GUESS DETAILS REVISED PLAN
Byline: Scott Malone
NEW YORK — Just a year ago Guess Inc. was riding high, but on Monday, the company began an effort to rebuild its credibility on Wall Street.
Executives at Guess turned to analysts to warn investors that they would not make their financial targets for the just-ended fiscal year. Further, as reported, the company had to explain that it was restating its earnings for the first three quarters of 2000, as a result of errors made by the company’s accounting staff in classifying certain expenses.
Officials spelled out modest financial goals for 2001, saying they expect to see improved earnings on essentially flat sales, as a result of a plan spearheaded by the Los Angeles-based company’s new president and chief operating officer, Carlos Alberini, to cut costs and better manage inventories.
The tone was quite a change from the Guess of early 2000. At that point, following a blockbuster year that saw earnings double and sales rise 27.1 percent, the company’s leadership was plotting out aggressive retail and wholesale growth plans.
In a prerecorded announcement broadcast on the Web, Guess co-chairman and co-chief executive Maurice Marciano explained that a recent companywide review of financial practices revealed that the firm had overstated earnings for the first two quarters of 2000 and understated them for the third.
The mistakes came because the company treated certain costs — related to real estate and computer systems — as capital spending that should have been treated as expenses, and because it failed to record accurate inventory levels while it was moving its distribution center from Los Angeles to Louisville, Ky.
“Of course, we are extremely disappointed with this outcome,” Marciano said. “Nevertheless, I am confident that with Carlos on board and with all the steps we have taken to improve financial controls and procedures, we will avoid similar issues in the future.”
Much of the market’s attention Monday was focused on Alberini, who joined Guess in December, a few weeks after the company’s chief financial officer, Brian Fleming, resigned. Analysts said they were confident in Alberini’s assertion that the accounting mistakes the company had discovered were not intentionally made, and that they believed he could restore Wall Street’s faith in the firm.
“I have a high degree of confidence in the new president and chief operating officer, Carlos Alberini, and the credibility that he brings to this company,” said John Rouleau, a Chicago-based analyst at Gruntal & Co. “This was a situation where everybody just missed the proper classification of these expenses and there was really no intent to manipulate earnings or to fraudulently classify expenses. I believe it was just an honest mistake by the company.”
Nonetheless, given Guess’s performance in recent months, Rouleau said: “It will take some time to rebuild the credibility on Wall Street, for sure.”
The company’s stock price has dropped precipitously in recent months, after it delivered a series of shocks to investors. In September, company shares — then trading in the low $20s, already off from the $33 high hit last spring — dropped dramatically when Guess warned that its third-quarter earnings would miss analysts’ expectations.
Its securities suffered another blow two months later when the company revealed that its third-quarter earnings decline was even worse than feared. Net earnings came in at $5.6 million — down 60 percent from the previous year and a little more than a third of Wall Street’s already-lowered expectations.
On Monday, Guess shares again dropped, closing at $6.38, down 86 cents, in New York Stock Exchange trading.
However, the company is now working to rebuild investors’ faith.
In an interview with WWD, Alberini — who previously served as cfo of the footwear retailer Footstar Inc. — acknowledged that restoring confidence in Guess is one of his major tasks.
“Our job as a company is to rebuild confidence with a lot of different parties, including Wall Street, our banks, our people. Obviously, we didn’t make our plans and when that happens, everybody gets surprised and disappointed,” he said. “We will be rebuilding confidence by setting reasonable expectations and then delivering consistently+It’s very high on my list. We talk about this every day internally.”
He said the accounting mistakes were the result of a “lack of knowledge of some people.”
“There was clearly no intent,” he said. “I wouldn’t be here if I had found that was the case.”
Alberini said he is leading the effort to find a new cfo, adding: “I am committed to building a top-notch team to build the company effectively and efficiently.”
He said that as it expanded into the retail arena, Guess over the past year started to run into problems that were outside some of its staff’s area of expertise, and added that the company’s accounting operations had faced a turnover issue recently.
One of the mistakes was due to an incorrect understanding of how to classify retail real estate costs for stores that have not yet opened, he said.
