UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
95-3679695 |
|
(State or other
jurisdiction |
(I.R.S. Employer |
1444 South Alameda Street
Los Angeles, California 90021
(213) 765-3100
(Address, including zip code, and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Name
of Each Exchange |
|
common stock, par value $0.01 per share |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
As of the close of business on June 26, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $252,390,048 based upon the closing price $16.30 on the New York Stock Exchange composite tape on such date. For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant. Such exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
As of the close of business on March 1, 2005, the registrant had 44,202,490 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference into Part III herein.
TABLE OF CONTENTS
ITEM 1. BUSINESS.
Important Factors Regarding Forward-Looking Statements
Throughout this Annual Report on Form 10-K, including documents incorporated by reference herein, we make “forward-looking” statements, which are not historical facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be in the Company’s other reports filed under the Securities Exchange Act of 1934, in its press releases and in other documents. In addition, from time to time, the Company, through its management, may make oral forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects and proposed new products, services, developments or business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “continue”, and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements relating to the Company’s expected results of operations, the accuracy of data relating to, and anticipated levels of, future inventory and gross margins, anticipated cash requirements and sources, cost containment efforts, estimated charges, plans regarding store openings and closings, plans regarding business growth, e-commerce, business seasonality, industry trends, consumer demands and preferences, competition and general economic conditions. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.
For additional information regarding forward-looking statements, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein.
General
Unless the context indicates otherwise, when we refer to “we,” “us” or the “Company” in this Form 10-K, we are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world’s leading lifestyle collections of casual apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. Our apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, Question Mark and Triangle Design, BRAND G, a stylized G, GUESS Kids, Baby GUESS and MARCIANO. The lines include full collections of denim and cotton clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets and knitwear. We also selectively grant licenses to manufacture and distribute a broad range of products that complement our apparel lines, including eyewear, watches, handbags, footwear, kids’ and infants’ apparel, leather apparel, fragrance, jewelry and other fashion accessories.
Our products are sold through three primary distribution channels: in our own stores, to a network of wholesale accounts and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of licensees and distributors. Our core customer is a style-conscious consumer primarily between the ages of 15 and 30. These consumers are part of a highly desirable demographic group that we believe is growing rapidly and has significant disposable income. We also appeal to customers outside this group through specialty product lines that include
1
MARCIANO, a more sophisticated fashion line targeted to women, and GUESS Kids, targeted to boys and girls ages six to 12.
We were founded in 1981 and currently operate as a Delaware corporation.
Business Segments
The business segments of the Company are retail, wholesale and licensing. In the first quarter of 2003, the Company revised its segment reporting to better reflect how its three business segments—retail, wholesale and licensing—are managed and each segment’s performance is evaluated. The earnings from operations for each segment now include those costs that are specifically related to each segment, consisting primarily of store operations, distribution, selling and merchandising, depreciation, amortization and employee compensation directly related to that business segment. In addition, the Company is continuing to allocate design and advertising charges to the business segments based on the assessed benefit derived from the respective expenditures. The new structure excludes from the segment results corporate overhead costs, which consist of shared costs of the organization. These costs are presented separately and include, among others, the following corporate costs: information technology, human resources, accounting and finance, executive compensation, facilities and legal. Financial information about each segment, together with certain geographical information, for the fiscal years ended December 31, 2004, 2003 and 2002 are included under Note 14 to the Consolidated Financial Statements contained herein.
In 2004, 71.1% of our net revenue was generated from retail operations, 22.4% from wholesale operations and 6.5% from licensing operations. Our total net revenue in 2004 was $729.3 million and net earnings were $29.6 million.
Business Strengths
We believe we have several business strengths which help us to successfully execute our strategies. These business strengths include:
Brand Equity. We believe that our brand name is one of the most familiar in fashion and is one of our most valuable assets. We believe the enduring strength of the GUESS? brand name and image is due mainly to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. Our industry is highly competitive and subject to rapidly changing consumer preferences and tastes. The success of our brand depends on our ability to anticipate the fashion preferences of our customers. We have a team of designers who, under the direction of Maurice Marciano, our Co-Chairman and Co-Chief Executive Officer, seeks to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. Through our award-winning advertising, under the creative leadership and vision of Paul Marciano, our Co-Chairman and Co-Chief Executive Officer, we have achieved worldwide recognition of the GUESS? brand name. By retaining control over advertising and marketing activities from our headquarters in Los Angeles, we maintain the integrity, consistency and direction of the GUESS? brand image worldwide, while realizing substantial cost savings when compared to the use of outside advertising agencies.
