GES-2014.08.02-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 2, 2014
OR 
o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to           
Commission file number: 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-3679695
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
1444 South Alameda Street
 
Los Angeles, California
90021
(Address of principal executive offices)
(Zip Code)
(213) 765-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of September 2, 2014 the registrant had 85,214,945 shares of Common Stock, $.01 par value per share, outstanding.
 


Table of Contents

GUESS?, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) 
 
Aug 2,
2014
 
Feb 1,
2014
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
461,519

 
$
502,945

Short-term investments
5,019

 
5,123

Accounts receivable, net
233,906

 
276,565

Inventories
392,387

 
350,899

Other current assets
109,475

 
80,554

Total current assets
1,202,306

 
1,216,086

Property and equipment, net
309,155

 
324,606

Goodwill
38,639

 
38,992

Other intangible assets, net
12,336

 
13,143

Long-term deferred tax assets
56,891

 
54,973

Other assets
121,092

 
116,631

 
$
1,740,419

 
$
1,764,431

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of capital lease obligations and borrowings
$
1,997

 
$
4,160

Accounts payable
194,101

 
191,532

Accrued expenses
164,068

 
174,333

Total current liabilities
360,166

 
370,025

Capital lease obligations and other long-term debt
6,735

 
7,580

Deferred rent and lease incentives
90,044

 
90,492

Other long-term liabilities
114,695

 
120,518

 
571,640

 
588,615

Redeemable noncontrolling interests
5,468

 
5,830

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding

 

Common stock, $.01 par value. Authorized 150,000,000 shares; issued 139,513,762 and 139,245,729 shares, outstanding 85,257,404 and 84,962,345 shares, at August 2, 2014 and February 1, 2014, respectively
853

 
850

Paid-in capital
447,587

 
439,742

Retained earnings
1,229,022

 
1,247,180

Accumulated other comprehensive loss
(10,774
)
 
(13,801
)
Treasury stock, 54,256,358 and 54,283,384 shares at August 2, 2014 and February 1, 2014, respectively
(519,198
)
 
(519,457
)
Guess?, Inc. stockholders’ equity
1,147,490

 
1,154,514

Nonredeemable noncontrolling interests
15,821

 
15,472

Total stockholders’ equity
1,163,311

 
1,169,986

 
$
1,740,419

 
$
1,764,431

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
Aug 2,
2014
 
Aug 3,
2013
 
Aug 2,
2014
 
Aug 3,
2013
Product sales
$
581,779

 
$
611,894

 
$
1,078,707

 
$
1,130,558

Net royalties
26,792

 
27,118

 
52,405

 
57,368

Net revenue
608,571

 
639,012

 
1,131,112

 
1,187,926

Cost of product sales
391,794

 
390,480

 
738,104

 
741,968

Gross profit
216,777

 
248,532

 
393,008

 
445,958

Selling, general and administrative expenses
186,919

 
181,623

 
365,127

 
365,387

Restructuring charges

 
6,129

 

 
8,466

Earnings from operations
29,858

 
60,780

 
27,881

 
72,105

Other income (expense):
 

 
 

 
 
 
 
Interest expense
(772
)
 
(365
)
 
(1,297
)
 
(914
)
Interest income
320

 
475

 
725

 
809

Other income (expense), net
4,766

 
(139
)
 
3,647

 
5,318

 
4,314

 
(29
)
 
3,075

 
5,213

 
 
 
 
 
 
 
 
Earnings before income tax expense
34,172

 
60,751

 
30,956

 
77,318

Income tax expense
11,900

 
20,048

 
10,871

 
25,515

Net earnings
22,272

 
40,703

 
20,085

 
51,803

Net earnings attributable to noncontrolling interests
318

 
837

 
232

 
2,021

Net earnings attributable to Guess?, Inc.
$
21,954

 
$
39,866

 
$
19,853

 
$
49,782

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders (Note 2):
 

 
 

 
 

 
 

Basic
$
0.26

 
$
0.47

 
$
0.23

 
$
0.59

Diluted
$
0.26

 
$
0.47

 
$
0.23

 
$
0.58

 
 
 
 
 
 
 
 
Weighted average common shares outstanding attributable to common stockholders (Note 2):
 

 
 

 
 
 
 
Basic
84,573

 
84,080

 
84,536

 
84,331

Diluted
84,799

 
84,347

 
84,765

 
84,563

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.225

 
$
0.200

 
$
0.450

 
$
0.400


See accompanying notes to condensed consolidated financial statements.


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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
Aug 2,
2014
 
Aug 3,
2013
 
Aug 2,
2014
 
Aug 3,
2013
Net earnings
$
22,272

 
$
40,703

 
$
20,085

 
$
51,803

Other comprehensive income (loss) (“OCI”):
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
(19,708
)
 
2,390

 
2,542

 
(22,024
)
Derivative financial instruments designated as cash flow hedges
 

 
 

 
 
 
 
Gains (losses) arising during the period
1,867

 
227

 
(812
)
 
4,897

Less income tax effect
(515
)
 
(163
)
 
106

 
(745
)
 Reclassification to net earnings for (gains) losses realized
290

 
(508
)
 
815

 
(966
)
Less income tax effect
391

 
84

 
370

 
154

Marketable securities
 

 
 

 
 
 
 
Losses arising during the period
(40
)
 
(132
)
 
(66
)
 
(33
)
Less income tax effect
15

 
51

 
25

 
11

 Reclassification to net earnings for gains realized

 

 
(87
)
 

Less income tax effect

 

 
33

 

Supplemental Executive Retirement Plan (“SERP”)
 

 
 

 
 
 
 
Plan amendment

 
4,529

 

 
4,529

Less income tax effect

 
(1,733
)
 

 
(1,733
)
Actuarial loss amortization
235

 
277

 
469

 
554

Prior service (credit) cost amortization
(58
)
 
156

 
(116
)
 
311

Less income tax effect
(68
)
 
(165
)
 
(135
)
 
(330
)
Total comprehensive income
4,681

 
45,716

 
23,229

 
36,428

Less comprehensive income attributable to noncontrolling interests:
 

 
 

 
 
 
 
Net earnings
318

 
837

 
232

 
2,021

Foreign currency translation adjustment
(284
)
 
(561
)
 
117

 
(209
)
Amounts attributable to noncontrolling interests
34

 
276

 
349

 
1,812

Comprehensive income attributable to Guess?, Inc.
$
4,647

 
$
45,440

 
$
22,880

 
$
34,616


See accompanying notes to condensed consolidated financial statements.


