NEW YORK — Moody’s Investors Service took Guess’ $80 million in debt down a notch Wednesday based on continuing weakness in the apparel company’s wholesale division.
“The ratings recognize concerns about Guess’ near-term financial performance following news of a steep reduction in wholesale revenues for the fourth quarter of 2002 and reduced guidance for the full year,” Moody’s said. In the third quarter ended Sept. 28, wholesale revenues receded 24 percent to $50.7 million.
Moody’s also said it now expects this to be the second full year of operating losses for the combined core wholesale and retail businesses, adding that it has “no certainty that a turnaround will occur in the near future.”
Guess’ $80 million senior subordinated notes, due 2003, were dropped to “B3″ from “B2,” while its senior unsecured issuer rating fell to “B2″ from “B1.” A “B1″ mark is four slots below the line separating investment-grade ratings from those considered speculative.
The downgrade didn’t deter Guess’ stock performance as shares rose 17 cents, or 3.9 percent, to close at $4.53 in New York Stock Exchange trading Wednesday. However, the closing price is just less than half Guess’ 12-month high.
Moody’s said the ratings assume that Guess will be able to refinance its $80 million subordinated notes maturing in August 2003 based on the value of its franchise and its licensing income. However, it said the outlook remains negative, recognizing the challenges that Guess may face in refinancing its debt during a period of cyclical and fashion weakness. Moody’s warned the ranking could decline if Guess has difficulty refinancing its maturing debt or if it experiences further revenue declines due to accelerating weakness in the brand franchise.
The ratings also recognize the very high revenue and profit volatility typical of an apparel manufacturer and retailer.
In the third quarter, Guess’ wholesale arm recorded a $4.5 million operating loss, deeper than the $4.1 million loss seen a year earlier. Contributing to the 24 percent drop in wholesale volume in the quarter was the discontinuation of its in-house children’s wear business, which generated $6.6 million in the year-ago quarter. Wholesale order backlog at the end of the quarter was $49.1 million, down from $77.5 million a year before.
This story first appeared in the December 12, 2002 issue of WWD. Subscribe Today.
Distribution has declined this year, with the number of outside retail locations selling Guess women’s and men’s merchandise dropping to 1,285, from 1,500 at the beginning of the year, Carlos Alberini, president and chief operating officer, said in a November conference call with analysts. The recent return of Nancy Schactman as president of sales for the wholesale arm should help stop the decline next year, Alberini said.
Alberini wasn’t available for comment on Wednesday.
On the plus side, Moody’s said the firm’s ratings could stabilize or even improve if the company is able to extend debt maturities and regain its market position.
It also said it expects net cash flow from operations will be flat to slightly positive, even at these weak performance levels; a financial cushion provided by Guess’ licensing revenue; management’s proactive stance of closing less-productive stores and reducing new store openings to preserve cash, and that the company will continue to largely finance its operating needs using cash flow from operations.
Moody’s noted that Guess’ licensing revenues have remained fairly stable, despite the declines in its retail and wholesale business. It believes that some licensed products, particularly watches, leather accessories and sunglasses, may have established a separate reputation that resonates with consumers, independent of more fashion-sensitive apparel.
In its most recent quarterly financial results, Guess said a $4 million pre-tax gain from the settlement of a lawsuit helped it more than double its earnings in the third quarter, despite an 8.5 percent decline in sales. But the Los Angeles-based company warned that the economy remains tough and said it was kicking off a round of cost-cutting actions intended to improve margins.
Net income rose to $3.4 million, or 8 cents a diluted share, in line with the company’s earnings forecast. Year-ago earnings were hurt by $4.4 million in pre-tax restructuring charges.
Net revenues for the quarter ended Sept. 28 were down 8.5 percent to $157.8 million, and retail sales dropped 0.7 percent, to $95.5 million, on a 5.4 percent drop in same-store sales. Licensing royalties shot up 20.8 percent to $12.3 million.
Warning of continued pressure on sales and margins in the fourth quarter, Guess is forecasting fourth-quarter earnings of 10 to 13 cents a share, before 15 to 18 cents in restructuring charges. For the year, the company expects to post a per-share loss of 2 to 5 cents, exclusive of extraordinary items.