GES-2013-11.02-10Q
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 November 2, 2013
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 December 5, 2013 the registrant had 84,882,089 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) 
 
Nov 2,
2013
 
Feb 2,
2013
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
350,132

 
$
329,021

Short-term investments
10,181

 
6,906

Accounts receivable, net
258,909

 
316,863

Inventories
426,886

 
369,712

Other current assets
103,617

 
84,723

Total current assets
1,149,725

 
1,107,225

Property and equipment, net
336,858

 
355,729

Goodwill
39,023

 
39,287

Other intangible assets, net
13,813

 
16,032

Long-term deferred tax assets
41,436

 
43,063

Other assets
115,976

 
152,170

 
$
1,696,831

 
$
1,713,506

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of capital lease obligations and borrowings
$
3,924

 
$
1,901

Accounts payable
188,994

 
191,143

Accrued expenses
169,503

 
191,922

Total current liabilities
362,421

 
384,966

Capital lease obligations
7,613

 
8,314

Deferred rent and lease incentives
91,312

 
94,218

Other long-term liabilities
109,567

 
121,996

 
570,913

 
609,494

Redeemable noncontrolling interests
3,358

 
3,144

 
 
 
 
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 139,147,643 and 138,812,082 shares, outstanding 84,855,714 and 85,367,984 shares, at November 2, 2013 and February 2, 2013, respectively
849

 
853

Paid-in capital
436,019

 
423,387

Retained earnings
1,196,373

 
1,162,982

Accumulated other comprehensive loss
(7,304
)
 
(2,461
)
Treasury stock, 54,291,929 and 53,444,098 shares at November 2, 2013 and February 2, 2013, respectively
(519,539
)
 
(497,769
)
Guess?, Inc. stockholders’ equity
1,106,398

 
1,086,992

Nonredeemable noncontrolling interests
16,162

 
13,876

Total stockholders’ equity
1,122,560

 
1,100,868

 
$
1,696,831

 
$
1,713,506

 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents

GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
Nov 2,
2013
 
Oct 27,
2012
 
Nov 2,
2013
 
Oct 27,
2012
Product sales
$
581,081

 
$
597,374

 
$
1,711,639

 
$
1,756,123

Net royalties
32,416

 
31,454

 
89,784

 
87,364

Net revenue
613,497

 
628,828

 
1,801,423

 
1,843,487

Cost of product sales
385,270

 
381,219

 
1,127,238

 
1,109,242

Gross profit
228,227

 
247,609

 
674,185

 
734,245

Selling, general and administrative expenses
178,379

 
189,492

 
543,766

 
579,686

Restructuring charges
1,889

 
—

 
10,355

 
—

Earnings from operations
47,959

 
58,117

 
120,064

 
154,559

Other income (expense):
 

 
 

 
 

 
 

Interest expense
(428
)
 
(424
)
 
(1,342
)
 
(1,205
)
Interest income
803

 
—

 
1,612

 
1,509

Other income (expense), net
3,624

 
(245
)
 
8,942

 
5,765

 
3,999

 
(669
)
 
9,212

 
6,069

 
 
 
 
 
 
 
 
Earnings before income tax expense
51,958

 
57,448

 
129,276

 
160,628

Income tax expense
17,147

 
19,989

 
42,662

 
53,007

Net earnings
34,811

 
37,459

 
86,614

 
107,621

Net earnings attributable to noncontrolling interests
791

 
812

 
2,812

 
1,429

Net earnings attributable to Guess?, Inc.
$
34,020

 
$
36,647

 
$
83,802

 
$
106,192

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

 
 

 
 

 
 

Basic
$
0.40

 
$
0.43

 
$
0.99

 
$
1.21

Diluted
$
0.40

 
$
0.43

 
$
0.98

 
$
1.21

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

 
 

 
 

 
 

Basic
84,149

 
84,408

 
84,270

 
86,857

Diluted
84,417

 
84,702

 
84,512

 
87,156

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60


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
 
Nine Months Ended
 
Nov 2,
2013
 
Oct 27,
2012
 
Nov 2,
2013
 
Oct 27,
2012
Net earnings
$
34,811

 
$
37,459

 
$
86,614

 
$
107,621

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
 
 
 
 
 
 
 
Gains (losses) arising during the period
15,357

 
37,254

 
(14,150
)
 
(11,993
)
       Less income tax effect
(3,948
)
 
(7,499
)
 
3,535

 
2,955

 Reclassification to net income for losses realized
217

 
—

 
217

 
—

Less income tax effect
(37
)
 
—

 
(37
)
 
