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GUESS?, Inc. and Subsidiaries
The increase in our gross margin from product sales was primarily the result of fixed store occupancy costs being spread over a larger
comparable store revenue base, a favorable mix in retail net revenue, which generally carries a higher gross margin rate, lower off-price
sales and a decrease in wholesale markdowns and allowances as a percentage of wholesale net revenues.
Furthermore, during the fourth quarter of 1999, we enhanced our ability to estimate reserves through improved processes and more current
and accurate data. As a result, we revised our estimate of certain reserves. This resulted in a reduction of cost of sales of $2.3 million and
an increase in gross margin of $2.3 million or 2.4%.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses of $171.0 million for the year ended December 31, 1999 decreased to 28.5% of
net revenue, from 30.3% of net revenue or $142.8 million, in the year ended December 31, 1998. The decrease in SG&A expenses as a
percentage of net revenue was due to our ability to leverage certain expenses against a higher revenue base, as well as the success of
our ongoing cost containment programs.
Gain on Disposition of Property and Equipment
We realized a non-recurring pre-tax gain of $3.8 million on the disposition of property and equipment.
Severance (Recovery) Related to Distribution Facility Relocation
In accordance with the requirements of EITF 94-3, "Liability for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," we recorded a $3.2 million charge for future severance costs related to the relocation
of our distribution operations from Los Angeles, California to Louisville, Kentucky.
Earnings from Operations
Earnings from operations increased 64.4% to $93.8 million, or 15.6% of net revenue, for the year ended December 31, 1999 from
$57.0 million, or 12.1% of net revenue, for the year ended December 31, 1998. The increase was primarily due to higher revenue.
Interest Expense, Net
Net interest expense decreased 27.1% to $9.4 million for the year ended December 31, 1999 from $12.9 million for the year ended
December 31, 1998. This decrease resulted primarily from a lower outstanding average debt. For the year ended December 31, 1999,
the average debt balance was $93.1 million, with an average effective interest rate of 9.5%. For the year ended December 31, 1998,
the average debt balance was $135.5 million, with an average effective interest rate of 9.0%.
Income Taxes
The income tax provision for the year ended December 31, 1999 was $35.2 million, or a 40.4% effective tax rate. The income tax provision
for the year ended December 31, 1998 was $18.2 million, or a 42.0% effective tax rate. The effective tax for 1998 was adversely impacted
by Federal and state income taxes related to a dividend declared to us by one of our foreign subsidiaries.
Net Earnings
Net earnings increased to $51.9 million for the year ended December 31, 1999, from $25.1 million for the year ended December 31, 1998.
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
During our fiscal year 2000, we relied primarily on borrowings under our $125.0 million Credit Agreement ("Credit Facility"), trade credit
and internally generated funds to finance our operations and expansion. Net cash provided by operating activities decreased $57.1 million to
$30.2 million for the year ended December 31, 2000, from $87.3 million for the year ended December 31, 1999. The decrease in the current
year was primarily due to lower earnings. At December 31, 2000, we had working capital of $96.3 million compared to $97.9 million at
December 31, 1999. The net decrease in working capital was primarily attributable to decreases in short-term investments and receivables,
increases in inventories and other current assets, partially offset by increases in accounts payable and an increase in current installments
of notes payable and long-term debt. The most significant changes were represented by short-term investments, which decreased by
$26.2 million due to the sale of investments to fund the business expansion, inventories, which increased $37.6 million due to new stores
and growth in the wholesale business and accounts payable, which increased $22.3 million as a result of increased inventories.
On December 3, 1999, we entered into a Credit Facility with Chase Manhattan Bank that replaced our $100.0 million revolving credit
facility entered into in March 1997. The Credit Facility provides us with a $125.0 million revolving credit facility subject to a borrowing
base calculation and is secured by inventory and accounts receivable including a $50.0 million sub-limit for letters of credit. The Credit
Facility bears interest at the London Interbank Offered Rate ("LIBOR") plus a range as defined or the greater of the Prime rate, the base