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GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
 
Aug 2,
2014
 
Aug 3,
2013
Cash flows from operating activities:
 

 
 

Net earnings
$
20,085

 
$
51,803

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization of property and equipment
41,363

 
43,327

Amortization of intangible assets
1,291

 
981

Share-based compensation expense
7,613

 
5,999

Unrealized forward contract gains
(1,047
)
 
(1,601
)
Net loss on disposition of property and equipment and long-term assets
5,986

 
7,290

Other items, net
847

 
(3,215
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
42,381

 
38,950

Inventories
(43,485
)
 
(33,156
)
Prepaid expenses and other assets
(8,484
)
 
4,752

Accounts payable and accrued expenses
(30,286
)
 
(15,890
)
Deferred rent and lease incentives
(442
)
 
(2,354
)
Other long-term liabilities
(5,459
)
 
5,281

Net cash provided by operating activities
30,363

 
102,167

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(32,316
)
 
(40,445
)
Changes in other assets
319

 
7,804

Proceeds from sale and maturity of investments
598

 
1,826

Acquisition of businesses, net of cash acquired
(309
)
 
(653
)
Net cash settlement of forward contracts
(842
)
 
1,468

Net cash used in investing activities
(32,550
)
 
(30,000
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
786

 
1,294

Repayment of borrowings and capital lease obligations
(3,720
)
 
(1,002
)
Dividends paid
(38,455
)
 
(34,100
)
Noncontrolling interest capital contributions

 
521

Issuance of common stock, net of nonvested award repurchases
619

 
3,259

Excess tax benefits from share-based compensation
148

 
221

Purchase of treasury stock

 
(22,099
)
Net cash used in financing activities
(40,622
)
 
(51,906
)
Effect of exchange rates on cash and cash equivalents
1,383

 
(5,557
)
Net change in cash and cash equivalents
(41,426
)
 
14,704

Cash and cash equivalents at beginning of period
502,945

 
329,021

Cash and cash equivalents at end of period
$
461,519

 
$
343,725

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
870

 
$
537

Income taxes paid
$
46,208

 
$
50,986

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 2, 2014
(unaudited) 
(1)
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Guess?, Inc. and its subsidiaries (the “Company”) contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of August 2, 2014 and February 1, 2014, the condensed consolidated statements of income and comprehensive income for the three and six months ended August 2, 2014 and August 3, 2013, and the condensed consolidated statements of cash flows for the six months ended August 2, 2014 and August 3, 2013. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six months ended August 2, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.
The three and six months ended August 2, 2014 had the same number of days as the three and six months ended August 3, 2013. All references herein to “fiscal 2015,” “fiscal 2014” and “fiscal 2013” represent the results of the 52-week fiscal year ending January 31, 2015, the 52-week fiscal year ended February 1, 2014 and the 53-week fiscal year ended February 2, 2013, respectively. 
New Accounting Guidance
In July 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar loss or a tax credit carryforward, if specific criteria are met. The Company adopted this guidance effective February 2, 2014. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In April 2014, the FASB issued authoritative guidance which raises the threshold for disposals to qualify as discontinued operations. Under this new guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following disposal and retained equity method investments in a discontinued operation. This guidance is effective for fiscal periods beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective

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adoption. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2014, the FASB issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.
(2)
Earnings Per Share
Basic earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share represents net earnings attributable to common stockholders divided by the weighted average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, earnings attributable to nonvested restricted stockholders are excluded from net earnings attributable to common stockholders for purposes of calculating basic and diluted earnings per common share. However, net losses are not allocated to nonvested restricted stockholders since they are not contractually obligated to share in the losses of the Company.
The computation of basic and diluted net earnings per common share attributable to common stockholders is as follows (in thousands, except per share data):
 
Three Months Ended
 
Six Months Ended
 
Aug 2, 2014
 
Aug 3, 2013
 
Aug 2, 2014
 
Aug 3, 2013
Net earnings attributable to Guess?, Inc.
$
21,954

 
$
39,866

 
$
19,853

 
$
49,782

Less net earnings attributable to nonvested restricted stockholders
167

 
351

 
292

 
410

Net earnings attributable to common stockholders
$
21,787

 
$
39,515

 
$
19,561

 
$
49,372

 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
84,573

 
84,080

 
84,536

 
84,331

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units
226

 
267

 
229

 
232

Weighted average common shares used in diluted computations
84,799

 
84,347

 
84,765

 
84,563

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders:
 

 
 

 
 
 
 
Basic
$
0.26

 
$
0.47

 
$
0.23

 
$
0.59

Diluted
$
0.26

 
$
0.47

 
$
0.23

 
$
0.58

For the three months ended August 2, 2014 and August 3, 2013, equity awards granted for 1,666,111 and 1,061,684, respectively, of the Company’s common shares and for the six months ended August 2, 2014 and August 3, 2013, equity awards granted for 1,549,291 and 1,412,576, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common share equivalents outstanding because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being antidilutive. For the three and six months ended August 2, 2014, the Company also excluded 259,700 nonvested stock units which are subject to the achievement of performance-based vesting conditions from the computation of diluted weighted average common shares and common share equivalents outstanding because the performance condition had not yet been achieved as of August 2, 2014. For the three and six months ended August 3, 2013, the Company excluded 243,700 nonvested stock units which were subject to the achievement of performance-based vesting conditions from the computation of diluted

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weighted average common shares and common share equivalents outstanding because the performance condition had not yet been achieved as of August 3, 2013.
On March 14, 2011, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to $250 million of the Company’s common stock (the “2011 Share Repurchase Program”). On June 26, 2012, the Company’s Board of Directors authorized a new program to repurchase, from time-to-time and as market and business conditions warrant, up to $500 million of the Company’s common stock (the “2012 Share Repurchase Program”). The 2012 Share Repurchase Program was in addition to the 2011 Share Repurchase Program. Repurchases under programs may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under programs and programs may be discontinued at any time, without prior notice. There were no share repurchases under the 2012 Share Repurchase Program during the three and six months ended August 2, 2014. During the six months ended August 3, 2013, the Company repurchased 882,551 shares under the 2011 and 2012 Share Repurchase Programs at an aggregate cost of $22.1 million. All such share repurchases were made during the three months ended May 4, 2013. As of August 2, 2014, the Company had remaining authority under the 2012 Share Repurchase Program to purchase $495.8 million of its common stock and no remaining authority to purchase shares under the 2011 Share Repurchase Program.

