By  on September 1, 1994

NEW YORK -- Hurt by lower gross margins, Guess Inc.'s operating profits declined 11.5 percent in the second quarter ended June 26, to $20.8 million from $23.5 million.

Gross margins for the Los Angeles-based apparel firm declined to 45.6 percent of sales in the quarter from 49.8 percent, primarily reflecting an increase in production costs due to changes in fabrication and increases in processing costs.

The margin pressure was partly offset by higher royalty income and lower selling costs.

Net earnings in the quarter fell 35.5 percent to $16.1 million from $24.9 million, reflecting a jump in interest costs due to its August 1993 recapitalization.

Overall sales in the quarter declined 9.5 percent to $111 million from $122.7 million, reflecting Guess's decision to license out its non-core product lines in 1992.

The figures came from a Securities and Exchange Commission filing. Guess, a privately held company, reports these numbers because of its outstanding public debt. In the half, Guess's operating earnings edged up 1 percent to $49.3 million, while net earnings declined 20.1 percent to $39.5 million. Sales declined 8.5 percent to $225.6 million.

Sales at wholesale operations in the quarter fell 14.8 percent to $97.2 million in the quarter and slid 8.2 percent to $208.8 million in the half. Guess said this decline reflected a loss of revenues from lines licensed out in 1993, including its boys' line, the majority of its girls' line and a women's knit line.

In 1992, Guess focused its wholesale operations on its core men's and women's lines, primarily denim and other cotton apparel.

Excluding the licensed lines, wholesale sales slipped 2.8 percent to $96 million in the quarter and gained 7.7 percent to $205.1 million in the half.

Revenues at Guess's retail operations increased 9.6 percent in the quarter to $31.7 million, driven by a strong performance by its full-price stores. Retail revenues in the half rose 8.3 percent to $54.6 million.Guess's policy is to record sales to its own stores at the same wholesale prices charged other customers.

Royalty income jumped 25.4 percent in the quarter to $8.4 million and surged 62.7 percent in the half to $16.5 million, due to new licenses and royalties from higher sales of existing licenses. Interest expense in the quarter increased to $4.5 million in the quarter from $500,000 a year earlier, resulting largely from the issuance of $130 million, 9 1/2-percent senior-subordinated debt in August 1993.The August 1993 recapitalization helped fund the buyout of the shares of Georges Marciano, who left the firm as chief executive officer in August 1993.

The company's remaining three shareholders are his brothers, Maurice Marciano, chairman and chief executive officer; Paul Marciano, president, and Armand Marciano, senior executive vice president.

The company expects its licensing program to reduce net sales in 1994, but said the "associated reduction in earnings from such sales will be substantially offset in future years by the increase in royalty income from the new licenses which have minimal related expenses."

-- Fairchild News Service

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