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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 September 30, 2000
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 November 6, 2000 the registrant had 43,539,327 shares of Common Stock,
$.01 par value per share, outstanding.
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GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Earnings (Unaudited) - Third Quarter and
Nine Months Ended September 30, 2000 and September 25, 1999 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2000 and September 25, 1999 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
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 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
SEP 30, DEC 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash $ 9,158 $ 6,139
Investments 2,408 27,059
Accounts receivable, net of reserves 77,670 39,673
Inventories 164,214 106,624
Prepaid expenses and other current assets 9,931 8,861
Prepaid income taxes 5,765 3,004
Deferred tax assets 9,619 9,619
---------- ------------
Total current assets 278,765 200,979
Property and equipment, at cost, net of accumulated
depreciation and amortization 159,527 125,688
Other assets, at cost, net of accumulated amortization 21,790 42,369
---------- ------------
$ 460,082 $ 369,036
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of bank debt and long-term debt $ 14,659 $ 7,475
Accounts payable 66,440 61,736
Accrued expenses 24,437 33,824
---------- -----------
Total current liabilities 105,536 103,035
Notes payable and long-term debt, less current installments 155,300 83,363
Other liabilities 10,572 14,236
---------- -----------
Total liabilities 271,408 200,634
Minority interest 182 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 63,569,119 and 63,335,743 shares,
outstanding 43,538,327 and 43,304,951 shares at
September 30, 2000 and December 31, 1999, respectively 144 141
Paid-in capital 164,907 163,300
Retained earnings 177,597 144,443
Accumulated other comprehensive income (loss) (3,380) 10,247
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
------------ -----------
Net stockholders' equity 188,492 167,355
------------ -----------
$ 460,082 $ 369,036
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- --------------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
Product sales $ 206,831 $ 144,142 $ 553,903 $ 374,264
Net royalties 9,532 11,405 28,985 29,892
----------- ----------- ----------- ---------
216,363 155,547 582,888 404,156
Cost of sales 144,566 90,286 352,941 229,832
----------- ----------- ----------- ---------
Gross profit 71,797 65,261 229,947 174,324
Selling, general and administrative expenses 58,498 42,911 166,233 113,133
Severance recovery (costs) relating to
distribution facility relocation --- --- 1,545 (3,200)
----------- ----------- ----------- ---------
Earnings from operations 13,299 22,350 65,259 57,991
Other income (expense):
Gain on disposal of property
and equipment --- 3,849 --- 3,849
Interest expense (4,159) (2,364) (10,305) (6,902)
----------- ----------- ----------- ---------
(4,159) 1,485 (10,305) (3,053)
Earnings before income taxes 9,140 23,835 54,954 54,938
Income taxes 3,500 9,600 21,800 22,200
----------- ----------- ----------- ---------
Net earnings $ 5,640 $ 14,235 $ 33,154 $ 32,738
=========== =========== =========== ==========
EARNINGS PER SHARE:
Net earnings per share - basic and diluted $ 0.13 $ 0.33 $ 0.76 $ 0.76
=========== =========== =========== ==========
Weighted average number of shares
outstanding - basic 43,492 43,015 43,422 42,958
=========== =========== =========== ==========
Weighted average number of shares
outstanding - diluted 43,828 43,482 43,857 43,315
=========== ============ =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEP 30, SEP 25,
2000 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 33,154 $ 32,738
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 24,741 17,317
Gain on disposition of property and equipment --- (4,564)
Other items, net (1,004) (402)
Changes in operating assets and liabilities:
Accounts receivable (37,997) (12,353)
Inventories (57,590) 3,275
Prepaid expenses and other current assets (8,760) 1,304
Accounts payable 4,705 7,134
Accrued expenses (10,934) 4,816
Income taxes payable --- (252)
------------- -----------
Net cash (used in) provided by operating activities (53,686) 49,013
Cash flows from investing activities:
Purchases of property and equipment (58,683) (20,384)
Proceeds from the disposition of property and equipment 3,133 6,372
Net proceeds from the sale of short-term investments 33,274 ---
Increase in short-term investments (1,843) (30,150)
Acquisition of interest in GUESS? Canada --- (2,027)
Increase in long-term investments --- (2,232)
------------- -----------
Net cash used in investing activities (24,119) (48,421)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 182,131 3,015
Repayment of notes payable and long-term debt (103,010) (7,702)
Issuance of common stock 1,610 1,146
------------- -----------
Net cash provided by (used in) financing activities 80,731 (3,541)
Effect of exchange rates on cash 93 (27)
Net increase (decrease) in cash 3,019 (2,976)
Cash, beginning of period 6,139 5,853
------------- -----------
Cash, end of period $ 9,158 $ 2,877
============= ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 11,195 $ 12,911
Income taxes 23,758 15,158
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2000 and December 31, 1999, the consolidated statements of
earnings for the quarter ended and nine months ended September 30, 2000 and
September 25, 1999, and the statements of cash flows for the nine months ended
September 30, 2000 and September 25, 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 nine
months ended September 30, 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 third quarter of 2000; however,
this change resulted in six more calendar days for the nine months ended
September 30, 2000.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the September 30, 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 nine month periods ended September 30, 2000 and September 25,
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 535,404
shares of common stock at prices ranging from $21.06 to $27.31 per share during
the nine month period ended September 30, 2000 and options to purchase 767,436
shares of common stock at prices ranging from $10.50 to $13.13 during the nine
month period ended September 25, 1999 were not included in the computation of
diluted earnings per share because the exercise prices were greater than 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 8.