—

Derivative financial instruments designated as cash flow hedges
 

 
 

 
 

 
 

Gains (losses) arising during the period
(711
)
 
(2,050
)
 
4,186

 
5,390

Less income tax effect
54

 
158

 
(691
)
 
(515
)
 Reclassification to net income for gains realized
(1,348
)
 
(3,985
)
 
(2,314
)
 
(7,438
)
Less income tax effect
262

 
514

 
416

 
934

Marketable securities
 

 
 

 
 

 
 

Gains arising during the period
41

 
219

 
8

 
316

Less income tax effect
(16
)
 
(83
)
 
(5
)
 
(120
)
Supplemental Executive Retirement Plan (“SERP”)
 

 
 

 
 

 
 

Plan amendment
—

 
—

 
4,529

 
—

Less income tax effect
—

 
—

 
(1,733
)
 
—

Actuarial loss amortization
277

 
835

 
831

 
2,505

Prior service cost amortization
(58
)
 
155

 
253

 
465

Less income tax effect
(84
)
 
(378
)
 
(414
)
 
(1,134
)
Total comprehensive income
44,817

 
62,599

 
81,245

 
98,986

Less comprehensive income attributable to noncontrolling interests:
 

 
 

 
 

 
 

Net earnings
791

 
812

 
2,812

 
1,429

Foreign currency translation adjustment
(317
)
 
323

 
(526
)
 
(196
)
Amounts attributable to noncontrolling interests
474

 
1,135

 
2,286

 
1,233

Comprehensive income attributable to Guess?, Inc.
$
44,343

 
$
61,464

 
$
78,959

 
$
97,753


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)
 
Nine Months Ended
 
Nov 2,
2013
 
Oct 27,
2012
Cash flows from operating activities:
 

 
 

Net earnings
$
86,614

 
$
107,621

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

 
 

Depreciation and amortization of property and equipment
63,684

 
64,471

Amortization of intangible assets
1,893

 
1,809

Share-based compensation expense
9,844

 
12,662

Unrealized forward contract (gains) losses
257

 
(847
)
Net loss on disposition of property and equipment
8,353

 
4,479

Other items, net
(1,519
)
 
1,546

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
55,684

 
1,990

Inventories
(57,797
)
 
(90,669
)
Prepaid expenses and other assets
7,529

 
5,898

Accounts payable and accrued expenses
(32,600
)
 
(22,967
)
Deferred rent and lease incentives
(2,804
)
 
6,383

Other long-term liabilities
(1,849
)
 
3,626

Net cash provided by operating activities
137,289

 
96,002

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(55,432
)
 
(77,357
)
Changes in other assets
6,638

 
(12,417
)
Proceeds from maturity of investment
1,826

 
4,000

Acquisition of businesses, net of cash acquired
(653
)
 
(15,980
)
Net cash settlement of forward contracts
1,838

 
4,972

Net cash used in investing activities
(45,783
)
 
(96,782
)
Cash flows from financing activities:
 

 
 

Payment of debt issuance costs
—

 
(383
)
Proceeds from borrowings
2,466

 
—

Repayment of borrowings and capital lease obligations
(1,040
)
 
(1,425
)
Dividends paid
(51,109
)
 
(53,143
)
Purchase of redeemable noncontrolling interest
—

 
(4,185
)
Noncontrolling interest capital contributions
521

 
—

Noncontrolling interest capital distributions
—

 
(3,086
)
Issuance of common stock, net of nonvested award repurchases
3,960

 
2,097

Excess tax benefits from share-based compensation
339

 
237

Purchase of treasury stock
(22,099
)
 
(140,262
)
Net cash used in financing activities
(66,962
)
 
(200,150
)
Effect of exchange rates on cash and cash equivalents
(3,433
)
 
(3,587
)
Net change in cash and cash equivalents
21,111

 
(204,517
)
Cash and cash equivalents at beginning of period
329,021

 
491,805

Cash and cash equivalents at end of period
$
350,132

 
$
287,288

 
 
 
 
Supplemental cash flow data:
 

 
 