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(3)
Stockholders’ Equity and Redeemable Noncontrolling Interests
A reconciliation of the total carrying amount of total stockholders’ equity, Guess?, Inc. stockholders’ equity and stockholders’ equity attributable to nonredeemable and redeemable noncontrolling interests for the fiscal year ended February 1, 2014 and six months ended August 2, 2014 is as follows (in thousands):
 
Stockholders’ Equity
 
 
 
Guess?, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
 
Redeemable
Noncontrolling
Interests
Balance at February 2, 2013
$
1,086,992

 
$
13,876

 
$
1,100,868

 
$
3,144

Net earnings
153,434

 
4,277

 
157,711

 

Foreign currency translation adjustment
(17,621
)
 
(804
)
 
(18,425
)
 
(104
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($237)
1,669

 

 
1,669

 

Loss on marketable securities, net of income tax of $4
(7
)
 

 
(7
)
 

SERP plan amendment, prior service cost amortization and actuarial valuation gain (loss) and related amortization, net of income tax of ($2,963)
4,619

 

 
4,619

 

Issuance of common stock under stock compensation plans, net of tax effect
2,404

 

 
2,404

 

Issuance of stock under Employee Stock Purchase Plan
980

 

 
980

 

Share-based compensation
13,949

 

 
13,949

 

Dividends
(68,215
)
 

 
(68,215
)
 

Share repurchases
(22,099
)
 

 
(22,099
)
 

Noncontrolling interest capital contribution

 

 

 
1,199

Noncontrolling interest capital distribution

 
(1,877
)
 
(1,877
)
 

Redeemable noncontrolling interest redemption value adjustment
(1,591
)
 

 
(1,591
)
 
1,591

Balance at February 1, 2014
$
1,154,514

 
$
15,472

 
$
1,169,986

 
$
5,830

Net earnings
19,853

 
232

 
20,085

 

Foreign currency translation adjustment
2,425

 
117

 
2,542

 
65

Gain on derivative financial instruments designated as cash flow hedges, net of income tax of $476
479

 

 
479

 

Loss on marketable securities, net of income tax of $58
(95
)
 

 
(95
)
 

SERP prior service credit and actuarial valuation amortization, net of income tax of ($135)
218

 

 
218

 

Issuance of common stock under stock compensation plans, net of tax effect
(93
)
 

 
(93
)
 

Issuance of stock under Employee Stock Purchase Plan
635

 

 
635

 

Share-based compensation
7,613

 

 
7,613

 

Dividends
(38,486
)
 

 
(38,486
)
 

Redeemable noncontrolling interest redemption value adjustment
427

 

 
427

 
(427
)
Balance at August 2, 2014
$
1,147,490

 
$
15,821

 
$
1,163,311

 
$
5,468


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Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of related income taxes, for the three and six months ended August 2, 2014 and August 3, 2013 are as follows (in thousands):
 
Three Months Ended Aug 2, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at May 3, 2014
$
14,846

 
$
(1,667
)
 
$
33

 
$
(6,679
)
 
$
6,533

Gains (losses) arising during the period
(19,424
)
 
1,352

 
(25
)
 

 
(18,097
)
Reclassification to net earnings for losses realized

 
681

 

 
109

 
790

Net other comprehensive income (loss)
(19,424
)
 
2,033

 
(25
)
 
109

 
(17,307
)
Balance at August 2, 2014
$
(4,578
)
 
$
366

 
$
8

 
$
(6,570
)
 
$
(10,774
)
 
Six Months Ended Aug 2, 2014
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at February 1, 2014
$
(7,003
)
 
$
(113
)
 
$
103

 
$
(6,788
)
 
$
(13,801
)
Gains (losses) arising during the period
2,425

 
(706
)
 
(41
)
 

 
1,678

Reclassification to net earnings for (gains) losses realized

 
1,185

 
(54
)
 
218

 
1,349

Net other comprehensive income (loss)
2,425

 
479

 
(95
)
 
218

 
3,027

Balance at August 2, 2014
$
(4,578
)
 
$
366

 
$
8

 
$
(6,570
)
 
$
(10,774
)
 
Three Months Ended Aug 3, 2013
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at May 4, 2013
$
(14,148
)
 
$
1,918

 
$
169

 
$
(11,140
)
 
$
(23,201
)
Gains (losses) arising during the period
2,951

 
64

 
(81
)
 
2,796

 
5,730

Reclassification to net earnings for (gains) losses realized

 
(424
)
 

 
268

 
(156
)
Net other comprehensive income (loss)
2,951

 
(360
)
 
(81
)
 
3,064

 
5,574

Balance at August 3, 2013
$
(11,197
)
 
$
1,558

 
$
88

 
$
(8,076
)
 
$
(17,627
)
 
Six Months Ended Aug 3, 2013
 
Foreign Currency Translation Adjustment
 
Derivative Financial Instruments Designated as Cash Flow Hedges
 
Marketable Securities
 
SERP
 
Total
Balance at February 2, 2013
$
10,618

 
$
(1,782
)
 
$
110

 
$
(11,407
)
 
$
(2,461
)
Gains (losses) arising during the period
(21,815
)
 
4,152

 
(22
)
 
2,796

 
(14,889
)
Reclassification to net earnings for (gains) losses realized

 
(812
)
 

 
535

 
(277
)
Net other comprehensive income (loss)
(21,815
)
 
3,340

 
(22
)
 
3,331

 
(15,166
)
Balance at August 3, 2013
$
(11,197
)
 
$
1,558

 
$
88

 
$
(8,076
)
 
$
(17,627
)

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Details on reclassifications out of accumulated other comprehensive income (loss) to net earnings during the three and six months ended August 2, 2014 and August 3, 2013 are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
Location of
(Gain) Loss
Reclassified from
Accumulated OCI
into Earnings 
 
Aug 2, 2014
 
Aug 3, 2013
 
Aug 2, 2014
 
Aug 3, 2013
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
   Foreign exchange currency contracts
$
265

 
$
(393
)
 
$
759

 
$
(872
)
 
Cost of sales
   Foreign exchange currency contracts
25

 
(115
)
 
56

 
(94
)
 
Other income/expense
      Less income tax effect
391

 
84

 
370

 
154

 
Income tax expense
 
681

 
(424
)
 
1,185

 
(812
)
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
   Available-for-sale securities

 

 
(87
)
 

 
Other income/expense
      Less income tax effect

 

 
33

 

 
Income tax expense
 

 

 
(54
)
 

 
 
SERP:
 
 
 
 
 
 
 
 
 
   Actuarial loss amortization
235

 
277

 
469

 
554

 
(1) 
   Prior service (credit) cost amortization
(58
)
 
156

 
(116
)
 
311

 
(1) 
      Less income tax effect
(68
)
 
(165
)
 
(135
)
 
(330
)
 
Income tax expense
 
109

 
268

 
218

 
535

 
 
Total reclassifications during the period
$
790

 
$
(156
)
 
$
1,349

 
$
(277
)
 
 
__________________________________
(1)
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. Refer to Note 13 for further information.
Redeemable Noncontrolling Interests
The Company is party to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest from the acquisition of its majority-owned subsidiary, Guess Sud SAS (“Guess Sud”). The put arrangement for Guess Sud, representing 40% of the total outstanding equity interest of that subsidiary, may be exercised at the discretion of the noncontrolling interest holders by providing written notice to the Company any time after January 30, 2012. The put arrangement is recorded on the balance sheet at its expected redemption value based on a method which approximates fair value and classified as a redeemable noncontrolling interest outside of permanent equity. The redemption value of the Guess Sud redeemable put arrangement was $4.3 million and $4.7 million at August 2, 2014 and February 1, 2014, respectively.
During fiscal 2014, the Company entered into a majority-owned joint venture to establish Guess Brasil Comércio e Distribuição S.A. (“Guess Brazil”). The Company funded $1.8 million to obtain a 60% interest in Guess Brazil and is subject to a put arrangement with respect to the common securities that represent the remaining noncontrolling interest. The put arrangement may be exercised at the discretion of the noncontrolling interest holder by providing written notice to the Company beginning in fiscal 2020, or sooner in certain limited circumstances, and every third anniversary thereafter subject to certain time restrictions. The redemption value of the Guess Brazil put arrangement is based on a multiple of Guess Brazil’s earnings before interest, taxes, depreciation and amortization subject to certain adjustments. The redemption value of the Guess Brazil redeemable put arrangement was $1.2 million and $1.1 million at August 2, 2014 and February 1, 2014, respectively.