We have developed the “GUESS? signature image” and “GUESS? lifestyle concept,” through the use of our strong and distinctive images, merchandising display themes, logos, and trademarks which are registered in approximately 170 countries.
Advertising and Marketing. We control all of our worldwide advertising, marketing activities and promotional materials from our headquarters in Los Angeles. GUESS Jeans, GUESS U.S.A. and Guess?, Inc. images have been showcased in dozens of major publications and in outdoor and broadcast media throughout the U.S. and worldwide. Our advertising campaigns promote the GUESS? image with our award winning advertising and a consistent emphasis on innovative and distinctive designs.
2
We communicate this message through the use of our signature black and white print advertisements, as well as color print advertisements, designed by our in-house Advertising Department. Led by Paul Marciano, this team has won numerous awards and contributed to making the GUESS? brand one of the most recognizable fashion brands. We have maintained a high degree of consistency in our advertisements by using similar themes and images. We require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing.
Retail Distribution. At December 31, 2004, we operated a total of 287 stores in the U.S. and Canada, consisting of 186 full-price retail stores, 86 factory outlet stores, four kids stores and 11 new concept stores, and four stores in Italy that are an integral part of our European design activities. Our retail network creates an upscale and inviting shopping environment and enhances our image. Distribution through our retail stores allows us to influence the merchandising and presentation of our products, build brand equity and test market new product design concepts. Our retail stores carry a full assortment of men’s and women’s merchandise, including most of the GUESS? licensed products. Our factory outlet stores are primarily located in outlet malls generally operating outside the shopping radius of our wholesale customers and our own full-price retail stores.
In 2004, we launched our MARCIANO line. This line was previously labeled as GUESS Collection and was rebranded as MARCIANO in the third quarter of 2004. The new assortment commands higher price points and it targets a more upscale, contemporary customer. The MARCIANO line is available in approximately 120 of our full-price retail stores in the U.S. and Canada. As a test, we also opened five MARCIANO stores in 2004 that feature this line exclusively and expect to open at least seven additional exclusive MARCIANO stores in 2005. These stores range in size between 2,000 and 4,000 square feet.
In 2004, we also began testing a new Accessories store concept. We believe we offer unique positioning in the accessory marketplace with a well-recognized brand name at a more accessible price point than the luxury accessory brands. We opened six Accessories stores in 2004 and plan to open five additional Accessories stores in 2005. These stores range in size between 1,000 and 3,000 square feet and carry the full GUESS? accessory line. We continue to sell accessories in our full-price retail and factory outlet stores, and through our licensees. Our accessory products are also available in department stores.
In the fourth quarter of 2003, we made the decision to exit the kids stores which were performing below our expectations. During 2004, these stores generated $3.4 million in revenues and had a combined operating loss of $1.9 million. At December 31, 2004, there were three kids retail stores and one kids factory store still open. As of February 2005, we closed one of these kids stores and intend to close two additional kids stores by year end.
Licensee Stores. Our international licensees and distributors also operated 248 GUESS? stores in 40 countries outside the U.S. and Canada at December 31, 2004. These stores carry apparel and accessories that are similar to those sold in the U.S., including some that are tailored for local fashion sensibilities. We work closely with international licensees and distributors to ensure that their store designs and merchandise programs protect the reputation of the GUESS? trademarks. Our international licenses and distribution agreements also allow for the sale of GUESS? brand products in better department stores and upscale specialty retail stores.
Wholesale Distribution. We have both domestic and international wholesale distribution channels. Domestic wholesale customers consist primarily of better department stores and select specialty retailers and upscale boutiques, which have the image and merchandising expertise that we require for the effective presentation of our products. Leading domestic wholesale customers include Federated Department Stores, Inc., The May Department Stores Company and Dillard’s, Inc. At December 31, 2004, our products were sold directly to consumers from approximately 930 doors in the U.S. These locations include 541 shop-in-shops, an exclusive selling area within a department store that offers a wide array of our
3
products and incorporates GUESS? signage and fixture designs. These shop-in-shops allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s or men’s apparel. Through our foreign subsidiaries and our network of international distributors, our products are also found in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America.