Interest paid
$
876

 
$
590

Income taxes paid
$
71,971

 
$
66,050

 
See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 2, 2013
(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 November 2, 2013 and February 2, 2013, the condensed consolidated statements of income and condensed consolidated statements of comprehensive income for the three and nine months ended November 2, 2013 and October 27, 2012, and the condensed consolidated statements of cash flows for the nine months ended November 2, 2013 and October 27, 2012. 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 nine months ended November 2, 2013 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 2, 2013.
The Company has made certain reclassifications to the prior year’s consolidated financial statements to conform to classifications in the current year. These reclassifications had no impact on previously reported results from operations or net cash provided by operating activities.  
The three and nine months ended November 2, 2013 had the same number of days as the three and nine months ended October 27, 2012. All references herein to “fiscal 2014”, “fiscal 2013” and “fiscal 2012” represent the results of the 52-week fiscal year ending February 1, 2014, the 53-week fiscal year ended February 2, 2013 and the 52-week fiscal year ended January 28, 2012, respectively. 
New Accounting Guidance
In February 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (loss) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The Company adopted this guidance effective February 3, 2013 and accordingly has presented the required comprehensive income disclosures in the accompanying notes to the condensed consolidated financial statements.
In July 2013, the 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. This guidance is effective for fiscal periods beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

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(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 for 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. 
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
 
Nine Months Ended
 
Nov 2, 2013
 
Oct 27, 2012
 
Nov 2, 2013
 
Oct 27, 2012
Net earnings attributable to Guess?, Inc.
$
34,020

 
$
36,647

 
$
83,802

 
$
106,192

Less net earnings attributable to nonvested restricted stockholders
290

 
323

 
696

 
779

Net earnings attributable to common stockholders
$
33,730

 
$
36,324

 
$
83,106

 
$
105,413

 
 
 
 
 
 
 
 
Weighted average common shares used in basic computations
84,149

 
84,408

 
84,270

 
86,857

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock units
268

 
294

 
242

 
299

Weighted average common shares used in diluted computations
84,417

 
84,702

 
84,512

 
87,156

 
 
 
 
 
 
 
 
Net earnings per common share attributable to common stockholders:
 

 
 

 
 

 
 

Basic
$
0.40

 
$
0.43

 
$
0.99

 
$
1.21

Diluted
$
0.40

 
$
0.43

 
$
0.98

 
$
1.21

For the three months ended November 2, 2013 and October 27, 2012, equity awards granted for 1,037,751 and 1,415,864, respectively, of the Company's common shares and for the nine months ended November 2, 2013 and October 27, 2012, equity awards granted for 1,421,685 and 1,363,393, 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 their effect would have been anti-dilutive. For the three and nine months ended November 2, 2013, the Company also excluded 243,700 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 November 2, 2013. There were no nonvested stock options or units in the comparable prior-year periods which remained subject to a performance condition as of October 27, 2012.
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. During the nine months ended November 2, 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. At November 2, 2013,

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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.
(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 2, 2013 and nine months ended November 2, 2013 is as follows (in thousands):
 
Stockholders’ Equity
 
 
 
Guess?, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
 
Redeemable
Noncontrolling
Interests
Balances at January 28, 2012
$
1,175,630

 
$
18,635

 
$
1,194,265

 
$
8,293

Net earnings
178,744

 
2,742

 
181,486

 
—

Foreign currency translation adjustment, net of income tax of ($13,769)
22,025

 
322

 
22,347

 
65

Loss on derivative financial instruments designated as cash flow hedges, net of income tax of $1,056
(6,041
)
 
—

 
(6,041
)
 
—

Gain on marketable securities, net of income tax of ($85)
139

 
—

 
139

 
—

SERP prior service cost and actuarial valuation gain (loss) and related amortization, net of income tax of ($2,855)
4,613

 
—

 
4,613

 
—

Issuance of common stock under stock compensation plans, net of tax effect
1,362

 
—

 
1,362

 
—

Issuance of stock under ESPP
1,186

 
—

 
1,186

 
—

Share-based compensation
16,285

 
—

 
16,285

 
—

Dividends
(172,792
)
 
—

 
(172,792
)
 
—

Share repurchases
(140,262
)
 
—

 
(140,262
)
 
—

Purchase of redeemable noncontrolling interest
4,857

 
(4,857
)
 
—

 
(4,185
)
Noncontrolling interest capital contribution
—

 
1,488

 
1,488

 
—

Noncontrolling interest capital distribution
—

 
(4,237
)
 
(4,237
)
 
—

Redeemable noncontrolling interest redemption value adjustment
1,246

 
(217
)
 
1,029

 
(1,029
)
Balances at February 2, 2013
$
1,086,992

 
$
13,876

 
$
1,100,868

 
$
3,144

Net earnings
83,802

 
2,812

 
86,614

 
—

Foreign currency translation adjustment, net of income tax of $3,498
(9,909
)
 
(526
)
 
(10,435
)
 
(56
)
Gain on derivative financial instruments designated as cash flow hedges, net of income tax of ($275)
1,597