10

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(4)
Accounts Receivable
Accounts receivable is summarized as follows (in thousands):
 
Aug 2, 2014
 
Feb 1, 2014
Trade
$
258,446

 
$
291,411

Royalty
8,629

 
16,372

Other
5,172

 
8,174

 
272,247

 
315,957

Less allowance for doubtful accounts
38,341

 
39,392

 
$
233,906

 
$
276,565

Accounts receivable consists of trade receivables relating primarily to the Company’s wholesale business in Europe, and to a lesser extent, to its wholesale businesses in North America and Asia, and royalty receivables relating to its licensing operations. The accounts receivable allowance includes allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. Retail sales returns allowances are included in accrued expenses.
(5)
Inventories
Inventories consist of the following (in thousands):
 
Aug 2, 2014
 
Feb 1, 2014
Raw materials
$
14,778

 
$
10,585

Work in progress
175

 
977

Finished goods
377,434

 
339,337

 
$
392,387

 
$
350,899

As of August 2, 2014 and February 1, 2014, the Company had an allowance to write-down inventories to the lower of cost or market of $21.8 million and $23.4 million, respectively.
(6)
Restructuring Charges
During the first quarter of fiscal 2014, the Company implemented plans to streamline its structure and reduce expenses in both Europe and North America. During the second quarter of fiscal 2014, the Company expanded these plans to include the consolidation and streamlining of certain operations in Europe and Asia. There were no restructuring charges incurred during the three and six months ended August 2, 2014 as the actions under these plans were substantially completed during fiscal 2014. The Company does not expect significant future cash-related severance and lease termination charges related to these plans to be incurred during the remainder of fiscal 2015. During the three and six months ended August 3, 2013, the Company incurred restructuring charges of $6.1 million and $8.5 million, respectively, related primarily to severance, impairment and lease termination costs. As of August 2, 2014, the Company had a balance of approximately $1.8 million in accrued expenses for amounts expected to be paid during the remainder of fiscal 2015. At February 1, 2014, the Company had a balance of approximately $4.6 million in accrued expenses related to these restructuring activities.

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The following table summarizes the components of the restructuring activities during the fiscal year ended February 1, 2014 and six months ended August 2, 2014 (in thousands):
 
Severance
 
Impairment and Lease Termination
 
Total
Balance at February 2, 2013
$

 
$

 
$

Charges to operations
9,206

 
3,236

 
12,442

Non-cash write-offs

 
(1,717
)
 
(1,717
)
Cash payments
(4,567
)
 
(1,492
)
 
(6,059
)
Foreign currency and other adjustments
(61
)
 
(27
)
 
(88
)
Balance at February 1, 2014
$
4,578

 
$

 
$
4,578

Cash payments
(1,892
)
 

 
(1,892
)
Foreign currency and other adjustments
(846
)
 

 
(846
)
Balance at August 2, 2014
$
1,840

 
$

 
$
1,840

(7)
Income Taxes
Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year. The Company’s effective income tax rate increased to 35.1% for the six months ended August 2, 2014 from 33.0% for the six months ended August 3, 2013.
The Company accrues an amount for its estimate of additional income tax liability which the Company, more likely than not, could incur as a result of the ultimate resolution of income tax audits (“uncertain tax positions”). The Company reviews and updates the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.
The Company had aggregate accruals for uncertain tax positions, including penalties and interest, of $12.0 million and $11.4 million as of August 2, 2014 and February 1, 2014, respectively. The change in the accrual balance from February 1, 2014 to August 2, 2014 resulted from the completion of tax audits during the six months ended August 2, 2014.
(8)
Segment Information
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: North American Retail, Europe, Asia, North American Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before restructuring charges, if any. The Company believes this segment reporting reflects how its five business segments are managed and each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The North American Retail segment includes the Company’s retail and e-commerce operations in North America and its retail operations in Central and South America. The Europe segment includes the Company’s wholesale, retail and e-commerce operations in Europe and the Middle East. The Asia segment includes the Company’s wholesale, retail and e-commerce operations in Asia. The North American Wholesale segment includes the Company’s wholesale operations in North America and Central and South America. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal.

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Net revenue and earnings (loss) from operations are summarized as follows for the three and six months ended August 2, 2014 and August 3, 2013 (in thousands):
    
 
Three Months Ended
 
Six Months Ended
 
Aug 2, 2014
 
Aug 3, 2013
 
Aug 2, 2014
 
Aug 3, 2013
Net revenue:
 

 
 

 
 
 
 
North American Retail
$
244,000

 
$
254,313

 
$
472,344

 
$
492,624

Europe
235,260

 
250,372

 
394,418

 
415,764

Asia
64,267

 
65,852

 
134,385

 
136,984

North American Wholesale
38,252

 
41,357

 
77,560

 
85,186

Licensing
26,792

 
27,118

 
52,405

 
57,368

Total net revenue
$
608,571

 
$
639,012

 
$
1,131,112

 
$
1,187,926

Earnings (loss) from operations:
 

 
 

 
 
 
 
North American Retail
$
(4,662
)
 
$
10,390

 
$
(13,061
)
 
$
6,157

Europe
24,513

 
39,275

 
17,881

 
34,057

Asia
2,264

 
5,039

 
5,617

 
12,003

North American Wholesale
5,167

 
8,478

 
12,920

 
17,127

Licensing
24,909

 
25,101

 
47,630

 
51,305

Corporate Overhead
(22,333
)
 
(21,374
)
 
(43,106
)
 
(40,078
)
Restructuring Charges

 
(6,129
)
 

 
(8,466
)
Total earnings from operations
$
29,858

 
$
60,780

 
$
27,881

 
$
72,105

Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year. Restructuring charges incurred during the three and six months ended August 3, 2013 related to plans to streamline and consolidate the Company’s operations and reduce expenses in North America, Europe and Asia. Refer to Note 6 for more information regarding these restructuring charges.
(9)
Borrowings and Capital Lease Obligations
Borrowings and capital lease obligations are summarized as follows (in thousands):
 
Aug 2, 2014
 
Feb 1, 2014
European capital lease, maturing quarterly through 2016
$
7,294

 
$
8,637

Other
1,438

 
3,103

 
8,732

 
11,740

Less current installments
1,997

 
4,160

Long-term capital lease obligations and other debt
$
6,735

 
$
7,580

Capital Lease
The Company entered into a capital lease in December 2005 for a building in Florence, Italy. As of August 2, 2014, the capital lease obligation was $7.3 million. The Company entered into a separate interest rate swap agreement designated as a non-hedging instrument that resulted in a swap fixed rate of 3.55%. This interest rate swap agreement matures in 2016 and converts the nature of the capital lease obligation from Euribor floating-rate debt to fixed-rate debt. The fair value of the interest rate swap liability as of August 2, 2014 was approximately $0.4 million.
Credit Facilities
On July 6, 2011, the Company entered into a five-year senior secured revolving credit facility with JPMorgan Chase Bank, N.A., Bank of America, N.A. and the other lenders party thereto (the “Credit Facility”) which provided for a $200 million revolving multicurrency line of credit. The Credit Facility is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits. It may be used for working capital and other general corporate purposes.