Licensing Operations. The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. We carefully select our trademark licensees and approve in advance all product design, advertising and packaging materials of all licensed products in order to maintain a consistent GUESS? image. We currently have 21 domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, leather apparel, fragrance, jewelry and other fashion accessories. We have granted licenses for the manufacture or sale of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, North America and South America.
Business Growth Strategies
We regularly evaluate and implement initiatives that we believe will build brand equity, grow our business and enhance profitability. Our key growth strategies are as follows:
Leveraging the GUESS? Brand. We believe the GUESS? brand is an integral part of our business, a significant strategic asset and a primary source of sustainable competitive advantage. It communicates a distinctive image that is fun, fashionable and sexy. Brand loyalty, name awareness, perceived quality, strong brand images, public relations, publicity, promotional events and trademarks all contribute to brand integrity. Our design teams visit the world’s premier fashion locations in order to identify important style trends and to discover new fabrics. We will continue this practice while promoting our innovative designs through stylish advertising campaigns that advance the GUESS? image. Our marketing programs are designed to convey a uniform style image for the brand and are aimed at increasing the desire of the target group to join our GUESS? customer group.
Acquisition Strategy. We evaluate strategic acquisitions and alliances that support and contribute to our overall growth approach. On December 31, 2004, we entered into an agreement with Fingen S.p.A. and Fingen Apparel N.V. (collectively, the “Sellers”), to acquire the remaining 90% of the shares not already owned by the Company of Maco Apparel, S.p.A. (“Maco”), the Italian licensee of GUESS jeanswear for men and women in Europe as well as the assets and leases of certain retail stores in Europe. The agreement includes the purchase of inventory and receivables, the assumption of certain liabilities, and the transfer of leases for the GUESS retail locations. The stores are located in Rome, Milan, Paris, Amsterdam, London, and certain other European cities. We believe the Maco acquisition provides a solid platform to take advantage of GUESS’ already strong name recognition in Europe. For 2005, our goal for this acquisition, which closed on January 3, 2005, is to add approximately $100 million in revenues and to be slightly accretive to earnings.
Retail Store Strategy and Expansion Plans. Our retail growth strategy is to increase retail sales and profitability by expanding our network of retail stores and improving the performance of existing stores. During 2004, we opened a total of 34 new stores consisting of nine new full-price retail stores, 14 factory outlet stores and 11 new concept stores, while closing 12 stores in the U.S. and Canada.
Our retail locations build brand awareness and contribute to market penetration and growth of the brand in concert with our wholesale operations. In 2004, we increased our retail square footage by 6.1% to 1,460,000 square feet in the U.S. and Canada. We continue to be very selective with new store locations and expect to open approximately 36 new stores in 2005, consisting of 11 full-price retail and 13 factory
4
outlet stores, in addition to the 12 new concept stores. In addition, we plan to remodel or relocate approximately 24 stores. We also plan to close approximately five stores in 2005.
In 2004, total sales in the U.S. and Canada at our stores open for at least one year (also called “comparable store sales”) increased by 9.9% from 2003 levels. We believe the increase in comparable store sales is attributable to our commitment to several ongoing initiatives, including leadership in new product development, a more fashion-focused product mix, improvements in merchandising and visual presentation, the remodeling of select stores to promote a consistent brand message, a new retail store inventory allocation system, the introduction of the MARCIANO line and the development of a motivated team of sales professionals to service our customers and provide a favorable shopping experience.
The look and feel of GUESS? retail and factory outlet stores play an important role in building our brand equity. To enhance the quality of our presentation, we remodeled or relocated 17 stores during 2004 and plan to remodel or relocate approximately 24 stores during 2005.
As part of our retail growth strategy we are also placing additional emphasis on our Accessories line and MARCIANO line, which replaced our GUESS Collection line in 2004. This includes greater focus on these products in our existing stores as well as developing new concept stores in order to exclusively feature these products.