 
—

 
1,597

 
—

Gain on marketable securities, net of income tax of ($5)
3

 
—

 
3

 
—

SERP plan amendment, prior service cost and actuarial valuation amortization, net of income tax of ($2,147)
3,466

 
—

 
3,466

 
—

Issuance of common stock under stock compensation plans, net of tax effect
2,882

 
—

 
2,882

 
—

Issuance of stock under ESPP
763

 
—

 
763

 
—

Share-based compensation
9,844

 
—

 
9,844

 
—

Dividends
(51,194
)
 
—

 
(51,194
)
 
—

Share repurchases
(22,099
)
 
—

 
(22,099
)
 
—

Noncontrolling interest capital contribution
—

 
—

 
—

 
521

Redeemable noncontrolling interest redemption value adjustment
251

 
—

 
251

 
(251
)
Balances at November 2, 2013
$
1,106,398

 
$
16,162

 
$
1,122,560

 
$
3,358


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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 nine months ended November 2, 2013 are as follows (in thousands):
 
Foreign currency translation adjustment
 
Derivative financial instruments designated as cash flow hedges
 
Marketable securities
 
SERP
 
Total
Balances at August 3, 2013
$
(11,197
)
 
$
1,558

 
$
88

 
$
(8,076
)
 
$
(17,627
)
Gains (losses) arising during the period
11,726

 
(657
)
 
25

 
—

 
11,094

Reclassification to net income for (gains) losses realized
180

 
(1,086
)
 
—

 
135

 
(771
)
Net other comprehensive income (loss)
11,906

 
(1,743
)
 
25

 
135

 
10,323

Balances at November 2, 2013
$
709

 
$
(185
)
 
$
113

 
$
(7,941
)
 
$
(7,304
)
 
Foreign currency translation adjustment
 
Derivative financial instruments designated as cash flow hedges
 
Marketable securities
 
SERP
 
Total
Balances at February 2, 2013
$
10,618

 
$
(1,782
)
 
$
110

 
$
(11,407
)
 
$
(2,461
)
Gains (losses) arising during the period
(10,089
)
 
3,495

 
3

 
2,796

 
(3,795
)
Reclassification to net income for (gains) losses realized
180

 
(1,898
)
 
—

 
670

 
(1,048
)
Net other comprehensive income (loss)
(9,909
)
 
1,597

 
3

 
3,466

 
(4,843
)
Balances at November 2, 2013
$
709

 
$
(185
)
 
$
113

 
$
(7,941
)
 
$
(7,304
)
Details on reclassifications out of accumulated other comprehensive income (loss) to net income during the three and nine months ended November 2, 2013 are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Location of
(Gain)/Loss
Reclassified from
Accumulated OCI
into Income
 
Nov 2, 2013
 
Nov 2, 2013
 
Foreign currency translation adjustment:
 
 
 
 
 
   Liquidation of investment in a foreign entity
$
217

 
$
217

 
Restructuring charges
      Less income tax effect
(37
)
 
(37
)
 
Income tax expense
 
180

 
180

 
 
Derivative financial instruments designated as cash flow hedges:
 
 
 
 
 
   Foreign exchange currency contracts
(1,344
)
 
(2,216
)
 
Cost of sales
   Foreign exchange currency contracts
(4
)
 
(98
)
 
Other income/expense
      Less income tax effect
262

 
416

 
Income tax expense
 
(1,086
)
 
(1,898
)
 
 
SERP:
 
 
 
 
 
   Actuarial loss amortization
277

 
831

 
(1) 
   Prior service cost amortization
(58
)
 
253

 
(1) 
      Less income tax effect
(84
)
 
(414
)
 
Income tax expense
 
135

 
670

 
 
Total reclassifications during the period ended November 2, 2013
$
(771
)
 
$
(1,048
)
 