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On August 31, 2012, the Company increased its borrowing capacity under the Credit Facility from $200 million to $300 million by exercising the accordion feature in the Credit Facility pursuant to a Lender Joinder Agreement with the lenders party thereto. Also on August 31, 2012, the Company entered into an Amendment to the Credit Facility with the lenders party thereto to provide for (i) greater flexibility in certain of the Company’s covenants under the Credit Facility and (ii) access to a new $100 million accordion feature, subject to certain conditions and the willingness of existing or new lenders to assume such increased amount. As of August 2, 2014, the Company had $1.7 million in outstanding standby letters of credit, no outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Company, through its European subsidiaries, maintains short-term uncommitted borrowing agreements, primarily for working capital purposes, with various banks in Europe. The majority of the borrowings under these agreements are secured by specific accounts receivable balances. Based on the applicable accounts receivable balances as of August 2, 2014, the Company could have borrowed up to $112.8 million under these agreements. As of August 2, 2014, the Company had no outstanding borrowings and $1.6 million in outstanding documentary letters of credit under these agreements. The agreements are denominated primarily in euros and provide for annual interest rates ranging from 0.5% to 3.0%. The maturities of any short-term borrowings under these arrangements are generally linked to the credit terms of the underlying accounts receivable that secure the borrowings. With the exception of one facility for up to $47.0 million that has a minimum net equity requirement, there are no other financial ratio covenants.
Other
From time-to-time, the Company will obtain other financing in foreign countries for working capital to finance its local operations.
(10)
Share-Based Compensation
The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three and six months ended August 2, 2014 and August 3, 2013 (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
Aug 2, 2014
 
Aug 3, 2013
 
Aug 2, 2014
 
Aug 3, 2013
Stock options
$
620

 
$
684

 
$
1,076

 
$
1,257

Nonvested stock awards/units
3,439

 
2,994

 
6,377

 
4,599

Employee Stock Purchase Plan
97

 
73

 
160

 
143

Total share-based compensation expense
$
4,156

 
$
3,751

 
$
7,613

 
$
5,999

Unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options and nonvested stock awards/units totaled approximately $4.5 million and $23.9 million, respectively, as of August 2, 2014. This cost is expected to be recognized over a weighted average period of 1.7 years. The weighted average fair values of stock options granted during the six months ended August 2, 2014 and August 3, 2013 were $6.23 and $6.05, respectively. 
Grants
On April 2, 2014, the Company made an annual grant of 365,600 stock options and 301,200 nonvested stock awards/units to its employees. On April 3, 2013, the Company made an annual grant of 416,500 stock options and 408,400 nonvested stock awards/units to its employees.
Performance Awards
On July 11, 2013, the Company granted 100,000 nonvested stock units to Paul Marciano, the Company’s Chief Executive Officer and Vice Chairman of the Board, in connection with an employment agreement entered into between the Company and Mr. Marciano. The nonvested stock units had an initial vesting period of seven months followed by two annual vesting periods, which were subject to the achievement of performance-based vesting conditions for the last three quarters of fiscal 2014 and continued service vesting conditions through the vesting periods. The Company also granted a target of 143,700 nonvested stock units to Mr. Marciano, of which

14

Table of Contents

approximately 84% are expected to vest based on the achievement of performance-based conditions for the last three quarters of fiscal 2014 subject to continued service vesting conditions through the vesting date. Such shares are scheduled to vest on February 1, 2016.
On April 8, 2014, the Company granted 100,000 nonvested stock units to Mr. Marciano which have an initial vesting period of ten months followed by two annual vesting periods, subject to the achievement of performance-based vesting conditions for fiscal 2015 and continued service vesting conditions through the vesting periods. The Company also granted a target of 159,700 nonvested stock units to Mr. Marciano on April 8, 2014. The number of shares that will ultimately vest will equal 0% to 150% of the target number of shares, subject to the achievement of performance-based vesting conditions for fiscal 2015 and continued service vesting conditions through the vesting date. Such shares are scheduled to vest on January 31, 2017.
(11)
Related Party Transactions
The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities affiliated with trusts for the respective benefit of Paul Marciano, who is an executive of the Company, Maurice Marciano, Chairman of the Board, Armand Marciano, their brother and former executive of the Company, and certain of their children (the “Marciano Trusts”).
Leases
The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were four of these leases in effect at August 2, 2014 with expiration dates ranging from 2015 to 2020.
Aggregate rent and property tax expense under these related party leases was $2.9 million for each of the six months ended August 2, 2014 and August 3, 2013. The Company believes the related party lease terms have not been significantly affected by the fact that the Company and the lessors are related.
Aircraft Arrangements
The Company periodically charters aircraft owned by MPM Financial, LLC (“MPM Financial”), an entity affiliated with the Marciano Trusts, through MPM Financial and independent third party management companies contracted by MPM Financial to manage its aircraft. Under an informal arrangement with MPM Financial and the third party management companies, the Company has chartered, and may from time-to-time continue to charter, aircraft owned by MPM Financial at a discount from the third party management companies’ preferred customer hourly charter rates. The total fees paid under these arrangements for the six months ended August 2, 2014 were approximately $0.9 million. During the six months ended August 3, 2013, the total fees paid under these arrangements were minimal.
Consulting Arrangement
After serving for over 30 years as an executive and leader for Guess?, Inc., co-founder Maurice Marciano elected to retire from his position as executive Chairman of the Board and as an employee of the Company upon the expiration of his employment agreement on January 28, 2012. Mr. Marciano continues to serve the Company as its non-executive Chairman of the Board. In addition, under the terms of his previously existing employment agreement, the Company and Mr. Marciano entered into a two-year consulting agreement (the “Marciano Consulting Agreement”) under which Mr. Marciano provided certain consulting services to the Company, including advice and counsel to the Company’s Chief Executive Officer and other senior executives. The Marciano Consulting Agreement, which had a two-year term that commenced on January 28, 2012, provided for consulting fees of $500,000 per year and continued automobile use in a manner consistent with past practice. In January 2014, the Company extended the Marciano Consulting Agreement for an additional one-year period. Total expenses incurred with respect to the Marciano Consulting Agreement were approximately $0.3 million for each of the six months ended August 2, 2014 and August 3, 2013.

