Highlights From GES's Q2 Conference Call; Cut Inventory Levels Which Strengthened Margins, Guides In-line for Q3

August 27, 2009 12:37 PM EDT

Guess? Inc. (NYSE: GES) reports Q2 EPS of $0.64, versus the analyst estimate of $0.44. Revenue for the quarter was $522.4 million, versus the consensus of $485.15 million. Shares are being bought up today...last trade up 10%.

Highlights From GES's Q2 Conference Call:

• Sees Q2 same store sales down 12.5% in US dollars.
  
• Raises its quarterly dividend by 25% to $0.125 per common share.
  
• Sees Q3 EPS of $0.46-$0.49 on sales of $465-$485 million. The Street is currently looking for Q3 EPS and sales of $0.49 and $479.69 million, respectively.
  
• (Chairman/CEO) The second quarter, we've succeeded in growing our business increasing in constant dollar revenue by 9%.
  
• We expanded operating margin significantly and delivered earning per shares of $0.64, a 14% increase over last year.
  
• Europe performance was key to our results. Our efforts there to deliver product earlier were very successful, far exceeding our expectation as well. Our products are hitting the market faster and positioning us to benefit from early season demand. For the quarter, Europe local currency revenue increased by 35% with most of European business posting increase over last year. We leveraged our expense base in a significant way, which drove an improvement in operating margin.
  
• In North America retail business, we also exceeded our expectation as we posted a modest increase in profit, in spite of the negative comps.
  
• Regarding our international business, global expansion continued to be a major priority force.
  
• By the end of fiscal year, we plan to directly operate 75 retail stores in that region.
  
• Multiple challenges exist in that region, so we are very cautious on any major investments. Outside of North America, we have already opened 62 stores year-to-date and plan to open another 49 stores by the end of this fiscal year.
  
• (CFO) Total Q2 net revenues increased 1% to $522 million. In constant dollars, the growth was about 9%. This increase was driven by Europe where revenues grew 21% despite the stronger U.S. dollar.
  
• Gross margin was 44.4% compared to 45.1% a year earlier. Product margins improved in North America and in Asia as tight inventory management resulted in fewer markdowns and less clearance.
  
• Our SG&A rate improved 160 basis points declining to 27%. Total SG&A expenses decreased 4% to $141 million.
  
• For the period, the company's operating profit increased 7% to $91 million despite a negative $9 million currency translation effect. Operating margin increased 90 basis points reaching 17.4%.
  
• Our effective tax rate for the second quarter was 33% compared to 36% for the prior-year second quarter, and we are planning the remainder of fiscal 2010 with this 33% rate.
  
• Overall, net income attributable to common stockholders increased 11% to $59.6 million and diluted earnings per share increased 14% to $0.64.
  
• In North American retail, our comp stores sales declined by 10.2% in constant dollars and 12.5% in U.S. dollars, resulting in total revenues of $227 million, 6% lower than last year.
  
• Retail segment operating expenses declined compared to last year, and the SG&A rate improved by 100 basis points. Operating profit reached $30 million, slightly higher than last year and the operating margin improved 90 basis points to 13.3%.
  
• During the quarter, we opened five new stores and closed three ending the period with 431 stores in the U.S. and Canada. Average square footage increased by 6.6% over the prior year's Q2.
  
• At our wholesale segment, revenues declined 13% in U.S. dollars reaching $63 million in the second quarter. We continue to grow our Asia business with revenue increases in both Korea and China while the strong U.S. dollar nearly offset that growth.
  
• Improvements in product margins in both North America and Asia more than offset higher occupancy costs due to the growth of our business in Asia. Operating profits declined 8% reaching $10 million in Q2.
  
• For the quarter, European revenues totaled $210 million, increasing 21% in U.S. dollars and 35% in constant dollars.
  
• Operating earnings increased 30% to $52 million and operating margin expanded 190 basis points to 24.9%.
  
• Licensing revenue decreased by 16% to $22 million in the quarter, in line with our expectations.
  
• We ended the quarter with cash reserves of $330 million, $35 million higher than a year ago. Since last year, we have reduced our debt by $41 million, leaving us virtually debt free and improving our net cash position by $76 million.
  
• For the first half of this fiscal year, our operations generated $121 million of cash flow versus $116 million for the same period a year ago. Accounts receivable increased 2%, or $5 million, to $297 million compared to the prior year. In constant dollars, receivables increased by 9%. The increase in receivables is primarily due to the revenue increase in our European business, which is mainly a wholesale business.
  
