% to $162.4 million from
$100.6 million a year ago. The backlog of wholesale orders is affected by
various factors, including seasonality and the scheduling of manufacturing and
shipment of product which varies at any given time. Accordingly, a comparison of
backlogs of wholesale orders from period to period may not be indicative of
eventual actual shipments.
SEASONALITY
Our business is impacted by the general seasonal trends characteristic of the
apparel and retail industries. Our retail operations are generally stronger in
the third and fourth quarters, while wholesale operations generally experience
stronger performance in the first and third quarters. As the timing of the
shipment of products may vary from year to year, the result for any particular
quarter may not be indicative of results for the full year. We have not incurred
excessive overhead and other costs generally associated with large seasonal
variations.
10
INFLATION
We do not believe the relatively moderate rates of inflation experienced in the
United States over the last three years have had a significant effect on net
revenue or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which our products are
manufactured, we do not believe they have had a material adverse effect on our
net revenue or profitability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We receive United States dollars ("USD") for substantially all of our product
sales and our licensing revenues. Inventory purchases from offshore contract
manufacturers are primarily denominated in USD; however, purchase prices for our
products may be impacted by fluctuations in the exchange rate between the USD
and the local currencies of the contract manufacturers, which may have the
effect of increasing our cost of goods in the future. In addition, royalties
received from our international licensees are subject to foreign currency
translation fluctuations as a result of the net sales of the licensee being
denominated in local currency and royalties being paid to us in USD. During the
last three fiscal years, exchange rate fluctuations have not had a material
impact on our inventory costs.
We may enter into derivative financial instruments, including forward exchange
contracts, to manage foreign exchange risk on foreign currency transactions.
These financial instruments can be used to protect us from the risk that the
eventual net cash inflows from the foreign currency transactions will be
adversely affected by changes in exchange rates. Unrealized gains and losses on
outstanding foreign currency exchange contracts, used to hedge future revenues
and purchases, are not recorded in the financial statements but are included in
the measurement of the related hedged transaction when realized.
FORWARD EXCHANGE U.S. DOLLAR FAIR VALUE IN U.S$
CONTRACTS EQUIVALENT MATURITY DATE AT JULY 1, 2000
--------- ---------- ------------- ---------------
Canadian dollars $1,000,000 July 5 to August 7, 2000 $1,012,369
Canadian dollars 750,000 July 5 to August 7, 2000 744,525
Canadian dollars 1,000,000 July 17 to August 17, 2000 1,017,100
Canadian dollars 1,000,000 July 5 to September 18, 2000 993,444
Based upon the rates at July 1, 2000, the cost to buy the equivalent U.S.
dollars discussed above was approximately $5.5 million Canadian currency.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 7, 1996, a class action complaint naming us and certain of our
independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et al. v.
GUESS?, Inc. et al. The plaintiffs asserted claims for violation of state wage
and hour laws, wrongful discharge, and breach of contract arising out of our
relationship with our independent contractors and actions taken by them with
respect to their employees. The plaintiffs also alleged that we breached our
agreement with the United States Department of Labor regarding the monitoring of
our independent contractors. The court has held two hearings on certifying the
alleged class. The parties have agreed to settle the case. On March 1, 2000, the
court gave final approval to the parties' settlement. Since no class members
appealed within 60 days thereafter, the case has been finally resolved.
On July 7, 1998, the Union of Needletrades Industrial and Textile Employees
("UNITE") filed with the National Labor Relations Board ("NLRB") charges against
us alleging that we violated the National Labor Relations Act by failing to
uphold certain obligations under a prior settlement agreement with the NLRB, by
denying pro-union employees access to our facilities, by conferring new benefits
to employees, by making false accusations against UNITE, by conducting video
surveillance of UNITE's offices, and by assisting and organizing an anti-union
demonstration. These allegations were dismissed by the NLRB. UNITE appealed,
and, on October 15, 1999, the NLRB dismissed the appeal.
On February 24, 1998, we and Maurice Marciano, Paul Marciano and Armand
Marciano, as individuals, were named as defendants in a class action entitled
John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and Armand
Marciano filed in the Los Angeles Superior Court. The complaint, as amended,
purported to state claims under Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 for alleged misrepresentations in connection with our initial public
offering in August 1996. Mr. Robinson purported to represent a class of all
purchasers of our stock in the initial public offering and sought unspecified
damages. On January 10, 2000, the complaint was dismissed in its entirety. Mr.
Robinson has agreed not to pursue an appeal in exchange for the Company's
agreement not to pursue the claims against him.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals, as well as we, were named as defendants in a stockholder's
derivative complaint entitled John N. Robinson v. Maurice Marciano, Paul
Marciano and Armand Marciano and Guess ?, Inc. filed in the Los Angeles Superior
Court. The complaint purports to state a claim for intentional breach of
fiduciary duty, negligent breach of fiduciary duty, constructive fraud and abuse
of control in connection with the Marcianos' management of us since our initial
public offering. On July 26, 1999, the court entered an order that allows the
case to proceed past the pleadings stage. The parties have reached a settlement
in principle which requires court approval to be effective. Under the terms of
the settlement, the Company`s insurance carrier will pay up to but not exceeding
$750,000 and the Company will pay $0. The parties have scheduled a settlement
approval hearing for August 11, 2000. If settlement is approved, the case will
be dismissed.
On approximately January 15, 1999, UNITE filed an unfair labor practice charge
against us, alleging that attorney Dennis Hershewe violated Section 8(a)(1) of
the National Labor Relations Act ("the Act") by questioning our employee Maria
Perez about her union activities at the deposition he conducted in her workers'
compensation case. Mr. Hershewe represents Fireman's Fund Insurance Company, our
workers' compensation insurance carrier. GUESS? investigated the charge and
responded to it on March 10, 1999. The NLRB issued a complaint on part of the
charge on October 14, 1999, and we filed an answer on October 21, 1999. On July
6, 2000, the complaint was dismissed in its entirety. However, the NLRB and
UNITE have the right to appeal the dismissal.