15

Table of Contents

Other Transactions
From time-to-time, the Company utilizes a third-party agent named Harmony Collection, LLC to produce specific apparel products on behalf of the Company. Armand Marciano, brother of Maurice and Paul Marciano, is part owner and an executive of the parent company of Harmony Collection, LLC. The total payments made by the Company under this arrangement for the six months ended August 2, 2014 and August 3, 2013 were approximately $0.7 million and $0.8 million, respectively. The Company believes that the price and transaction terms have not been significantly affected by the relationship between the parties.
These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014.
(12)
Commitments and Contingencies
Leases
The Company leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through September 2031. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 2% to 12%, when specific sales volumes are exceeded. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through December 2018. As discussed in further detail in Note 9, the Company leases a building in Florence, Italy under a capital lease.
In March 2014, the Company amended its lease with respect to its primary U.S. distribution center based in Louisville, Kentucky to extend the term for an additional ten years, to 2024. The amendment also provides for two extension options for an additional period of five years each.
Litigation
On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and certain third-party licensees for the Company asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint sought injunctive relief, compensatory damages, including treble damages, and certain other relief. Complaints similar to those in the above action have also been filed by Gucci entities against the Company and certain of its subsidiaries in the Court of Milan, Italy, the Court of Paris, France and the Intermediate People’s Court of Nanjing, China. The three week bench trial in the U.S. matter concluded on April 19, 2012, with the court issuing a preliminary ruling on May 21, 2012 and a final ruling on July 19, 2012. Although the plaintiff was seeking compensation in the U.S. matter in the form of damages of $26 million and an accounting of profits of $99 million, the final ruling provided for monetary damages of $2.3 million against the Company and $2.3 million against certain of its licensees. The court also granted narrow injunctions in favor of the plaintiff for certain of the claimed infringements. On August 20, 2012, the appeal period expired without any party having filed an appeal, rendering the judgment final. On May 2, 2013, the Court of Milan ruled in favor of the Company in the Milan, Italy matter. In the ruling, the Court rejected all of the plaintiff’s claims and ordered the cancellation of three of the plaintiff’s Italian and four of the plaintiff’s European Community trademark registrations. On June 10, 2013, the plaintiff appealed the Court’s ruling in the Milan matter. In the China matter, the Intermediate People’s Court of Nanjing, China issued a ruling on November 8, 2013 granting an injunction in favor of the plaintiff for certain of the claimed infringements on handbags and small leather goods and awarding the plaintiff statutory damages in the amount of approximately $80,000. The Company strongly disagrees with the Court’s decision and has appealed the ruling. The judgment in the China matter is stayed pending the appeal, which was heard in May 2014. The France matter in the Court of Paris is currently scheduled to be heard in September 2014.

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On August 25, 2006, Franchez Isaguirre, a former employee of the Company, filed a complaint in the Superior Court of California, County of Los Angeles alleging violations by the Company of California wage and hour laws. The complaint was subsequently amended, adding a second former employee as an additional named party. The plaintiffs purport to represent a class of similarly situated employees in California who allegedly had been injured by not being provided adequate meal and rest breaks. The complaint seeks unspecified compensatory damages, statutory penalties, attorney’s fees and injunctive and declaratory relief. On June 9, 2009, the Court certified the class but immediately stayed the case pending the resolution of a separate California Supreme Court case on the standards of class treatment for meal and rest break claims. Following the Supreme Court ruling, the Superior Court denied the Company’s motions to decertify the class and to narrow the class in January 2013 and June 2013, respectively. The Company subsequently petitioned to have the Court’s decision not to narrow the class definition reviewed. That petition was ultimately denied by the California Supreme Court in April 2014. No trial date has been set.
Although the Company believes that it has a strong position and will continue to vigorously defend each of these remaining matters, it is unable to predict with certainty whether or not these efforts will ultimately be successful or whether the outcomes will have a material impact on the Company’s financial position or results of operations.
The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of August 2, 2014 or February 1, 2014 related to any of the Company’s legal proceedings.
(13)
Supplemental Executive Retirement Plan
The components of net periodic pension cost for the three and six months ended August 2, 2014 and August 3, 2013 were as follows (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
Aug 2, 2014
 
Aug 3, 2013
 
Aug 2, 2014
 
Aug 3, 2013
Interest cost
$
572

 
$
586

 
$
1,144

 
$
1,172

Net amortization of unrecognized prior service (credit) cost
(58
)
 
156

 
(116
)
 
311

Net amortization of actuarial losses
235

 
277

 
469

 
554

Net periodic defined benefit pension cost
$
749

 
$
1,019

 
$
1,497

 
$
2,037

In July 2013, the Company amended the SERP to limit the amount of eligible wages under the plan that count toward the SERP benefit for the active participant. As a result, the projected benefit obligation and unrecognized prior service cost were reduced by $4.5 million during fiscal 2014.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made, and may continue to make, periodic payments into insurance policies held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The amount of any future payments into the insurance policies may vary, depending on any changes to the estimates of final annual compensation levels and investment performance of the trust. The cash surrender values of the insurance policies were $53.6 million and $51.4 million as of August 2, 2014 and February 1, 2014, respectively, and were included in other assets in the Company’s condensed consolidated balance sheets. As a result of changes in the value of the insurance policy investments, the Company recorded unrealized gains of $0.7 million and $2.2 million in other income during the three and six months ended August 2, 2014, respectively, and unrealized gains of $1.1 million and $2.6 million in other income during the three and six months ended August 3, 2013, respectively. The projected benefit obligation was $55.6 million and $54.7 million as of August 2, 2014 and February 1, 2014, respectively, and was included in accrued expenses and other long-term liabilities in the Company’s condensed consolidated balance sheets depending on the expected timing of payments. SERP benefit payments of $0.3 million were made during the three and six months ended August 2, 2014.

