Guess?, Inc. Reports Third Quarter Results

LOS ANGELES, Nov. 24, 2015 /PRNewswire/ -- Guess?, Inc. (NYSE: GES) today reported financial results for its third quarter ended October 31, 2015.

Third Quarter Fiscal 2016 Highlights

• Americas Retail revenues decreased 7% in U.S. dollars and 3% in constant currency; retail comp sales including e-commerce decreased 6% in U.S. dollars and 2% in constant currency
• Europe revenues decreased 15% in U.S. dollars and 2% in constant currency
• Asia revenues decreased 17% in U.S. dollars and 9% in constant currency
• Americas Wholesale revenues decreased 12% in U.S. dollars and 3% in constant currency
• Operating earnings decreased 16%
• Earnings per share decreased 38%, including the negative impact of currency of 55%
• Announces quarterly cash dividend of $0.225
• Invested $44.0 million to repurchase 2.0 million of our common shares

Third Quarter Fiscal 2016 Results

For the third quarter of fiscal 2016, the Company recorded net earnings of $12.4 million, a 40.1% decrease compared to $20.8 million for the third quarter of fiscal 2015. Diluted earnings per share decreased 37.5% to $0.15, compared to $0.24 for the prior-year quarter. The negative impact of currency on earnings per share in the third quarter of fiscal 2016 was approximately 13 cents.

Victor Herrero, Chief Executive Officer, commented, "I am pleased to report that third quarter results were better than our expectations. Our European retail business was especially strong with a double digit comp sales increase for the quarter for the first time in five years."

Mr. Herrero continued, "I am very pleased with the progress we have made on the first three initiatives I identified on our last earnings call. On our first initiative, elevating the quality of our sales and merchandising organization, we have started building product knowledge, improving our digital marketing and social media capabilities, enhancing visual merchandising to emphasize best sellers and breadth of product and ensuring that pricing of our line delivers a consistent message. On our second initiative, to build our Asia business, we have made some critical hires and are deploying incremental capital to fuel the growth of the markets in this region. Most critically, on the third initiative, to reinforce a culture of purpose and accountability, I am laser focused on driving the organization to raise the level of execution as this will be a critical enabler of successful achievement of our strategies."

Total net revenue for the third quarter of fiscal 2016 decreased 11.7% to $521.0 million, from $589.8 million in the prior-year quarter. In constant currency, total net revenue decreased 3.9%. Refer to the accompanying tables for a summary of net revenue by segment as well as information regarding the impact of foreign currency exchange rate fluctuations on the Company's net revenue.

Operating earnings for the third quarter of fiscal 2016 decreased 16.2% to $20.8 million (including a $2.5 million unfavorable currency translation impact), from $24.9 million in the prior-year period. Operating margin in the third quarter decreased 20 basis points to 4.0%, compared to 4.2% in the prior-year quarter, due primarily to the negative impact from currency exchange rate fluctuations, partially offset by lower store impairment charges. The negative impact of currency on operating margin for the quarter was roughly 170 basis points.

• Operating margin for the Company's Americas Retail segment increased 340 basis points to negative 0.9% in the third quarter of fiscal 2016, compared to negative 4.3% in the prior-year period. The increase in operating margin was driven primarily by a lower SG&A rate due to lower store impairment charges.
• Operating margin for the Company's Europe segment decreased 20 basis points to 3.8% in the third quarter of fiscal 2016, compared to 4.0% in the prior-year period, due to lower gross margins, partially offset by a lower SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations on product costs, partially offset by higher initial mark-ups. The lower SG&A rate was due primarily to the favorable impact on the fixed cost structure resulting from positive same store sales and lower store impairment charges, partially offset by the unfavorable impact from lower wholesale shipments.
• Operating margin for the Company's Asia segment increased 170 basis points to 4.7% in the third quarter of fiscal 2016, compared to 3.0% in the prior-year period. The increase in operating margin was due to higher gross margins and a lower SG&A rate driven by overall leveraging of expenses as we phase out of our G by GUESS concept in South Korea.
• Operating margin for the Company's Americas Wholesale segment decreased 560 basis points to 20.5% in the third quarter of fiscal 2016, compared to 26.1% in the prior-year period. The decrease in operating margin was due to lower product margins driven primarily by lower initial mark-ups and the unfavorable impact from currency exchange rate fluctuations on product costs.
• Operating margin for the Company's Licensing segment increased 140 basis points to 89.5% in the third quarter of fiscal 2016, compared to 88.1% in the prior-year period.

Other net income, which primarily includes net realized and unrealized gains on non-operating assets, partially offset by net unrealized mark-to-market revaluation losses on foreign currency balances, was $0.2 million for the third quarter of fiscal 2016, compared to $7.5 million in the prior-year quarter.

