M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S
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GUESS?, Inc. and Subsidiaries
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Earnings From Operations
Earnings from operations were $43.3 million in 2000 as compared to $93.8 million in 1999, a decrease of $50.5 million or 53.8%. The
decrease in earnings from operations for the retail operating segment to $3.4 million in 2000, from $37.1 million in 1999 resulted princi-
pally from store restructuring and impairment charges of $6.2 million as discussed above, higher occupancy costs and higher new store
expenses. The decrease in earnings from operations for the wholesale operating segment to $9.2 million in 2000 from $25.1 million in
1999 resulted principally from increased markdown and return allowances, start-up and other non-recurring costs related to the relocation
of our distribution operation and increased SG&A expenses. Earnings from operations for the licensing operating segment decreased to
$30.8 million in 2000, from $31.6 million in 1999 principally due to fewer licenses in 2000.
Interest Expense, Net
Interest expense, net, increased to $13.8 million for the year ended December 31, 2000 from $9.4 million for the year ended December 31,
1999. This increase resulted from higher outstanding average debt, due to higher inventory levels throughout the year and significant
capital expenditures during 2000. For the year ended December 31, 2000, the average debt balance was $131.6 million, with an average
effective interest rate of 9.0%. For the year ended December 31, 1999, the average debt balance was $93.1 million, with an average
effective interest rate of 9.5%.
Income Taxes
The income tax provision for the year ended December 31, 2000 was $13.1 million, or a 44.3% effective tax rate. The income tax provision
for the year ended December 31, 1999 was $35.2 million, or a 40.4% effective tax rate. The effective tax rate for 2000 was negatively
impacted by a foreign subsidiary loss and potential income tax liabilities as a result of federal and certain state income tax audits.
Net Earnings
Net earnings decreased to $16.5 million for the year ended December 31, 2000 from $51.9 million for the year ended December 31, 1999.
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Net Revenue
Net revenue increased $127.7 million or 27.1% to $599.7 million for the year ended December 31, 1999 from $471.9 million for the year
ended December 31, 1998. Net revenue from retail operations increased $76.7 million or 34.5% to $299.4 million for the year ended
December 31, 1999 from $222.6 million for the year ended December 31, 1998, from a 26.8% increase in comparable store net revenue
and from the volume generated by our new store openings. The strong increase in comparable store net revenue was primarily attributable
to our improved merchandising and our fashioned-focused product mix. The retail segment is benefiting from our improved customer
service levels resulting from our enhanced personnel training and incentive programs that have been offered to our associates.
Net revenue from wholesale operations increased $48.1 million or 22.6% to $260.6 million for the year ended December 31, 1999 from
$212.5 million for the year ended December 31, 1998. Domestic and international wholesale operations net revenue increased, for the
year ended December 31, 1999, by $40.6 million to $228.7 million and by $7.4 million to $31.9 million, respectively. Our domestic whole-
sale net revenue increased primarily as a result of the increased demand for fashion products in both of our women's and men's lines.
International wholesale operations net revenue increased due primarily to increased sales from the European market, partially offset by
soft performance in the Asian and South American markets. GUESS? Canada contributed $12.1 million in international net revenues during
the second half for the year ended December 31, 1999. Net royalties increased $2.8 million or 7.7%, to $39.6 million for the year ended
December 31, 1999 from $36.8 million for the year ended December 31, 1998. The increase in net royalties was primarily due to settle-
ments and adjustments related to us terminating licensees, partially offset by us discontinuing certain licenses that were brought back
in-house and the continuing economic turmoil and currency devaluation in Asian markets. Net revenue from international operations
comprised 6.7% and 5.6% of net product revenue during 1999 and 1998, respectively.
Gross Profit
Gross profit increased 34.1% to $268.0 million for the year ended December 31, 1999 from $199.9 million for the year ended December 31,
1998. The increase in gross profit resulted from higher net revenue from product sales. Gross profit from product sales increased 40.1%
to $228.4 million for the year ended December 31, 1999 from $163.0 million for the year ended December 31, 1998. Gross margin (gross
profit as a percentage of total net revenue) increased to 44.7% for the year ended December 31, 1999 as compared to 42.3% for the
year ended December 31, 1998. Gross margin from product sales increased to 40.8% for the year ended December 31, 1999 compared
to 37.5% for the year ended December 31, 1998.
