NEW YORK — A gain from the settlement of a lawsuit helped Guess Inc. more than double its earnings in the third quarter despite an 8.5 percent decline in sales. But the Los Angeles-based company warned the economy remains tough and said it was kicking off a round of cost-cutting actions intended to improve margins.

Guess on Thursday reported net income of $3.4 million, or 8 cents a diluted share, in line with the company’s earnings forecast given early last month and more than double the $1.3 million, or 3 cents a share, reported a year earlier. This year’s results were helped by a $4 million pretax lawsuit settlement gain, while last year’s were hurt by $4.4 million in pretax restructuring charges.

Net revenues for the quarter ended Sept. 28 were $157.8 million, down from $172.4 million.

"Our third-quarter results were disappointing," said Carlos Alberini, president and chief operating officer in a conference call with analysts. "They continue to reflect the weakness in the marketplace. The economic environment, particularly at retail, continues to be uncertain and consumer confidence has been shaken by a series of events" including job losses and the poor performance of the stock market.

He added that a shift in business to more fashionable merchandise from basic goods is pinchingmargins.

"The basic business has been very, very difficult," he continued. "This affects not just women’s, which is affected in a big way, but also men’s. The company really realized that category was going to be under a lot of pressure, so we migrated into more fashion. Fashion is doing better, but not enough to compensate for the drop in basics. When you are left with some excess inventory, even when you plan the business well, fashion costs a lot more to get rid of. As a result, margins are under pressure."

The company’s fashion shifts have included introducing new fabrics and washes.

Inventory at the end of the quarter stood at $106.3 million, down 18.5 percent from its year-ago level. Guess’ inventory and revenue figures were reduced by the move this year to license out its kids business, rather than manage it in-house.The company’s retail operation, which currently operates 242 stores, saw operating earnings rise to $2.5 million, from $1 million. That came despite a 0.7 percent sales slip, to $94.8 million. Comparable-store sales were down 5.4 percent.

The wholesale arm recorded a $4.5 million operating loss, deeper than the $4.1 million loss seen a year earlier. That came on a 24 percent sales drop to $50.8 million, from $66.8 million a year ago. Last year’s revenues include $6.6 million in sales from the now discontinued in-house kids’ wear business. Wholesale order backlog at the end of the quarter was $49.1 million, down from $77.5 million a year before. 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, Alberini said. The company believes the recent return of Nancy Schactman as president of sales for the wholesale arm will help stop the decline next year, Alberini said.

Licensing proved to be the company’s strongest profit center for the quarter. Licensing operating income came to $11 million on $12.3 million in revenue, up from $8.5 million on $10.2 million a year earlier.

Alberini said the firm plans to close "less than a handful" of mostly new stores and cut some back-office positions. He said the cuts will result in $10 million to $12 million in pretax charges in the fourth quarter, but will begin saving about $7 million a year on a pretax basis, starting next year.

The company warned that it expects continued pressure on sales and margins in the fourth quarter, and is expected to post fourth-quarter earnings of 10 cents to 13 cents per diluted share, before 15 cents to 18 cents per share in restructuring charges. For the year, the company expects to post a per-share loss of 2 cents to 5 cents, also excluding the charges.

In the fourth quarter of 2001, the company recorded net income of 3 cents a diluted share, or $1.4 million on a net basis, with earnings for the year coming in at 14 cents a share, or $6.2 million.

For the nine-month period, the company recorded a loss of $6.7 million, or 15 cents a diluted share, compared with earnings of $4.9 million, or 11 cents a share, a year earlier. Net revenue slipped 15.9 percent to $415.8 million.Guess shares gained 30 cents, or 7 percent, to close at $4.58 in New York Stock Exchange trading Thursday.

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