Nine-Month Period Results

Net earnings for the nine months ended October 31, 2015 were $34.1 million, a decrease of 16.2% compared to $40.6 million for the nine months ended November 1, 2014. Diluted earnings per share decreased 14.9% to $0.40, compared to $0.47 for the prior-year period. The negative impact of currency on earnings per share for the nine months ended October 31, 2015 was approximately 24 cents.

Total net revenue for the first nine months of fiscal 2016 decreased 10.2% to $1.55 billion, from $1.72 billion in the prior-year period. In constant currency, total net revenue decreased 1.6%. Refer to the accompanying tables for a summary of net revenue by segment as well as information regarding the impact of foreign currency exchange rate fluctuations on the Company's net revenue.

Operating earnings for the first nine months of fiscal 2016 decreased 2.6% to $51.4 million (including a $5.7 million unfavorable currency translation impact), from $52.7 million in the prior-year period. Operating margin in the first nine months of fiscal 2016 increased 20 basis points to 3.3%, compared to 3.1% in the prior-year period. The increase in operating margin was driven by lower store impairment charges and higher initial mark-ups, partially offset by the unfavorable impact from currency exchange rate fluctuations and the negative impact on the Company's fixed cost structure from negative same store sales in Americas Retail. The negative impact of currency on operating margin for the first nine months of fiscal 2016 was roughly 130 basis points.

• Operating margin for the Company's Americas Retail segment increased 270 basis points to negative 0.6% in the first nine months of fiscal 2016, compared to negative 3.3% in the prior-year period, due to a lower SG&A rate and higher gross margins. The lower SG&A rate was driven by lower store impairment charges. The higher gross margins were due primarily to higher initial mark-ups, partially offset by the negative impact on the fixed cost structure resulting from negative comparable store sales and the unfavorable impact from currency exchange rate fluctuations on product costs.
• Operating margin for the Company's Europe segment decreased 20 basis points to 4.2% in the first nine months of fiscal 2016, compared to 4.4% in the prior-year period, due to lower gross margins, partially offset by a lower SG&A rate. The lower gross margins were driven primarily by the unfavorable impact from currency exchange rate fluctuations on product costs, partially offset by higher initial mark-ups. The lower SG&A rate was due primarily to the favorable impact on the fixed cost structure resulting from positive same store sales and lower store impairment charges, partially offset by the unfavorable impact from lower wholesale shipments.
• Operating margin for the Company's Asia segment increased 80 basis points to 4.6% in the first nine months of fiscal 2016, compared to 3.8% in the prior-year period. The increase in operating margin was driven by a lower SG&A rate due primarily to an overall leveraging of expenses as we phase out of our G by GUESS concept in South Korea.
• Operating margin for the Company's Americas Wholesale segment decreased 230 basis points to 18.2% in the first nine months of fiscal 2016, compared to 20.5% in the prior-year period, driven by lower product margins due primarily to lower initial mark-ups.
• Operating margin for the Company's Licensing segment decreased 80 basis points to 89.0% in the first nine months of fiscal 2016, compared to 89.8% in the prior-year period.

Other net income, which primarily includes net realized and unrealized gains on non-operating assets and net unrealized and realized mark-to-market revaluation gains on foreign currency contracts, was $6.6 million for the first nine months of fiscal 2016, compared to $11.1 million in the prior-year period.

Dividends

The Company's Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company's common stock. The dividend will be payable on December 24, 2015 to shareholders of record at the close of business on December 9, 2015.

Outlook

The following guidance assumes that foreign currency exchange rates remain at prevailing rates:

The Company's expectations for the fourth quarter of fiscal 2016 ending January 30, 2016, are as follows:

• Consolidated net revenues are expected to range between a decline of 1.5% and an increase of 1.5% in constant currency. Currency headwinds are expected to negatively impact consolidated revenue growth by approximately 5.5%, for a net decline between 7.0% and 4.0%.
• Operating margin is expected to be between 11.0% and 12.0% and includes 170 basis points of currency headwind.
• Diluted earnings per share are expected to be in the range of $0.53 to $0.62. The estimated impact on earnings per share of the currency headwinds is approximately $0.18.

The Company updated its outlook for the fiscal year ending January 30, 2016, which is now as follows:

• Consolidated net revenues are expected to decline between 1.5% and 0.5% in constant currency. Currency headwinds are expected to negatively impact consolidated revenue growth by approximately 8.0%, for a net decline between 9.5% and 8.5%.
• Operating margin is expected to be between 5.5% and 6.0% and includes 130 basis points of currency headwind.
• Diluted earnings per share are expected to be in the range of $0.93 to $1.02. The estimated impact on earnings per share of the currency headwinds is approximately $0.40.

