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GUESS?, Inc. and Subsidiaries
Net royalties decreased by $1.8 million or 4.6% to $37.8 million for the year ended December 31, 2000 from $39.6 million for the year
ended December 31, 1999. The decrease in net royalties was related to the discontinuation of certain licenses and the impact of currency
devaluation in European and Asian markets. Net revenue from international operations comprised 1.7% and 6.7% of net product royalties
during 2000 and 1999, respectively.
Gross Profit
Gross profit increased 5.8% to $283.6 million for the year ended December 31, 2000 from $268.0 million for the year ended December 31,
1999. The increase in gross profit resulted from higher net revenue from product sales. Gross profit from product sales increased 7.6%
to $245.8 million for the 2000 fiscal year from $228.4 million for the 1999 fiscal year.
Gross margin (gross profit as a percentage of total net revenue) decreased to 36.4% for the year ended December 31, 2000 from 44.7%
for the year ended December 31, 1999. Gross margin from product sales decreased to 33.2% for the year ended December 31, 2000 from
40.8% for the year ended December 31, 1999.
The decrease in gross margin from product sales was experienced in both our retail and wholesale operations. Gross margin in our retail
operation in fiscal year 2000 was negatively impacted by increased promotional markdowns to reduce excess inventory, inventory write-
downs, higher shrinkage results and higher occupancy costs due to the lower sales productivity of new stores and rent expenses for stores
not opened. Royalty revenues as a percentage of total net revenue decreased from 6.6% in 1999 to 4.8% in 2000. This reduced overall
gross margins as royalty revenue has no associated cost of sales.
Gross margin in our wholesale domestic and international operations in fiscal year 2000 was negatively impacted by higher markdown and
return allowances to department and specialty stores and sales to the off-price channels at prices below cost, or reduced margin in an
effort to reduce excess inventory. In addition, the Company recorded special charges of approximately $10.3 million to reduce inventories
to the lower of cost or market.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to $233.2 million, or 29.9% of net revenues for the year ended
December 31, 2000, from $171.0 million, or 28.5% of net revenues for the year ended December 31, 1999.
SG&A expenses increased 36.4% in 2000 compared to 1999 as a result of expenses necessary to operate new stores, higher costs at
the new distribution facility, including start-up expenses and higher payroll due to lower productivity and higher unit volume, increased
expenses incurred by GUESS? Canada, higher advertising expenses and consulting fees. During the first six months of 2000, we incurred
start-up and other non-recurring pre-tax costs of $5.3 million relating to the relocation of our distribution operation to Kentucky. Additionally,
at the beginning of the first quarter 2000, we revised our vacation pay policies to enhance employee benefits, which resulted in a one-
time pre-tax charge of $1.3 million.
Severance (Recovery) Related to Distribution Facility Relocation
In accordance with the requirements of EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)," the Company recorded a $3.2 million charge, in the second quarter
ended June 26, 1999, for future severance costs of 460 employees related to the relocation of its distribution operations from Los Angeles
to Louisville, Kentucky. As a result of employee transfers and attrition of 228 employees, the severance costs actually incurred for Los
Angeles-based employees was $1.7 million which has resulted in a recovery of $1.5 million of the severance charge in the second quarter
of 2000. The Company successfully completed the transition of all product lines to the new distribution center during the second quarter
of 2000. Because distribution operations were transferred to Kentucky, the Company does not expect to experience significant reduced
employee expenses.
Restructuring and Impairment Charges
During the fourth quarter ended December 31, 2000, the Company recorded restructuring charges including store closure costs primarily
related to rent paid and estimated rent to be paid on idle leased facilities, lease exit costs and construction costs of stores abandoned
during construction in the amount of $4.5 million. This is inclusive of charges of $0.8 million of asset impairments for under-performing
stores that the Company plans to close. Cash payments of approximately $1.7 million consisting primarily of estimated rent to be paid
on idle leased facilities and lease exit costs are anticipated to be paid during 2001. Annual rental savings from these closures should
approximate $1.7 million per year. Annual depreciation expense savings from these closures is not expected to be significant.
The Company also recorded an additional $4.1 million of charges to write-down the value of certain impaired assets, including fixed
assets related to unprofitable stores and an investment the Company has in an internet company. Related annual depreciation is expected
to be reduced by approximately $0.3 million.