4
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COMPREHENSIVE INCOME
The Company reports comprehensive income under SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net earnings,
unrealized gains (losses) on investments available for sale and foreign
currency translation adjustments. A reconciliation of comprehensive income
for the quarter and nine-month periods ended September 30, 2000 and September
25, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------------- -------------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 5,640 $ 14,235 $ 33,154 $ 32,738
Unrealized loss on investments, net of taxes (2,469) -- (13,883) --
Foreign currency translation adjustment (227) 25 256 67
--------- ----------- ---------- -----------
Comprehensive income $ 2,944 $ 14,260 $ 19,527 $ 32,805
========= =========== ========== ===========
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
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 its financial reporting.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation,"
which is an interpretation of APB Opinion No. 25. Interpretation No. 44
became effective on July 1, 2000, but certain elements of interpretation
apply to events occurring after December 15, 1998 and January 12, 2000.
Interpretation No. 44 clarifies the application of APB Opinion No. 25 for
certain issues, including (a) the definition of employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a stock
option plan qualifies as a non-compensation plan, (c) the accounting
consequences of various modifications to the terms of a previously fixed
stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of Interpretation
No. 44 did not have a material impact on the Company's financial statements.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables, less reserves aggregating
$7,094,000 at September 30, 2000 and $8,863,000 at December 31, 1999, royalty
receivables, less allowance for doubtful accounts of $972,000 at September
30, 2000 and $1,258,000 at December 31, 1999, and other receivables.
(4) INVENTORIES
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEP 30, DEC 31,
2000 1999
---------- ----------
<S> <C> <C>
Raw materials $ 10,590 $ 8,514
Work in progress 8,750 6,740
Finished goods - retail 69,552 45,750
Finished goods - wholesale 75,322 45,620
---------- ----------
$ 164,214 $ 106,624
========== ==========
</TABLE>
5
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(5) INVESTMENTS
At September 30, 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.
(6) 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, California 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.
(7) 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.
(8) 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
quarter and nine months ended September 30, 2000 and September 25, 1999 (in
thousands):
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------ ---------------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue:
Retail operations $ 103,518 $ 75,801 $ 266,083 $ 188,324
Wholesale operations 103,311 68,341 287,818 185,939
Licensing operations 9,534 11,405 28,987 29,892
----------- ---------- --------- ---------
$ 216,363 $ 155,547 $ 582,888 $ 404,156
=========== ========== ========= =========
Earnings from operations:
Retail operations $ 8,463 $ 12,471 $ 15,064 $ 19,269
Wholesale operations (2,503) 1,071 27,243 14,538
Licensing operations 7,339 8,808 22,952 24,184
----------- ---------- --------- ---------
$ 13,299 $ 22,350 $ 65,259 $ 57,991
=========== ========== ========== =========
</TABLE>
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the quarter ended
and nine months ended September 30, 2000, are not necessarily indicative of
the results that may be expected for the full fiscal year.
(9) 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 points 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 September 30,
2000, the Company has $73.4 million outstanding of
6
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borrowings under the Credit Facility, $4.0 million in outstanding standby
letters of credit and $23.6 million in outstanding documentary letters of
credit. At September 30, 2000, the Company had $24.0 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 September 30, 2000, the Company was in
compliance with all such covenants.
(10) COMMON STOCK
On May 24, 2000, the Company filed an amended registration statement to sell
up to $200 million of common stock at any time and from time to time. To
date, no shares during the third quarter of 2000 have been sold under this
registration statement, and all costs related to the registration have been
expensed and are included in selling, general and administrative expenses.