During 2004, we opened 11 new concept stores, consisting of five MARCIANO and six Accessories stores. While it is still early, and we plan to monitor the performance of these stores carefully, we are encouraged by the response we are seeing. These new store concepts leverage our brand recognition and the reputation we have for sexy, contemporary styling to extend our brand into new areas. The MARCIANO brand is attracting a slightly older, more sophisticated customer, while the Accessories stores are enabling us to build a more meaningful presence in this high-margin segment. We are targeting customers who already shop GUESS? stores but are looking for an expanded accessories presentation, as well as new customers who did not shop GUESS? in the past.
Continue to Develop Licensee Portfolio and Expand International Business. One of our primary objectives is to maintain the quality and reputation of the GUESS? brand. In order to accomplish this goal, we will continue to strategically reposition our licensing portfolio by constantly monitoring and evaluating the performance of our licensees worldwide and their strength and capabilities to appropriately represent our brand. As part of this process, we will consider bringing in-house apparel licenses, where appropriate, or license lines which we produce as we did with our kids business in 2001. If we determine that licensees are performing inadequately, we will, from time to time, discontinue the existing relationship and seek out a stronger replacement licensee.
As previously mentioned, on December 31, 2004, we entered into an agreement with Fingen S.p.A. and Fingen Apparel N.V., to acquire the remaining 90% of the shares not already owned by the Company of Maco, the Italian licensee of GUESS jeanswear for men and women in Europe, as well as the assets and leases of certain retail stores in Europe.
In 2004, we signed a new shoe license with Marc Fisher LLC to develop, manufacture, and distribute athletic and fashion footwear under the GUESS? trademark in the U.S. and several countries worldwide. We believe this is an important step in expanding our presence both domestically and globally in GUESS? footwear. In 2003, we granted a new worldwide license for fragrances and related products. We will continue to strategically examine opportunities to expand our licensee portfolio by developing new licensees that can expand our brand penetration and compliment the GUESS? image.
We believe there are significant growth opportunities in international markets. We are working closely with our international licensees and distributors to develop these opportunities and to expand the availability of the GUESS? brand throughout the world. In 2003, we granted a new license to manufacture and distribute children’s clothing in certain territories of Europe.
5
Improved Product Sourcing. Over the past several years, we have refocused our product sourcing strategies to increase efficiencies, reduce costs and improve quality. We currently purchase approximately 84% of our finished products from international vendors, primarily in Asia and Mexico. This is a significant change from years ago when we purchased the majority of our goods from domestic sources. We have increased our utilization of lower-cost, offshore “packaged purchases” in which we supply the product design and fabric selection, and the vendor manufactures and delivers the finished product. We have strategically aligned ourselves with sourcing vendors worldwide, who will take full responsibility for delivering quality, finished products in a timely manner. By continuing to use these packaged programs, we believe we can improve product gross margins, reduce carrying costs of raw materials and improve the timing of our deliveries and product quality. We also retain a close relationship with a number of domestic vendors located primarily in Los Angeles as we believe it is important to react to last minute trends as well as to respond to rush reorders.
Logistics. In 2000, we opened an automated distribution center in Louisville, Kentucky to replace the distribution center in Los Angeles as our primary distribution center. This 500,000 square-foot facility is near United Parcel Service’s national transit hub and has contributed to the reduction of our shipping time to our stores and wholesale accounts that are east of the Mississippi River. Depending on processing volumes and productivity improvements, we expect that we will continue to reduce operating cost per unit by reducing handling costs in the new facility and will provide better service to our customers by faster shipping and reduced response times. As of December 31, 2004, this facility was approximately 50% utilized.
We focused on all aspects of our supply chain in 2004 and expect to continue in 2005. This has included the implementation of new systems such as the installation of an automated product sorter machine in the Kentucky distribution center in the fourth quarter of 2004 which should improve operating efficiencies through automation. These systems, along with other actions we are taking, should result in lower processing and freight costs in the future.