“The company thought that it was fine to capitalize and that is not [in line with generally accepted accounting principles]. It’s just lack of knowledge,” Alberini said. “The turnover in the financial team may have had a lot to do with this.”
The company’s lack of retail expertise led to other problems as well last year. As reported, much of Guess’s third-quarter earnings shortfall came because the firm saw a heavy inventory buildup as consumer spending began to slow in late 2000, and was forced to sell closeout merchandise to off-pricers for less than it cost Guess to buy the goods.
“The company never had an inventory problem in the past,” said Alberini. “When it was limited to a wholesale business, it was easier to control inventory, because you produce based on what the orders are. With the company expanding into retail, inventory management becomes a much more complex task.”
Guess’s ambitious expansion plans for the year — it opened an additional 56 stores, raising its total store count to more than 200 — were another cause for the company’s performance problems, Alberini added.
“The company came out of 1999 with outstanding business momentum and record sales results. As anybody can reasonably expect, it approached 2000 with significant optimism and tremendous aspirations to continue that growth,” he said. “But sales trends decelerated in the second half of the year and inventory purchases were excessive.”
During his first seven weeks on the job, Alberini said, one of his major efforts has been upgrading the systems the company uses to track inventory, making it possible to closely watch companywide stock levels, he said. This, he continued, will allow the company’s wholesale and retail operations to coordinate their buying plans and to work together when necessary to clear out excess inventory.
Alberini also said that the Guess Kids and Guess Canada stores opened over the past year “did not perform as expected.”
As reported, Guess’s restated earnings for the first nine months of 2000 are in violation of the terms of its financial covenants with its lenders, though Alberini said he expects to be able to resolve that situation.
“We feel confident — although no assurance can be given — that we will achieve the necessary waivers or an amendment to cure the violation,” he said.
Analysts said they were pleased by Alberini’s approach to tightening up Guess’s operations — he now overseas finance, information systems, logistics, real estate, legal, human resources, production and retail operations. That leaves Maurice Marciano and his brother, Paul, who share the chairman and ceo title, free to focus on design, merchandising, marketing and licensing.
Margaret Whitfield, of Tucker Anthony Cleary Gull, called Alberini “just what the doctor ordered, in terms of adding financial controls to this company, which has a strong brand.”
Gruntal’s Rouleau added: “The Marcianos have done a wonderful job in creating the product and the image behind the brand. Those are clearly their strengths. We all have different strengths and weaknesses, and I believe that Carlos’s strength is the financial discipline, the financial controls and his operating experience.
“I think the Marciano brothers have done as good of a job as anybody in creating this brand. It’s now time for somebody to pitch in and help out on managing the operations side of this business, because they can’t do it all.”
While Alberini said he was optimistic about the systems the company is putting in place, in the prerecorded announcement he sketched out guarded financial targets for Guess for the year ahead.
He said the company expects to see flat revenues for the year, with a 10 to 15 percent decline in wholesale sales and a 5 to 10 percent increase in retail sales, as a result of the company’s larger store base. He projected that retail comps would be off 3 to 5 percent.
The company projected that 2001 earnings would come in at 68 to 72 cents a share.
Alberini said that he expects first- and second-quarter revenue to be down and margins to deteriorate. In the third quarter, he continued, revenues are likely to continue to decline, but he projected that margins could improve due to lower inventories. By the fourth quarter, the company is hoping for revenue growth.
Guess is also likely to post a $3 million one-time charge in pretax restructuring charges, he said.
The company also expects to open 25 stores next year.
As reported, the company expects to post a 27-cent- to 31-cent-a-share loss for the quarter ended Dec. 31, which will include a $14 million pretax charge for inventory write-downs and other one-time charges. For the fourth quarter of 1999, Guess recorded a net income of 44 cents a diluted share, or $19.1 million on a net basis.
For the 2000 fiscal year, the company expects to post net income of 36 cents to 40 cents. As reported, 1999 net income was $1.21 a share, or $51.9 million a net basis. Sales came in at $599.7 million. According to First Call, Guess is expected to post 2000 sales of $789.5 million.