Weakness in southern Europe outweighed strength in new markets and its North American retail operations as Guess Inc. reported lower third-quarter profits that fell short of analysts’ expectations.

This story first appeared in the December 1, 2011 issue of WWD. Subscribe Today.

In the three months ended Oct. 29, the Los Angeles-based apparel marketer registered a 4 percent decline in net income, to $66.3 million, 71 cents a diluted share, from $69.1 million, or 75 cents, in the year-ago period. Analysts on average had expected earnings per share of 73 cents.

Revenues advanced 4.7 percent, to $642.8 million from $613.9 million. At the North American retail unit, the firm’s largest, sales also rose 4.7 percent, to $265.6 million, while same-store sales dropped 4.1 percent in local currencies as Guess elected to ratchet down its promotional activity. Indicative of its strength in newer markets, Asia registered the largest percentage increase in sales growth, bounding 18.3 percent to $64.8 million. Overall gross margin ticked down to 43.2 percent of sales from 43.4 percent a year ago.

European sales grew 2.3 percent, to $221 million, but fell 3.7 percent in local currencies, while operating income in the company’s second largest unit dropped 19.8 percent to $34.2 million.

Calling Europe “the biggest challenge in the next 12 months,” Paul Marciano, vice chairman and chief executive officer, told analysts on a Wednesday conference call that the company has performed well in newer markets such as Germany, Russia, the Netherlands and Spain.

“The growth we’re achieving in these new markets was not enough to offset the impact of the weakening economy in southern Europe,” he said. “In Italy and France, our largest business in Europe, we posted negative comps for the quarter in our owned retail stores.”

Noting that the company already has annual revenues of more than $1 billion in Europe, he reaffirmed Guess’s strategy for the continent: “To develop and accelerate our penetration in north and eastern Europe where we are barely present.”

Marciano was emphatic that the company’s priority for its North American retail operations was “elevating our brand and increasing profitability. We concentrated on full-price selling, lowered our stock level and reduced our markdowns significantly from a year ago. In fact, year-over-year markdown improvement was even greater than what it was in the second quarter in the face of a heavily promotional environment.”

The combination of less promotion and increased prices allowed Guess to boost average unit retail sales “over 15 percent in our U.S. full-price stores,” he said. Even with the drop in its comps, operating income for the unit rose 42.5 percent to $27.5 million, the only one of Guess’ five business units to register an increase.

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