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Guess Income Rises, But Bottom Line Hit by Tax Reform in Q4

Guess Inc. saw its profitability negatively impacted by the tax reform passed at the end of the year, even as it posted strong sales gains, particularly in Europe and Asia.

In a Nutshell: Guess Inc. posted solid increases in fourth quarter and full-year net income, with gains in Europe, Asia and wholesale offsetting declines in Americas retail.

But the Los Angeles-based denim and sportswear company saw its bottom line hit hard by the Tax Act enacted in December, helping lead to a substantial drop in fourth quarter earnings and a net loss for the year, even while its operating profit growth and adjusted operating margin expansion came in at the high end of expectations.

Executives noted on a conference call with analysts that the denim business has been strong, notably in novelty looks such as destroyed and stretch fabric jeans, and mid- and high-waist silhouettes. Logo T-shirts have been doing well, they said, as has outerwear, where price sensitivity hasn’t been as much of a factor as in the past.

Sales: Net revenue for the fourth quarter ended Feb. 3 increased 17.5% to $792.2 million compared to $674 million in the prior-year quarter. Retail revenues in the Americas decreased 6.1% and retail comp sales, including e-commerce, fell 4 percent. Americas wholesale revenues increased 3.8%, Europe revenues were up 39.7%, with retail comp sales including e-commerce increasing 18 percent, while Asia revenues grew 40.2%, as retail comp sales including e-commerce rose 14 percent.

For the year, net revenue increased 7.9% to $2.36 billion compared to $2.19 billion in the prior year. Americas retail revenues decreased 10.9%, with retail comp sales including e-commerce falling 9 percent, while Americas wholesale revenues increased 2.8%.

Europe revenues increased 26.7% in fiscal 2017, with retail comp sales including e-commerce growing 11 percent, as Asia revenues rose 24.3%, with retail comp sales including e-commerce increasing 8 percent.

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Earnings: Net earnings for the fourth quarter fell 84.2% to $1 million from $6.6 million for the fourth quarter of fiscal 2017. Guess said several key provisions of the Tax Act affected the company, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent. Its fourth quarter results included the impact of a $47.9 million charge related to the tax reform. This is comprised of a $24.9 million charge for the provisional re-measurement of certain deferred taxes and related amounts and a provisional charge of $23 million to income tax expense for the estimated effects of the transitional tax on the deemed repatriation of foreign earnings. The company’s effective tax rate increased to 95.5% for the fourth quarter of fiscal 2018, compared to 65.6% in the prior-year quarter.

However, on a conference call with analysts, Guess Inc. CEO Victor Herrero, said, “I see that the tax reform announced late last year will be of material benefit to us. We will have a lower effective tax rate and increased flexibility to repatriate cash from overseas.”

For the year, Guess recorded a net loss of $7.9 million compared to net earnings of $22.8 million for the fiscal year ended January 28, 2017. The company’s effective tax rate increased to 105.6% for fiscal 2018 compared to 52.6% in the prior year.

CEO’s Take: Herrero said: “I believe that this year marks the beginning of a turnaround for the company. I am convinced that maintaining the focus on the strategic initiatives I outlined on my arrival at the company in August 2015 is now clearly showing in our financial results. And looking forward to fiscal 2019, we expect to make continued progress on this front. I still see a lot of opportunities left in Europe and Asia, where we will continue to allocate capital for superior returns and where we plan to continue growing sales in double digits while also expanding margins. We will keep working on improving the profitability of the Americas by executing on our cost reduction and margin improvement initiatives.”