Guess?, Inc. (GES)
F3Q2012 Earnings Call
November 30, 2011 4:30 p.m. ET
Paul Marciano - Chief Executive Officer
Dennis Secor - Chief Financial Officer
Russell Bowers - Chief Operating Officer, North America Retail
Michael Prince - Chief Operating Officer
Jeff Klinefelter - Piper Jaffray
Christine Chen - Needham & company
Shreya Jawalkar - Jefferies
Helena Tse - Bank of America Merrill Lynch
Dana Telsey - Telsey Advisory Group
Jeff Black - Citigroup
Diana Katz - Lazard Capital Markets
Margaret Whitfield - Sterne, Agee & Leach
John Kernan - Cowen and Company
Previous Statements by GES
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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 reports filed with the SEC.
Now, I would like to turn the call over to Paul Marciano.
Thank you. Good afternoon and thank you for joining us today. Overall, we are pleased with our performance in the third quarter. During the quarter, we made good progress on many of our strategic initiatives, while at the same time we continued to focus on execution and manage carefully things that we control.
As we highlighted on our last call, some of the pressure that we saw emerging in global economy have now clearly intensified. The economic and fiscal crisis that are being played out in Europe affected that region more than what we expected. That impacted the top line performance and our third quarter revenue did not meet expectation, but we were able to achieve operating margin that exceeded our expectation for the quarter and delivered earning of $0.71 per share.
In North America, our focus on brand elevation resulted in a significant improvement of North American retail profitability. We also continued to diversify our geographic distribution and expanded our presence in more underpenetrated markets. As a result, our international business drove more than half of this quarter top line growth. Managing our expenses and inventory level was one of the priorities and we performed well driving better product margin and a lower expense rate in the quarter.
I want to start with Europe. Where we see the biggest challenge in the next 12 months, the economic turmoil and credit crisis are now having the clear impact in our consumer confidence and our business. Product offering within our stores have not been optimal given this environment. We did however make progress in several key initiatives designed to support our long-term strategies in that region. We completed the seamless transition to a new logistic partner and now have a strong relationship with a world class provider who can support our $1 billion business that Guess? has today in Europe.
In the third quarter, we grew our business in key market like Germany, Russia, Netherlands, and Spain. The brand is resonating well with consumers in these new markets, giving us confidence on the long-term potential of our brand in underpenetrated markets in the region. The growth we’re achieving in these new markets was not enough to offset the impact of the weakening economy in Southern Europe. In Italy and France, our largest business in Europe, we posted negative comp for the quarter in our own retail stores. While we cannot control economic condition, our brand continued to be strong in Europe and getting stronger. Our strategy in the future remains straightforward, to develop and accelerate our penetration in North and Eastern Europe where we’re barely present.
In North America Retail, we’re very happy with our Q3 results as we continue to focus on effort on elevating our brand and increasing profitability. We concentrated on full price selling, lower the stock level, and reduced our markdown significantly from a year ago. In fact, our year-over-year mark-down improvement was even greater than what it was in the second quarter in the face of a heavily promotional environment. Combined with the successful pricing strategy, we improved our AUR significantly. It was up over 15% in our U.S. full price stores.
These enabled us to increase overall segment product margin by two full points, despite significant increase in our product cost. Our focus to manage our bottom line is paying off. In addition to product margin improvement, we also reduced operating expenses resulting in improved profitability of almost 3 full points and a 42% increase in operating profit. That’s a great accomplishment in this environment which also reaffirms our commitment to long-term strategy.
In the third quarter we continued to expand our retail footprint, opening ten new stores across multiple concepts. We plan to open another 13 this quarter which will result in a year-end store count of 500 stores between U.S. and Canada. For the holiday season, we remain confident in the direction of our business. The stores look very strong with improvements in our product and merchandise presentation. We are gaining momentum in the women apparel business based on the strength of our most recent delivery. Our stores continue to be clean and we have reduced our promotion to level that is consistent with the long-term vision of the brand. G by GUESS and GUESS by Marciano continued to generate very positive momentum.
In Asia, our business grew 18% in the quarter, with both our businesses in South Korea and Greater China posting strong double-digit top line increase. We continued our store expansion in the third quarter as well, opening 36 new stores and we now have 400 freestanding stores across Asia. We are very pleased with the response we received from our Chinese customers.