7
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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 "continues" or the negative
of such terms or other comparable terminology. Certain statements contained
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, the cooperation of the company's lenders, 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 and the
Company's Form 10-Q for the quarters ended April 1, 2000 and July 1, 2000,
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 third quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the nine months
ended September 30, 2000.
RESULTS OF OPERATIONS
Third Quarter and Nine Months Ended September 30, 2000 and September 25, 1999.
NET REVENUE. Net revenue for the third quarter ended September 30, 2000
increased $60.8 million or 39.1% to $216.4 million from $155.5 million in the
quarter ended September 25, 1999. Net revenue from retail operations
increased $27.7 million or 36.6% to $103.5 million in the current year third
quarter from $75.8 million for the same period in 1999. This increase is
primarily attributable to a net increase of 55 new stores, which includes 59
new stores, 3 store closures and 1 store consolidation, since September 25,
1999 and a 4.8% increase in combined comparable store sales. There were 129
full priced stores, 6 kids stores and 63 factory outlet stores at
8
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September 30, 2000. During the third quarter, comparable store sales for July
increased 11.9% and for August, increased 4.9%, however, September same store
sales did not materialize as expected, due to softness in the retail
environment, and declined by 3.6%.
Net revenue from wholesale operations increased $35.0 million or 51.2% to
$103.3 million in the quarter ended September 30, 2000 from $68.3 million for
the comparable period in 1999. Domestic wholesale operations net revenue
increased by $29.4 million or 51.3% to $86.7 million in the third quarter ended
September 30, 2000 from $57.3 million in the comparable period in 1999.
Domestic wholesale operations net revenue increased primarily due to a strong
demand for our men's and women's product lines and the addition of our boys'
product line. Also contributing to higher net revenues was the increase
in off-price sales of $12.0 million compared with $3.6 million in the same
1999 period. International wholesale operations net revenues increased $5.6
million or 50.9% to $16.6 million in the third quarter of 2000 compared to
$11.0 million in the same period in 1999.
Net royalty revenue was $9.5 million in the current quarter compared to $11.4
million in the 1999 third quarter, which included income from a one-time
settlement of $1.9 million. Excluding the one-time income, net royalty
revenue was consistent with the prior year.
Net revenue increased $178.7 million or 44.2% to $582.9 million for the nine
months ended September 30, 2000 from $404.2 million for the nine months ended
September 25, 1999. Net revenue from retail operations increased $77.8
million or 41.3% to $266.1 million in the nine months ended September 30,
2000 from $188.3 million for the same period in 1999. This increase is
primarily attributable to a net increase of 55 new stores since September 25,
1999 and a 10.5% increase in combined comparable store sales resulting from a
fashion-forward product mix, strong visual merchandising and quick
replenishment.
Net revenue from wholesale operations increased $101.9 million or 54.8% to
$287.8 million for the nine months ended September 30, 2000 from $185.9
million for the comparable period in 1999. Domestic wholesale operations net
revenue increased $82.4 million or 50.3% to $246.1 million in the nine months
ended September 30, 2000 from $163.7 million in the nine months ended
September 25, 1999. Domestic wholesale net revenue increased primarily due to
a strong demand for our women's and men's product lines and the addition of
our boy's product line. International wholesale operations net revenue
increased $19.5 million or 87.7% to $41.7 million in the nine months ended
September 30, 2000 from $22.2 million in the same 1999 period. The increase
in the current year period is due to a nine-month inclusion of Guess Canada
as compared to the prior year period which included only a three-month
inclusion. Excluding Guess Canada, international wholesale net revenues
increased 56.3% to $29.4 million in the nine months ended September 30, 2000
from $18.8 million in the nine months ended September 25, 1999.
Net royalty revenue was $29.0 million for the nine months ended September 30,
2000 compared to $29.9 million for the comparable 1999 period which included
income from one-time net settlements of $3.8 million. Excluding the prior
year income from settlements, net royalty revenue increased by $2.9 million
in the current year nine-month period ended September 30, 2000.
GROSS PROFIT. Gross profit increased 10.0% to $71.8 million, or 33.2% of net
revenue, in the third quarter ended September 30, 2000 from $65.3 million, or
42.0% of net revenue in the third quarter ended September 25, 1999. The
decline in the gross profit rate in the current year third quarter was due to
losses incurred on off-price sales, higher markdowns on product sales, a $5.4
million reserve for the disposition of excess inventory and slightly lower
licensing revenue. These lower margin elements were due to softness in the
retail environment and higher than expected levels of prior season inventory.