On a segment basis, the Company expects the following ranges for percentage changes for comparable store sales ("comps") and net revenue in constant currency and U.S. dollars compared to the same prior-year period:

Presentation of Non-GAAP Information

The financial information presented in this release includes non-GAAP financial measures such as constant currency financial information and free cash flow measures. The non-GAAP measures are provided in addition to, and not as alternatives for, the Company's reported GAAP results.

This release includes certain constant currency financial information. Foreign currency exchange rate fluctuations affect the amount reported from translating the Company's foreign revenue, expenses and balance sheet amounts into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results under GAAP. The Company provides constant currency information to enhance the visibility of underlying business trends, excluding the effects of changes in foreign currency translation rates. To calculate net revenue, comparable store sales and earnings (loss) from operations on a constant currency basis, operating or forecasted results for the current-year period are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. However, in calculating the estimated impact of currency on our earnings per share guidance for the fourth quarter and full year of fiscal 2016, the Company estimates gross margin (including the impact of merchandise-related hedges) and expenses using the appropriate prior-year rates, translates the estimated foreign earnings at the comparable prior-year rates, and excludes the year-over-year earnings impact of gains or losses arising from balance sheet remeasurement and foreign currency contracts not designated as merchandise hedges. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.

The Company also includes information regarding its free cash flows in this release. The Company calculates free cash flows as cash flows from operating activities less purchases of property and equipment. Free cash flows is not intended to be an alternative to cash flows from operating activities as a measure of liquidity, but rather provides additional visibility to investors regarding how much cash is generated for discretionary and non-discretionary items after deducting purchases of property and equipment. Free cash flow information presented may not be comparable to similarly titled measures reported by other companies. A reconciliation of reported GAAP cash flows from operating activities to the comparable non-GAAP free cash flow measure is provided in the accompanying tables.

Investor Conference Call

The Company will hold a conference call at 4:45 pm (ET) on November 24, 2015 to discuss the news announced in this press release. A live webcast of the conference call will be accessible at www.guess.com via the "Investor Relations" link. The webcast will be archived on the website for 30 days.

About Guess?

Guess?, Inc. designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. Guess? products are distributed through branded Guess? stores as well as better department and specialty stores around the world. As of October 31, 2015, the Company directly operated 826 retail stores in the Americas, Europe and Asia. The Company's licensees and distributors operated 799 additional retail stores worldwide. As of October 31, 2015, the Company and its licensees and distributors operated in more than 90 countries worldwide. For more information about the Company, please visit www.guess.com.

Forward-Looking Statements

Except for historical information contained herein, certain matters discussed in this press release or the related conference call and webcast, including statements concerning the Company's expectations, future prospects and strategic initiatives (including those identified by our Chief Executive Officer, Victor Herrero), as well as guidance for the fourth quarter and full year of fiscal 2016, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are frequently indicated by terms such as "expect," "will," "goal," "strategy," "believe," "continue," "outlook," "plan" and similar terms, are only expectations, and involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from what is currently anticipated. Factors which may cause actual results in future periods to differ materially from current expectations include, among others: our ability to maintain our brand image and reputation; domestic and international economic conditions, including economic and other events that could negatively impact consumer confidence and discretionary consumer spending; changes in the competitive marketplace and in our commercial relationships; our ability to anticipate and respond to consumer preferences and trends; our ability to manage our inventory commensurate with customer demand; risks related to the timing and costs of delivering merchandise to our stores and our wholesale customers; our ability to effectively operate our various retail concepts, including securing, renewing, modifying or terminating leases for store locations; our ability to successfully implement our growth strategies and other strategic initiatives; our ability to successfully implement plans for cost savings; unexpected obligations arising from new or existing litigation, tax and other regulatory proceedings; accounting adjustments identified from subsequent events arising after issuance of this release; risks associated with our foreign operations, such as violations of laws prohibiting improper payments and the burdens of complying with a variety of foreign laws and regulations; risks associated with the acts or omissions of our third party vendors, including a failure to comply with our vendor code of conduct or other policies; risks associated with cyber attacks and other cyber security risks; and changes in economic, political, social and other conditions affecting our foreign operations and sourcing, including the impact of currency fluctuations, global tax rates and economic and market conditions in Eastern Europe, Southern Europe and Asia (particularly China and Korea). In addition to these factors, the economic, technological, managerial, and other risks identified in the Company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission, including but not limited to the risk factors discussed therein, could cause actual results to differ materially from current expectations. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE Guess?, Inc.