Highlights From GES's Q3 Conference Call: Each Business Segment Exceeded Expectations in Gross Revenues & Earnings

December 1, 2009 9:46 AM EST

Guess? Inc. (NYSE: GES) reports Q3 EPS of $0.69, 18 cents better than the analyst estimate of $0.51. Revenues were $522.8 million, which compares to the estimate of $482.57 million. Shares are performing well this morning, up 12.85%.

Highlights From GES's Q3 Conference Call:

• Sees Q4 EPS of $0.77-$0.80, versus the consensus of $0.69. Sales are expected to be $585-$605 million, versus the consensus of $563.79 million.
  
• (CEO) We are very, very pleased with our Q3 financial results. In the last quarter, each of our businesses exceeded our expectation in gross revenues and earnings. In fact, we set another record for the net earning in a quarter.
  
• Our businesses in North America and Asia both grew, and our licensing business was about flat.
  
• In Europe, we had a solid quarter, especially considering the effect of a fall/winter pre-collection that shifted shipment out of Q3 and into Q2.
  
• In North American retail, we performed well even as customers continued to shop cautiously. We grew that business as a result of square footage expansion. During the quarter, we posted a 3.4 comp decrease, which was stronger than what we had expected.
  
• Our comp accelerated during the quarter, culminating in a positive low single comp in October.
  
• Next is Europe, which also outperformed expectation. We made good progress developing our business outside Italy, and we increased our penetration in France, Spain, U.K., and Germany.
  
• So far this year, our combined businesses in these four markets have grown by 18%. But as we had planned, our revenue declined in the quarter given the pre-collection shift.
  
• In total, we added nine retail stores in the quarter in such cities like Montpellier, Dusseldorf and London, where we just opened a new flagship store on Regent Street. Our revenue for our retail business increased by over 40%.
  
• Next is Asia where we have several businesses in different stages of development. Korea continues to drive our Asia business, passing the double-digit comp this quarter with a 60% revenue increase. We just added a new underwear line and now operate 22 underwear locations.
  
• In China, we had the better quarter as a result of significant improvements we made to the product assortment offering. China grew by double-digits in the quarter and remain very focused to be the strong foundation for the future of our brand.
  
• We strongly believe that Europe can reach $1 billion in sales in the next two to three years.
  
• Retail growth remain a major part of that strategy, and our goal for the next year is to open 100 stores, Guess? Stores, across our concept in Europe.
  
• Another area of opportunity in accessories is jewelry. We have decided to internalize our traditional jewelry business, and our first delivery will take place in January 2010.
  
• (CFO) Total Q3 net revenues decreased 1% to $523 million. Total Company gross profit was $237 million, or 2% lower than last year. Gross margin was 45.3% compared to 45.8% a year earlier.
  
• We continued to manage expenses very tightly, reducing our SG&A expenses by 3% to $138 million and improving our SG&A rates 60 basis points to 26.4%.
  
• We improved our operating margins, which reached 18.9% for the quarter versus 18.8% a year ago. For the period, the Company's operating profit reached $99 million, which was a slight decrease to last year's level.
  
• In North American retail, our comp stores sales declined by 3.4%. Total revenues increased 2% to $240 million, given this quarter's larger store base. We expanded our gross margin by 50 basis points driven by stronger product margins.
  
• During the quarter, we opened two new stores ending the period with 433 stores in the U.S. and Canada.
  
• In Europe, third quarter revenues declined $17 million from last year or 9%. As expected, our European wholesale business was down, given last quarter's $29 million shift.
  
• Our cash position remained very strong. We ended the quarter with cash of $345 million and virtually no debts. Our net cash position has improved by about $150 million in the last year. So far this year, we have generated operating cash flow of $165 million versus $93 million last year, an improvement of over 75%.
  
• We ended the quarter with $262 million in inventory, about 4% higher than last year's Q3.
  
• (COO) We are investing in trending categories like denim, both premium and basic, leggings, woven tops and men and women, dresses, sweaters and outerwear.
  
• For this Friday, after Thanksgiving, our business was up in the mid to high single-digits, and margins were consistent with last year. With this performance, we closed the month of November with positive same-store sales in the low single-digits, consistent with October's trend.
  
• Our November product margins showed an improvement of more than 300 basis points versus last year, as a result of improved sourcing and less promotional activity throughout the month.
  
• All considered, we expect a substantial improvement in margins, and we are assuming that comps will be slightly positive for the period. This would translate into a revenue increase in the low single-digits for the period as well.
  
• In our European retail business, we expect an increase in revenues of over 40%, mainly due to the new stores. Lastly, we expect the jewelry business, as Paul mentioned, which will be part of our European operation, will be immediately accretive to earnings with a favorable fourth quarter EPS impact of as much as $0.02.
  
• Overall for Q4, we are planning our European revenues to be up in the mid to high single-digits in local currency.
  
• With respect to gross margins, we expect to achieve an expansion over last year's Q4 of about 250 basis points Company-wide.
  
• Regarding expenses, we are planning the fourth quarter with a slight increase to our SG&A rate, primarily due to last year's Q4 reversals of certain performance-based compensation accruals.
  