Gross profit for the nine months ended September 30, 2000 was $229.9 million,
or 39.5% of net revenue, compared to $174.3 million, or 43.1% of net revenue,
for the nine months ended September 25, 1999. The decrease in the gross
profit rate for the first nine months of 2000 compared to the same prior year
period was primarily attributable to higher markdowns on product sales
together with losses on the sales of excess inventory through off-price
channels. These off-price sales were necessary to reduce higher levels of
inventory and were concentrated in the third quarter of 2000. Additional
reserves of $5.4 million for excess inventory also contributed to the
decrease in the gross profit rate for the nine months ended September 30,
2000.
9
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $58.5 million decreased to 27.0% of net
revenue in the quarter ended September 30, 2000 compared to $42.9 million, or
27.6% of net revenue, in the third quarter ended September 25, 1999. The
improvement of SG&A expenses as a percentage of net revenue was primarily
generated through economies of scale on our overhead.
SG&A expenses were $166.2 million, or 28.5% of net revenue, in the nine
months ended September 30, 2000 compared to $113.1 million, or 28.0% of net
revenue, in the nine months ended September 25, 1999. The current year
nine-month period includes $5.3 million of start-up and other non-recurring
costs relating to the relocation of our distribution facility in Kentucky and
a $1.3 million one-time pre-tax charge as a result of a revision to our
vacation pay policies to enhance employee benefits. Excluding these expenses
totaling $7.2 million, SG&A expenses as a percentage of net revenue decreased
to 27.3% in the nine months ended September 30, 2000.
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, California to Louisville, Kentucky. As a result of employee
transfers and attrition, the severance cost 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 decreased to $13.3
million, or 6.2% of net revenue, in the third quarter ended September 30,
2000 from $22.4 million, or 14.4% of net revenue, in the third quarter ended
September 25, 1999. The $9.1 million or 40.6% decrease in the current quarter
is primarily due to the lower gross profit rate. Earnings from operations
increased to $65.3 million, or 11.2% of net revenue, in the nine months ended
September 30, 2000 from $58.0 million, or 14.4% of net revenue, in the nine
months ended September 25, 1999. The dollar increase is primarily due to
higher revenue. The decrease as a percentage of net revenue in the current
year nine month period is attributable to the lower gross profit rate.
GAIN ON DISPOSITION OF PROPERTY AND ENVIRONMENT. In the quarter ended
September 25, 1999, the company realized a non-recurring pre-tax gain of $3.8
million on the disposition of property and equipment.
INTEREST EXPENSE, NET. Net interest expense increased 75.0% to $4.2 million in
the third quarter ended September 30, 2000, from $2.4 million for the comparable
period in 1999. The increase is due to higher outstanding debt in the third
quarter of 2000. Total debt at September 30, 2000 was $170.0 million, which
included $79.6 million of our senior subordinated notes due 2003, $73.4 million
of borrowings under our revolving credit agreement due in October 2002, and
$16.8 million of bank debt related to Guess Canada. On a comparable basis and
excluding Guess Canada, the average debt balance for the third quarter of 2000
was $154.9 million, with an average effective interest rate of 8.9%, versus an
average debt balance of $92.8 million, with an average effective interest rate
of 9.5% for the 1999 third quarter.
Net interest expense increased 49.3% to $10.3 million in the nine months ended
September 30, 2000, from $6.9 million for the comparable period in 1999. The
increase is due to higher outstanding debt in the nine months of 2000. On a
comparable basis and excluding Guess Canada, the average debt balance for the
first nine months of 2000 was $125.4 million, with an average effective interest
rate of 9.0%, versus an average debt balance of $94.7 million, with an average
effective interest rate of 9.6%, for the 1999 period.
INCOME TAXES. Income taxes for the third quarter ended September 30, 2000 were
$3.5 million, or a 38.3% effective tax rate, compared to $9.6 million, or a
40.3% effective tax rate, in the quarter ended September 25, 1999. Income taxes
for the nine months ended September 30, 2000 were $21.8 million, or a 39.7%
effective tax rate, compared to $22.2 million, or a 40.4% effective tax rate, in
the nine months ended September 25, 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.
NET EARNINGS. Net earnings decreased 54.2% to $5.6 million, or 2.6% of net
revenue, in the third quarter ended September 30, 2000, from $14.2 million, or
9.1% of net revenue, in the same period in 1999. Net earnings increased slightly
to $33.2 million, or 5.7% of net revenue, in the nine months ended September 30,
2000, from $32.7 million, or 8.1% of net revenue, in the same period in 1999.