17

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(14)
Fair Value Measurements
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of August 2, 2014 and February 1, 2014 (in thousands):
 
 
Fair Value Measurements at Aug 2, 2014
 
Fair Value Measurements at Feb 1, 2014
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$

 
$
3,248

 
$

 
$
3,248

 
$

 
$
2,116

 
$

 
$
2,116

Available-for-sale securities
 
5,066

 

 

 
5,066

 
5,732

 

 

 
5,732

Total
 
$
5,066

 
$
3,248

 
$

 
$
8,314

 
$
5,732

 
$
2,116

 
$

 
$
7,848

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$

 
$
342

 
$

 
$
342

 
$

 
$
1,712

 
$

 
$
1,712

Interest rate swap
 

 
440

 

 
440

 

 
581

 

 
581

Deferred compensation obligations
 

 
8,305

 

 
8,305

 

 
7,498

 

 
7,498

Total
 
$

 
$
9,087

 
$

 
$
9,087

 
$

 
$
9,791

 
$

 
$
9,791

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended August 2, 2014 or during the year ended February 1, 2014.
The fair values of the Companys available-for-sale securities are based on quoted prices. The fair value of the interest rate swaps are based upon inputs corroborated by observable market data. Foreign exchange forward contracts are entered into by the Company principally to hedge the future payment of inventory and intercompany transactions by non-U.S. subsidiaries. Periodically, the Company may also use foreign currency forward contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries. The fair values of the Companys foreign exchange forward contracts are based on quoted foreign exchange forward rates at the reporting date. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.
Available-for-sale securities are recorded at fair value and are included in short-term investments and other assets in the accompanying condensed consolidated balance sheets depending on their respective maturity dates. At August 2, 2014, available-for-sale securities consisted of $5.0 million of corporate bonds which mature in September 2014 and $0.1 million of marketable equity securities. During the six months ended August 2, 2014, the Company received proceeds of $0.6 million from the sale of marketable equity securities which were classified as available-for-sale securities. The sale of marketable equity securities was made during the three months ended May 4, 2013. The cost of securities sold was based on the specific identification method. Gains recognized during the six months ended August 2, 2014 were $0.1 million as a result of this sale and were included in other income and expense. Unrealized gains (losses), net of taxes, are included as a component of stockholders equity and comprehensive income (loss). The accumulated unrealized gains, net of taxes, included in accumulated other

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comprehensive income (loss) related to available-for-sale securities owned by the Company at August 2, 2014 were minimal.
At February 1, 2014, available-for-sale securities consisted of $5.1 million of corporate bonds and $0.6 million of marketable equity securities. The accumulated unrealized gains, net of taxes, included in accumulated other comprehensive income (loss) related to available-for-sale securities owned by the Company at February 1, 2014 were $0.1 million.
The carrying amount of the Companys remaining financial instruments, which principally include cash and cash equivalents, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair values of the Companys debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Companys incremental borrowing rate. At August 2, 2014 and February 1, 2014, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on variable-rate debt including the capital lease obligation approximated rates currently available to the Company. 
Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers each individual store as an asset group for impairment testing, which is the lowest level at which individual cash flows can be identified. The asset group includes store leasehold improvements, furniture, fixtures and equipment, computer hardware and software and certain long-term security deposits and lease acquisition costs. The Company reviews retail stores for impairment risk once the locations have been opened for at least one year, or sooner as changes in circumstances require. The Company believes that waiting one year allows a store to reach a maturity level where a more comprehensive analysis of financial performance can be performed.
An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the assets ability to continue to generate earnings from operations and positive cash flow in future periods or if significant changes in the Companys strategic business objectives and utilization of the assets occurred. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value, which is determined based on discounted future cash flows. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows. Future expected cash flows for store assets are based on managements estimates of future cash flows over the remaining lease period or expected life, if shorter. The Company considers historical trends, expected future business trends and other factors when estimating each stores future cash flow. The Company also considers factors such as: the local environment for each store location, including mall traffic and competition; the Companys ability to successfully implement strategic initiatives; and the ability to control variable costs such as cost of sales and payroll and, in some cases, renegotiate lease costs. The estimated cash flows used for this nonrecurring fair value measurement are considered a Level 3 input as defined above. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, there may be additional exposure to future impairment losses that could be material to the Companys results of operations.
The Company recorded impairment charges of $4.6 million and $4.8 million during the three and six months ended August 2, 2014, respectively, and $2.1 million and $3.1 million during the three and six months ended August 3, 2013, respectively, related primarily to the full impairment of certain under-performing retail stores in North America and Europe. These impairment charges, which exclude impairment charges incurred during the three and six months ended August 3, 2013 related to restructuring activities, were included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income for each of the respective periods. Refer to Note 6 for more information regarding impairment charges related to restructuring activities.

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(15)
Derivative Financial Instruments
Hedging Strategy
The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges.
The Company’s primary objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur primarily in Europe, Canada and South Korea are denominated in U.S. dollars and British pounds and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound denominated intercompany liabilities. In addition, certain operating expenses and tax liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. The Company enters into derivative financial instruments, including forward exchange contracts, to offset some but not all of the exchange risk on certain of these anticipated foreign currency transactions.
Periodically, the Company may also use foreign currency forward contracts to hedge the translation and economic exposures related to its net investments in certain of its international subsidiaries.
The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign currency forward contracts. As of August 2, 2014, credit risk has not had a significant effect on the fair value of the Company’s foreign currency contracts.
The Company also has interest rate swap agreements, which are not designated as hedges for accounting purposes, to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s variable-rate capital lease obligation, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 9 for further information. 
Hedge Accounting Policy
U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in other income and expense in the period in which the royalty expense is incurred.
U.S. dollar forward contracts are also used to hedge the net investments of certain of the Company’s international subsidiaries over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as net investment hedges, are recorded in foreign currency translation adjustment as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are not recognized in earnings until the sale or liquidation of the hedged net investment.
The Company also has foreign currency contracts that are not designated as hedging instruments for accounting purposes. Changes in fair value of foreign currency contracts not designated as hedging instruments are reported in net earnings as part of other income and expense.

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Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of August 2, 2014 and February 1, 2014 was as follows (in thousands):
 
 
Derivative
Balance Sheet
Location
 
Fair Value at
Aug 2, 2014
 
Fair Value at
Feb 1, 2014
ASSETS:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Other current assets
 
$
1,430

 
$
977

Derivatives not designated as hedging instruments:
 
 
 
 
 
 

Foreign exchange currency contracts
 
Other current assets
 
1,818

 
1,139

Total
 
 
 
$
3,248

 
$
2,116

LIABILITIES:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Accrued expenses
 
$
237

 
$
672

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts
 
Accrued expenses
 
105

 
1,040

Interest rate swaps
 
Other long-term liabilities
 
440

 
581

Total derivatives not designated as hedging instruments
 
 
 
545

 
1,621

Total
 
 
 
$
782

 
$
2,293

Derivatives Designated as Hedging Instruments
Cash Flow Hedges
During the six months ended August 2, 2014, the Company purchased U.S. dollar forward contracts in Canada and Europe totaling US$40.4 million and US$38.2 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of August 2, 2014, the Company had forward contracts outstanding for its European and Canadian operations of US$66.9 million and US$28.9 million, respectively, which are expected to mature over the next 13 months.