On May 21, 1999, we filed a demand for arbitration against Pour le Bebe, Inc.
and Pour la Maison, Inc. (collectively, "PLB") seeking damages and
injunctive relief in connection with four written license agreements
12
between the parties. We alleged that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. On July 19, 1999, PLB filed a counterdemand for arbitration
against us. PLB sought damages and injunctive relief against us alleging breach
of contract, violation of the California Franchise Relations Act, interference
with prospective economic advantage, unlawful business practices, statutory
unfair competition and fraud. The arbitration was conducted before the American
Arbitration Association pursuant to arbitration clauses in the license
agreements.
On June 9, 2000, the arbitrators issued a final award in our favor and rejected
each of PLB's counterclaims. The amount of this award was $7,659,677. Because of
the uncertainty of the ultimate realization of the award, no recognition has
been given to it in our consolidated financial statements. Thereafter, the
Company filed a petition to confirm the arbitration award and PLB filed a
petition to vacate the award. Both the petition to confirm and the petition to
vacate have been determined to be "related cases" to another action brought by
PLB and its principles against the Company's attorneys. All three cases are
pending judicial reassignment and all previously scheduled motion hearing dates
have been vacated. We are informed that PLB may be attempting to raise before
the California Department of Corporations the same franchise issues rejected by
the arbitrators in the final award. The Federal Trade Commission contacted the
Company on July 28, 2000 requesting information regarding certain franchise
inquiries.
On June 9, 1999, we commenced a lawsuit in the Los Angeles County Superior Court
against Kyle Kirkland, Kirkland Messina LLC, and CKM Securities (collectively
"Kirkland") for tortious interference, unfair competition, fraud and related
claims. This action arises out of alleged misrepresentations and omissions of
material fact made by Kirkland in connection with the operations and financial
performance of PLB. On March 29, 2000, the California Court of Appeal determined
that the action will proceed in court. Kirkland's petition for review to the
California Supreme Court was denied on July 12, 2000. No trial date has been
set.
On March 28, 2000 a complaint was filed against us in San Diego County Superior
Court entitled Snodgrass v. Guess?, Inc. and GUESS? Retail, Inc. The complaint
purports to be a class action filed on behalf of current and former store
management employees in California. Plaintiffs seek overtime wages and a
preliminary and permanent injunction. No trial or hearing date has been set.
On May 4, 2000, a complaint was filed against the Company and Mr. Paul
Marciano in the Los Angeles Superior Court - Michael Benasra v. Paul Marciano
and Guess?, Inc., Case No. BC 229359. The complaint grows out of the
arbitration between the Company and PLB, discussed above. The plaintiff, the
President of PLB, alleges that defendants made defamatory statements about
him during the arbitration. Plaintiff seeks general damages of $50,000,000
and unspecified punitive damages. Defendants moved to compel arbitration of
this matter, or alternatively, to strike the action under the state's anti
SLAPP (strategic litigation against public participation) statutes. The
motion to compel arbitration, which was heard on July 13, 2000, has been
taken under submission by the trial judge and no ruling has yet been made. No
trial date has been set.
We cannot predict the outcome of these matters. We believe the outcome of one or
more of the above cases could have a material adverse effect on our results of
operations or financial condition.
Most major corporations, particularly those operating retail businesses, become
involved from time to time in a variety of employment-related claims and other
matters incidental to their business in addition to those described above. In
the opinion of our management, the resolution of any of these pending incidental
matters is not expected to have a material adverse effect on our results of
operations or financial condition.
13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's Annual Meeting of Stockholders was held on May 15,
2000.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in the
Proxy Statement. All nominees were elected.
(c) The matters voted upon at the Annual Meeting and the results thereof
were as follows:
I. To elect two Class I Directors to hold office for a three-year term
and until their successors are duly elected and qualified.
FOR WITHHELD
---------- ---------
Armand Marciano 42,049,209 601,927
Alice Kane 42,051,304 599,832
II. To ratify the selection of KPMG LLP to serve as our independent certified
public accountants for the year ending December 31, 2000.
FOR AGAINST ABSTAINED
---------- ------- ---------
41,064,246 2,475 8,265
III. To approve the GUESS?, Inc. 1996 Equity Incentive Plan.
FOR AGAINST ABSTAINED
---------- ------- ---------
41,064,246 1,569,693 17,197
IV. To approve the GUESS?, Inc. Annual Incentive Bonus Plan.
FOR AGAINST ABSTAINED
---------- ------- ---------
42,103,501 530,082 17,553
ITEM 5. OTHER INFORMATION
None.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1. Restated Certificate of Incorporation of the Company. (1)
3.2. Bylaws of the Company. (1)
4.1. Specimen stock certificate.(1)
27.1. Financial Data Schedule*
* filed herewith.
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.
- -----------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended July
1, 2000.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GUESS ?, INC.
Date: August 14, 2000 By: /s/ MAURICE MARCIANO
--------------------------
Maurice Marciano
Co-Chairman of the Board,
Co-Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 14, 2000 By: /s/ BRIAN FLEMING
--------------------------
Brian Fleming
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
16
5
1,000
3-MOS
DEC-31-2000
JAN-01-2000
JUL-01-2000
7,666
2,752
74,919
8,777
173,711
271,152
263,030
115,280
444,816
104,052
79,562
0
0
143
184,699
444,816
347,072
366,525
208,375
314,466
(99)
0
6,146
45,814
18,300
0
0
0
0
27,514
0.63
0.63
Includes net royalties of $19.5 million.