OTHER. The Company is evaluating certain under-performing stores and expects
to take certain charges to operations of up to $10.0 million for store
closures beginning in the fourth quarter of the current year.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended September 30, 2000, we relied primarily on internally
generated funds, trade credit and bank borrowings to finance our operations
and expansion. At September 30, 2000, we had working capital of $173.2
million compared to $97.9 million at December 31, 1999. The increase was
primarily due to a $38.0 million increase in net receivables, a $57.6 million
increase in inventories, an $8.8 million increase in prepaid and other
current assets and a $10.9 million decrease in accrued expenses, which was
partially offset by a $24.7 million decrease in short-term investments and a
$4.7 million increase in accounts payable. The increase in receivables is
primarily due to a 36.2% increase in wholesale operations sales in the third
quarter of 2000 from the fourth quarter of 1999. The increase in inventory is
the result of higher anticipated product sales, higher wholesale backlog and
our retail expansion program. Included in the net cash flow for the nine
months ended September 30, 2000 was the funding of approximately $7.5 million
of construction costs for the distribution center and new stores that was
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 September 30, 2000,
we had $73.4 million outstanding borrowings under the revolving credit facility,
$4.0 million in outstanding standby letters of credit and $23.6 million in
outstanding documentary letters of credit. At September 30, 2000, we had $24.0
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 September 30, 2000, we were
in compliance with all such covenants.
Based on current earnings expectations for the fourth quarter ending December
31, 2000, the Company may not meet a financial covenant in the Credit
Facility for the fourth quarter of 2000. The Company is currently in
discussions with the lead lender with respect to obtaining a waiver; however,
there can be no assurances that such a waiver will be granted.
Capital expenditures, net of lease incentives granted, totaled $58.7 million
in the nine months ended September 30, 2000. We estimate our capital
expenditures for fiscal 2000 will be approximately $76.5 million, primarily
for the retail store expansion and remodeling, shop-in-shop programs,
information systems and general operations. In the fourth quarter of 2000, we
plan to report charges of up to $10.0 million for closing certain
under-performing stores.
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.
At September 30, 2000, unfilled wholesale orders increased 13.2% to $133.3
million from $117.7 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 vary 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 are generally
stronger in the first and third quarters. As product shipment timing may vary
from year to year, the results for any particular quarter may not be
indicative of results for the full year. During the third quarter ended
September 30, 2000, we have not incurred excessive overhead and other costs
generally associated with large seasonal variations.
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.
11
<PAGE>
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.
<TABLE>
<CAPTION>
FORWARD EXCHANGE U.S. DOLLAR FAIR VALUE IN U.S$
CONTRACTS EQUIVALENT MATURITY DATE AT SEPTEMBER 30, 2000
----------------- ------------ ------------- ---------------------
<S> <C> <C> <C>
Canadian dollars $700,000 September 18 to October 18, 2000 $690,451
Canadian dollars 500,000 September 15 to October 16, 2000 492,347
Canadian dollars 500,000 October 16 to November 15, 2000 493,112
Canadian dollars 750,000 October 16 to November 15, 2000 742,114
</TABLE>
Based upon the rates at September 30, 2000, the cost to buy the equivalent U.S.
dollars discussed above was approximately $3.7 million Canadian currency.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
reached a settlement which required the Company's insurance carrier to pay up
to but not exceeding $750,000 and the Company to pay $0. The court approved
the settlement in August and the case has been finally resolved.
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. The NLRB appealed the
decision and briefs have been submitted by us and the NLRB in September 2000.
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 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. On September 29, 2000, the court confirmed the
final award and denied PLB's petition to vacate. On October 23, 2000, the court
entered judgment confirming the final arbitration award. 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 has decided not to proceed with an investigation
regarding the franchise issue.
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.
13
<PAGE>
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) statute. The
motion to compel arbitration was denied and the decision has been appealed.
Pending resolution on appeal, this matter has been stayed. 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.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------
<S> <C>
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.
</TABLE>
-------------------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
14
<PAGE>
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: November 13, 2000 By: /s/ MAURICE MARCIANO
--------------------------
Maurice Marciano
Co-Chairman of the Board, Co-Chief
Executive Officer and
Director (Principal Executive Officer)
Date: November 13, 2000 By: /s/ BRIAN FLEMING
--------------------------
Brian Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
15