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The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings for the three and six months ended August 2, 2014 and August 3, 2013 (in thousands): 
 
Gain (Loss)
Recognized in
OCI
 
Location of
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings(1)
 
Gain (Loss)
Reclassified from
Accumulated OCI into
Earnings
 
Three Months
Ended
Aug 2, 2014
 
Three Months
Ended
Aug 3, 2013
 
 
Three Months
Ended
Aug 2, 2014
 
Three Months
Ended
Aug 3, 2013
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
1,866

 
$
247

 
Cost of sales
 
$
(265
)
 
$
393

Foreign exchange currency contracts
$
1

 
$
(20
)
 
Other income/expense
 
$
(25
)
 
$
115


 
Gain (Loss)
Recognized in
OCI
 
Location of
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings(1)
 
Gain (Loss)
Reclassified from
Accumulated OCI into
Earnings
 
Six Months
Ended
Aug 2, 2014
 
Six Months
Ended
Aug 3, 2013
 
 
Six Months
Ended
Aug 2, 2014
 
Six Months
Ended
Aug 3, 2013
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
(706
)
 
$
4,479

 
Cost of sales
 
$
(759
)
 
$
872

Foreign exchange currency contracts
$
(106
)
 
$
418

 
Other income/expense
 
$
(56
)
 
$
94

 __________________________________
(1)
The ineffective portion was immaterial during the three and six months ended August 2, 2014 and August 3, 2013 and was recorded in net earnings and included in interest income/expense.
As of August 2, 2014, accumulated other comprehensive income (loss) included a net unrealized gain of approximately $0.4 million, net of tax, of which $0.3 million will be recognized in cost of product sales or other income over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values.
The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (loss) (in thousands):
 
Three Months Ended
 
Six Months Ended
 
Aug 2,
2014
 
Aug 3,
2013
 
Aug 2,
2014
 
Aug 3,
2013
Beginning balance gain (loss)
$
(1,667
)
 
$
1,918

 
$
(113
)
 
$
(1,782
)
Net gains (losses) from changes in cash flow hedges
1,352

 
64

 
(706
)
 
4,152

Net (gains) losses reclassified to earnings
681

 
(424
)
 
1,185

 
(812
)
Ending balance gain
$
366

 
$
1,558

 
$
366

 
$
1,558

At February 1, 2014, the Company had forward contracts outstanding for its European and Canadian operations of US$87.1 million and US$15.2 million, respectively, that were designated as cash flow hedges.
Derivatives Not Designated as Hedging Instruments
As of August 2, 2014, the Company had euro foreign currency contracts to purchase US$109.4 million expected to mature over the next 13 months and Canadian dollar foreign currency contracts to purchase US$11.5 million expected to mature over the next four months.

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The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as hedging instruments in other income and expense for the three and six months ended August 2, 2014 and August 3, 2013 (in thousands):
 
Location of
Gain (Loss)
Recognized in
Earnings
 
Gain (Loss)
Recognized in Earnings
 
Gain
Recognized in Earnings
 
 
Three Months
Ended
Aug 2, 2014
 
Three Months
Ended
Aug 3, 2013
 
Six Months
Ended
Aug 2, 2014
 
Six Months
Ended
Aug 3, 2013
Derivatives not designated as hedging instruments:
 
 
 

 
 

 
 
 
 
Foreign exchange currency contracts
Other income/expense
 
$
3,984

 
$
(727
)
 
$
1,195

 
$
3,049

Interest rate swaps
Other income/expense
 
$
57

 
$
118

 
$
132

 
$
196

At February 1, 2014, the Company had euro foreign currency contracts to purchase US$111.8 million and Canadian dollar foreign currency contracts to purchase US$13.8 million.
(16)
Subsequent Events
On August 27, 2014, the Company announced a regular quarterly cash dividend of $0.225 per share on the Company’s common stock. The cash dividend will be paid on September 26, 2014 to shareholders of record as of the close of business on September 10, 2014.


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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Unless the context indicates otherwise, when we refer to “we,” “us,” “our” or the “Company” in this Form 10-Q, we are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
Important Factors Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may also be contained in the Company’s other reports filed under the Securities Exchange Act of 1934, as amended, in its press releases and in other documents. In addition, from time-to-time, the Company through its management may make oral forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our goals, future prospects and proposed new products, services, developments or business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “outlook,” “pending,” “plan,” “predict,” “project,” “strategy,” “will,” “would,” and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements relating to our expected results of operations, the accuracy of data relating to, and anticipated levels of, future inventory and gross margins, anticipated cash requirements and sources, cost containment efforts, restructuring charges, estimated charges, plans regarding store openings, closings and remodels, plans regarding business growth and international expansion, plans regarding supply chain efficiencies and global planning and allocation, e-commerce and omni-channel initiatives, business seasonality, results of litigation, industry trends, consumer demands and preferences, competition, currency fluctuations, estimated tax rates, results of tax audits and other regulatory proceedings, raw material and other inflationary cost pressures, consumer confidence and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such difference include those discussed under “Part I, Item 1A. Risk Factors” contained in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended February 1, 2014 and in our other filings made from time-to-time with the Securities and Exchange Commission (“SEC”) after the date of this report.
Business Segments
The Company’s businesses are grouped into five reportable segments for management and internal financial reporting purposes: North American Retail, Europe, Asia, North American Wholesale and Licensing. Management evaluates segment performance based primarily on revenues and earnings (loss) from operations before restructuring charges, if any. The Company believes this segment reporting reflects how its five business segments are managed and each segment’s performance is evaluated by the Company’s chief operating decision maker to assess performance and make resource allocation decisions. The North American Retail segment includes the Company’s retail and e-commerce operations in North America and its retail operations in Central and South America. The Europe segment includes the Company’s wholesale, retail and e-commerce operations in Europe and the Middle East. The Asia segment includes the Company’s wholesale, retail and e-commerce operations in Asia. The North American Wholesale segment includes the Company’s wholesale operations in North America and Central and South America. The Licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization, and restructuring charges. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: accounting and finance, executive compensation, facilities, global advertising and marketing, human resources, information technology and legal. Information relating to these segments is summarized in Note 8 to the Condensed Consolidated Financial Statements.

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Products
We derive our net revenue from the sale of GUESS?, G by GUESS, GUESS Kids and MARCIANO apparel and our licensees’ products through our worldwide network of retail stores, wholesale customers and distributors, as well as our on-line sites. We also derive royalty revenue from worldwide licensing activities.
Global Economic Conditions
Economic and market conditions have continued to be volatile and uncertain in many markets around the world and consumer behavior remains cautious. In North America, the relatively weaker levels of consumer confidence and the highly promotional conditions among retailers may persist. In Europe, sovereign debt issues, government austerity programs and bank credit issues have impacted the capital markets of numerous European countries, resulting in reduced consumer confidence and discretionary spending in those countries. These circumstances have had, and could in the future have, a negative impact on our business, particularly in our more mature markets in Southern Europe. The impact could be greater in our multi-brand wholesale channel, particularly in Italy, where many customers are relatively small and are not well capitalized. While the economic environment in Southern Europe has shown signs of improvement, the turmoil in Russia and Ukraine could negatively impact our Eastern European business. We also continue to see evidence of a more cautious consumer in China, where the economy has shown clear signs of slowing, as well as a more volatile environment in South Korea.