E-Commerce. Our websites, www.guess.com, www.guessfactory.com and www.marciano.com, are virtual storefronts that promote our brands. Designed as customer shopping centers, these sites showcase our products in an easy-to-navigate format, allowing customers to see and purchase our collections of casual apparel and accessories. Not only have these virtual stores become a successful additional retail distribution channel, but also they have improved customer service and are fun and entertaining alternative-shopping environments. These sites also provide fashion information, provide a mechanism for customer feedback, promote customer loyalty and enhance our brand identity through interactive content. In 2004, these combined sites generated net sales comparable with the top retail GUESS? stores in the chain.
GUESS? Products
We derive net revenue from three primary sources: the sale of our men’s and women’s apparel, and the sale of our licensees’ products through our network of retail and factory outlet stores in the U.S. and Canada; the sale of GUESS? men’s and women’s apparel worldwide to wholesale customers and distributors; and royalties from worldwide licensing activities.
6
The following table sets forth our net revenue from our business segments:
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Year Ended December 31, |
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|
|
2004 |
|
2003 |
|
2002 |
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|
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(dollars in thousands) |
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Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Retail operations |
|
$ |
518,855 |
|
71.1 |
% |
$ |
447,693 |
|
70.3 |
% |
$ |
384,456 |
|
65.9 |
% |
|
Wholesale operations |
|
163,165 |
|
22.4 |
|
149,113 |
|
23.5 |
|
159,625 |
|
27.4 |
|
|||
|
Net revenue from product sales |
|
682,020 |
|
93.5 |
|
596,806 |
|
93.8 |
|
544,081 |
|
93.3 |
|
|||
|
Licensing operations |
|
47,242 |
|
6.5 |
|
39,779 |
|
6.2 |
|
39,058 |
|
6.7 |
|
|||
|
Total net revenue |
|
$ |
729,262 |
|
100.0 |
% |
$ |
636,585 |
|
100.0 |
% |
$ |
583,139 |
|
100.0 |
% |
Products. Our product line is organized into two primary categories: men’s and women’s apparel. To take advantage of contemporary trends, we complement our core basic styles with more fashion-oriented items. Within our basic denim assortment, we have added new denim fabrics and washes. In addition, we have also added “immediates” and “nows” to our merchandise assortment; these are fashion forward styles that complement our current product line and are produced on an expedited basis.
Our line of women’s apparel also includes the MARCIANO product line, a full collection of better women’s apparel incorporating a sophisticated, high fashion combination of colors and styles. These products currently are sold primarily through our GUESS? retail stores, our MARCIANO stores and our www.marciano.com website. The MARCIANO line is designed to complement our young contemporary line. We believe these products have significant potential and we are placing additional emphasis on this line in 2005 to increase its penetration in the marketplace.
Licensed Products. The high level of desirability of the GUESS? brand among consumers has allowed us to selectively expand our product offerings and distribution channels worldwide through trademark licensing arrangements. We currently have 21 trademark licenses. Worldwide sales of licensed products (as reported to us by our licensees) were approximately $616 million in 2004. Our net royalties from these sales, including advances and renewal fees, were $47.2 million in 2004. Approximately 67.5% of our net royalties were derived from our top five licensees in 2004 and approximately 70.2% were derived from our domestic licensees.
Design
Under the direction of Maurice Marciano, GUESS? and MARCIANO products are designed by an in-house staff of three design teams (men’s, women’s, and MARCIANO) located in Los Angeles, California. Our design teams travel throughout the world in order to monitor fashion trends and discover new fabrics. Fabric shows in Europe, Asia and the U.S. provide additional opportunities to discover and sample new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. We also maintain a fashion library consisting of antique and contemporary garments as another source of creative concepts. In addition, our design teams regularly meet with members of the sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
7
Domestic Retail Operations
At December 31, 2004, our domestic retail operations, which includes stores in both the U.S. and Canada, consisted of 186 full-price retail, 86 factory outlet, four kids and 11 new concept stores which sell GUESS? and MARCIANO-labeled products and which we own and operate directly. Below is a summary of store statistics as of December 31, 2004, 2003 and 2002.
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December 31, |
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|
|
|
2004 |
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2003 |
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2002 |
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|||
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Retail stores: |
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|
|
|
|
|
|
|||
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U.S. |
|
150 |
|
147 |
|
138 |
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|||
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Canada |
|
36 |
|
35 |
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