• Overall, DSOs declined slightly compared to the same period a year ago. During the period, we managed overall credit risks prudently and tightly, including the use of outside insurance programs. At the end of the quarter, about 55% of our receivables were supported by insurance coverage, bank guarantees, and letters of credit.
  
• Our inventory management was once again very strong. We ended the quarter with $259 million in inventory, slightly lower than a year ago.
  
• (COO) As we were planning this year's business, we anticipated a slowdown in consumer spending and adjusted our inventories and purchase plans accordingly. This action resulted in strong margins for the period and enabled us to maintain our current lean inventory position.
  
• We have identified trending products and have made investments in those categories, which we feel can help drive our sales for both back-to-school and holiday as well.
  
• Our month-to-date comp performance in August is down in the negative high single-digit range, which is in line with our overall expectation for Q3.
  
• Based on this assumption and our store growth, we're now expecting Q3 total revenues in the retail segment to decline in the low-to-mid-single digit range.
  
• In Europe for Q3, we are expecting revenues in U.S. dollars to decline in the mid-to-high-teens range. This decline represents the impact of the shift that Dennis mentioned, partially offset by a revenue increase in our retail business as a result of new store growth.
  
• Our business has remained healthy in Europe and our backlog is currently flat to last year. The backlog for fall/winter 2009 is down as a result of the shift, while the backlog for spring/summer 2010 is up, reflecting this year's earlier sales campaign.
  
• We continue to expect that our North American wholesale business will contract in the third quarter. Our current U.S. backlog is down almost 17.5%. In Asia, we expect that our business will grow in constant dollars in the third quarter by over 30%, with much of that growth being offset by currency.
  
• In our licensing business, we expect that our third quarter revenues will decline in the mid-teens given our most recent trends and the ongoing impact of economic conditions on our licensee partners. This expectation would result in total company revenues between 465 and $485 million in Q3.
  
• We expect that gross margins will decline in the third quarter compared to a year ago.
  
• Regarding expenses, assuming that the current exchange rates continue, we expect third quarter expenses to be slightly down compared to last year's third quarter levels.
  
• Now with respect to earnings, overall, we expect third quarter operating margin to be around 14% and diluted earnings per share between 46 and 49 cents. This assumes no material mark-to-market charges.
  
• For the full fiscal year, we are still expecting that our capital expenditures net of tenant allowances could reach us to $90 million.
  
• (Q&A) Let's talk a little bit about the U.S. stores. Could you talk a little bit about the - when you - when the comps for U.S. for Q2, what was - was it the same throughout both Marciano, G by Guess, and the Guess concepts or was there significant variations between those? And if there were, what kind of - different drivers below zero? (A) We do not address comps by division, but I can tell you that there were some variations between brands. The retail comps were probably the most significantly down and it was driven by traffic in the malls. We believe that the traffic has been the main driver for the comps decline, and we think - and that has been pretty consistent throughout every month of the quarter.
  
• I want to understand a little bit better the Europe and the pull forward of shipments. Which kinds of customers? Is it across the board in Europe? Is it purely a timing issue? Whether you're trying to get goods in early or is it the reflection of any sort of change in the underlying demand level there? Can you see any patterns across? Because it seems pretty lumpy, last quarter you had a pull forward in the first quarter, in the fourth quarter rather. Help us understand this dynamic. What's the underlying kind of business reason why this has been lumpy for this quarter? (A)Yes, Omar, this is something that we have been really doing, and has been very successful so far. We have been trying to really move the business into the earlier quarters for both the first six months of the year and the second. And the idea here is to really have a much smoother calendar and with operating with the four seasons the way we operate in the States. Over there historically, the market has operated with two seasons that shipped at the beginning of each of those six-month periods. And we have been trying to really change that business model because it would help the opportunity for early demand being satisfied. It would open the opportunity for reorders later in the season, and it smoothes out the investment in inventory for both our customers and ourselves. So, we are very pleased with the fact that we have been able to move a lot of this business from third quarter into second, being very successful and very profitable. And the change we think - it has been very effective. We feel that we are reaching now a level where we are comfortable with the way the business is running because the last change has been more impactful on the apparel business, which was the last big business that we wanted to affect this change. So and it's across the board because we are offering this pre-collection line and people loved the product and wanted it in earlier. And so, we'd ship - fortunately we have the product in our workhouses and we were able to ship accordingly.

Guess?, Inc. designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children.

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