Guess?, Inc. (GES)

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Guess? Inc. (GES)

F2Q2012 Earnings Call

August 24, 2011 4:30 pm ET

Executives

Paul Marciano – CEI and Vice Chairman

Dennis Secor – CFO, SVP, Principal Financial and Accounting Officer

Russell Bowers – COO, North America Retail

Michael Prince – COO

Analysts

Jeff Klinefelter – Piper Jaffray

Christine Chen – Needham & Company

Randy Konik – Jefferies

Dana Telsey – Telsey Advisory Group

Jeff Black – Citigroup

Betty Chen – Wedbush

Omar Saad – ISI Group

Diana Katz – Lazard Capital Markets

Eric Beder – Brean Murray

Margaret Whitfield – Sterne, Agee

Susan Sansbury – Miller Tabak

John Kernan – Cowen

Presentation

Operator

Good day, everyone, and welcome to the Guess? second quarter fiscal 2012 earnings conference call. On the call are Paul Marciano, Chief Executive Officer; Maurice Marciano, Chairman of the Board; Michael Prince, Chief Operating Officer; and Dennis Secor, Chief Financial Officer.

During today’s call, the company will be making forward-looking statements, including comments regarding future plans and financial outlook. The company’s actual results may differ materially from current expectations based on the risk factors included in the company’s quarterly and annual report filed with the SEC.

Now I would like to turn the call over to Paul Marciano.

Paul Marciano

Thank you. Good afternoon and thank you for joining us. We are very pleased with our second quarter performance. We executed well with each of our business, delivering earnings at or beyond the level we had anticipated three months ago. Overall, we generated record second quarter revenues and delivered adjusted earnings that exceeded our guidance.

During the quarter, we increased our revenue by over 17% to $677 million and delivered top-line growth in all the regions. International remained a biggest growth driver, with Europe and Asia combining to represent nearly 80% of our sales growth. We also executed well in our strategy to support and elevate our brand, focusing on inventory control and markdown management, which resulted in overall product margin increase and adjusted operating margin that exceeded our expectation.

For the quarter, excluding the settlement charge that Dennis would describe, we delivered adjusted earnings per share of $0.84, a 17% increase over last year’s second quarter. Overall, the result demonstrates the continued strength and momentum of our brand and the ability of our management team to deliver solid results in this economy.

In North America Retail, we increased our profitability by focusing on full price selling, reducing our markdown, and driving faster sales through. We generated a significant improvement in our product margin. Also with good expense control, we substantially improved retail profitability 170 basis points better than the Q2 of last year. While sales have been impacted by significantly less markdown, we feel we have made strong progress towards elevating the brand even in the current environment.

Low inventories coupled with new visual merchandise initiatives have resulted in a shopping environment that is much more attractive. This is our lowest second quarter markdown rate since 2003 and this is very important to us. Overall, we are seeing great response to our basic denim, which has been a top priority for us, and our accessory business continued to grow. Our success with this initiative has brought substantial increase in our average unit retail price during the quarter.

In Europe, where our business continued to expand even as the economy there had shown some recent sign of slowing, in the second quarter, we increased our revenue by 30% in US dollar. We have also made progress on three very important initiatives but also long-term expansion opportunities. First, we continued to expand our owned retail stores presence. We have opened 28 stores so far this year, and we now operate 165 of our own retail stores of the 443 total stores in Europe.

Extending outside of Italy has been another priority, and retail development is a key factor of our strategy. As I said previously, we are underpenetrated in certain countries in Europe where we enjoy a strong brand awareness that have under-developed distribution. At the end of 2008, we operated only 24 stores outside Italy. Today we have quadrupled that number, leveraging our retail capability to expand our business in important markets like France, Spain, UK and Holland.

We also see Russia as significant growth opportunity where our business has doubled within the last 12 months. We operate directly in 10 different countries in Europe today. Our business continues to expand, but we now enjoy a much more balanced and diversified European business.

Next is Asia where South Korea and China both delivered strong results with overall revenue increasing 31% in the quarter. In Q2, we achieved an important milestone in South Korea with the launch of G by GUESS. So far, we have opened four locations in South Korea, and the business is off to a great start. We believe that this concept represents great opportunity for our business.

By the end of the year, we expect to open a total of 40 G by GUESS locations in South Korea. In China, we continued to work with strategic partners to open stores in secondary cities and have increased our presence by over 40%. We currently have 113 locations in China and well on track to open another 40 for the remainder of the year. We continued to of course to see this region as one of the greatest opportunities ever for our company. Our goal is to have 500 stores and concession in China in the next five years.

Our overall performance this quarter is a testament to the strength and vitality of the Guess? brand. Recently, however, we have seen increased volatility and uncertainty in financial markets around the world and the global economy. As we know from the past, volatility can significantly impact consumer confidence. It remains to be seen how customers would respond that we believe we are well positioned to continue our long history of solid financial performance. For that we have a strong management team with significant experience.

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