• (Q&A) Just - I guess, a question and a half, since I have to keep it to one. Product margins sound like a real point of strength for you across all divisions. Could you talk a little bit more about that? How much is coming from sourcing versus how much is coming from the efficiencies of managing your one global assortment? And where would you see product margins heading into next year? How much of a year-over-year improvement because we're hearing a lot about sourcing efficiencies as well. And the other would just be on retail growth. I mean you're emphasizing that, Paul, and it sounds like it's going to be a big part of your growth strategy. Could you put it in the context of sort of a square-footage growth strategy for Europe into next year? And Asia, if you can, as well? (A)Let me start with product margins. This is Carlos. We were very pleased with our performance with respect to product margins because, as you know, the business had changed pretty significantly, especially in the fourth quarter of last year. We are very pleased because our margin structure has been intact from pre-recession levels. And most of that has come from the way we are managing the business. Our inventory levels have been very much under control and in line with the demand that we saw. And we did benefit from sourcing, but that number was not even close to the expansion of margin that we saw because of how we managed the business with promotional events. So - but that doesn't mean that the number is not significant. We would rather not disclose the type of numbers that we are seeing there. We expect that that benefit would also continue into next year. So we are seeing ways to improve the way we are sourcing, including moving some of the sources throughout the world including there.(A)About the square-footage increase, specifically about Europe and Asia. In fact I will be flying to Europe in the next few hours to have a recap for next year and the year after of where we stand about potentials. We look at - I would prefer to give you in percentage. We look to increase our space, our own space that we'll operate directly in double digits and the same for Asia. And I'm comfortable with that. And - but definitely what we just said before is $1 billion benchmark is definitely in sight for us when five years ago it was 60 million or $70 million. So that is definitely our big focus and, of course, Asia which I mention on every conference call.
  
• Paul, could you just share the economics that you're experiencing in Europe. I mean what - the catalyst for this growth, I'd imagine there's a number of things. But can you compare and contrast the economics of running retail yourself in Europe versus the U.S.? (A)Well, it's - as you well know, it's a much larger investment when you do that yourself because you deal with much more higher occupancy due to the factor of key money that sometime are very substantial. [inaudible] And also it's different
  operation than U.S., definitely. And the productivity is higher. I mean, much higher - if you look , and because there's not such a large base of shopping centers and mall all over Europe, it's much more concentrated. And that's what we're experiencing. But, for example, France, which is a key country for us, we see that country becoming very, very significant for Guess? now in the next three years. And to think that we can do 300 or 350 million euro business is definitely in our sight. Just in France. So that
  gives you the potential about what the rest of Europe is.
  
• As I listened to your comments, your prepared comments, you were running through all these different countries, these different businesses, accessories, Europe, China. How do you prioritize? What would you prioritize as the top one or two or three most important opportunities for the brand? And as you look at the SG&A control that you've exhibited in this environment, how do you think about SG&A spending as you need to build out the team and the framework and the infrastructure to leverage these
  opportunities going forward? (A)Well, you can go different ways, Omar. Is first of fall when the crisis exploded last year, the impact was much, much stronger in U.S. than anywhere in the world. And this is where we pull up the brakes right away here. Meanwhile, the effect in Europe was much slower to come in. And we had a lot of stores and deals in process, and we proceeded with that. So how you prioritize is now you see the world out as three regions to decide. I mean you have that much CapEx to deploy, and you have to look at what is a priority as a brand first. What is important for the Guess? brand and use different concepts, and evaluate what you think is right according to the competition in the market or acceptance of a product. But because we're a lifestyle brand, and there are very few lifestyle brands, for example, in Europe, of course our chances have been much, much higher acceptance there than anywhere. And because also we have been advertising our brand for so long without selling any product in Europe, that when we decided to sell product, the brand was already extremely known. So we had to execute and deliver and have discipline for execution to go country-by-country what was our knowledge of Europe. And when you see that Europe will at one point and another have the size of business of U.S. because of the sheer numbers of countries and if you add Russia and Middle East in it, that is definitely a clear signal that we have to put equal if not more capital in Europe. And Asia, as I mentioned on different conference call, is a much slower pace there on the sense that we are still in the learning process to don't be overconfident to think that we know everything; we don't. We just go step-by-step where we feel stronger and stronger and just move at the pace we have to move cautiously. So that's also the capital is adequate to that assessment. (A)Omar, your second part of the question was related to SG&A. And the way we have been funding SG&A has been following the strategy for the business and the expansion of the brand, like Paul was mentioning. So as you can see, for example, when we saw that Europe was exploding during the last few years, we were very quick to build an infrastructure, and we created several centers, including administration and selling groups in Lugano, Switzerland. And now this year is the first time that we are anniversarying that type of investment. So a lot of this investment has been already incurred. We are now increasing our development spending as it relates to the retails team, and we just opened and we are operating in a new distribution center, which is pretty significant that will service the whole business in Europe. So a lot of very exciting developments as it relates to spending. We have been able to - because of the growth that we experienced, we have been able to really keep our SG&A rate, in fact, lower this year than what we have seen in years passed, in spite of that investment, as we annualize this spending. And we - that's the way we plan the business, and that's the way we are looking at next year as well.

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