 
__________________________________
(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

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value and classified as a redeemable noncontrolling interest outside of permanent equity. On May 15, 2012, the Company and the noncontrolling interest holders executed an amendment to the Guess Sud put arrangement which modified the put price to be based on the value of specified net tangible and intangible assets of Guess Sud instead of being based on a multiple of Guess Sud’s earnings before interest, taxes, depreciation and amortization. The redemption value of the Guess Sud redeemable put arrangement was $2.9 million and $3.1 million at November 2, 2013 and February 2, 2013, respectively.
During the second quarter of 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 $0.8 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 $0.5 million at November 2, 2013.
The Company was previously party to a put arrangement in connection with its now wholly-owned subsidiary, Focus Europe S.r.l. (“Focus”). Under the terms of this put arrangement, which represented 25% of the total outstanding interest of that subsidiary, the noncontrolling interest holder had the option to exercise the put arrangement at its discretion by providing written notice to the Company no later than June 27, 2012. The redemption value of the put arrangement was determined based on a multiple of Focus’s net earnings. In June 2012, the noncontrolling interest holder notified the Company of its intent to exercise the put arrangement. On July 9, 2012, the Company paid $4.2 million to the noncontrolling interest holder to acquire the remaining 25% interest in Focus. This amount was determined based on a multiple of Focus’s net earnings in accordance with the terms of the put arrangement.
(4)
Accounts Receivable
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. The Company provided for allowances relating to these receivables of $38.6 million and $38.4 million at November 2, 2013 and February 2, 2013, respectively. In addition, accounts receivable includes royalty receivables relating to licensing operations of $12.5 million and $8.8 million at November 2, 2013 and February 2, 2013, respectively, for which the Company provided for an allowance for doubtful accounts of $0.4 million and $0.3 million at November 2, 2013 and February 2, 2013, respectively. 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):
 
Nov 2, 2013
 
Feb 2, 2013
Raw materials
$
13,390

 
$
14,706

Work in progress
761

 
1,765

Finished goods
412,735

 
353,241

 
$
426,886

 
$
369,712

As of November 2, 2013 and February 2, 2013, the Company had an allowance to write-down inventories to the lower of cost or market of $24.1 million and $20.4 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

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these plans to include the consolidation and streamlining of certain operations in Europe and Asia. These actions resulted in restructuring charges related primarily to severance, impairment and lease termination costs of $1.9 million and $10.4 million during the three and nine months ended November 2, 2013, respectively. As of November 2, 2013, the Company had a balance of approximately $3.9 million in accrued expenses for amounts expected to be paid during the remainder of fiscal 2014. The Company currently estimates that it may incur an additional $1.0 million to $2.5 million in future cash-related severance and lease termination costs during the remainder of fiscal 2014 as facilities are vacated.
The following table summarizes the components of the restructuring activity during the three and nine months ended November 2, 2013 (in thousands):
 
Three Months Ended Nov 2, 2013
 
Severance
 
Impairment and Lease Termination
 
Total
Beginning balance
$
4,376

 
$
4

 
$
4,380

Charges to operations
440

 
1,449

 
1,889

Non-cash write-offs
—

 
(283
)
 
(283
)
Cash payments
(637
)
 
(1,165
)
 
(1,802
)
Foreign currency and other adjustments
(241
)
 
(5
)
 
(246
)
Ending balance
$
3,938

 
$
—

 
$
3,938

 
Nine Months Ended Nov 2, 2013
 
Severance
 
Impairment and Lease Termination
 
Total
Beginning balance
$
—

 
$
—

 
$
—

Charges to operations
7,679

 
2,676

 
10,355

Non-cash write-offs
—

 
(1,394
)
 
(1,394
)
Cash payments
(3,629
)
 
(1,262
)
 
(4,891
)
Foreign currency and other adjustments
(112
)
 
(20
)
 
(132
)
Ending balance
$
3,938

 
$
—

 
$
3,938


(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 was 33.0% for each of the nine months ended November 2, 2013 and October 27, 2012.
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 and net of federal tax benefits, of $4.4 million at each of the periods ended November 2, 2013 and February 2, 2013.
Italian Tax Settlement
In January 2013, to avoid a potentially long and costly litigation process, the Company reached an agreement with the Italian tax authority regarding an ongoing audit of one of the Company’s Italian subsidiaries. The agreement covered fiscal years 2008 through 2013 (with fiscal year 2013 remaining subject to final documentation). As a result of the agreement during the fourth quarter of fiscal 2013, the Company recorded a

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settlement charge of $12.8 million (including penalty and interest and net of related offsets in other tax jurisdictions) in excess of prior uncertain tax position reserves of $11.7 million. As part of the agreement, a portion of the amount payable to the Italian tax authority will be payable in three installments during fiscal 2015. At November 2, 2013, there were no amounts included in other long-term liabilities in the Company’s condensed consolidated balance sheet related to this agreement. At February 2, 2013, the Company included €9.1 million (US$12.4 million) in other long-term liabilities related to this agreement.
The Company was advised by its Italian counsel that tax audits like this one in Italy involving proposed income adjustments greater than €2 million are automatically referred for review by a public prosecutor who may seek to pursue charges or close the matter, and that resulting criminal charges, if any, would be instituted against individuals rather than against the affected companies under Italian law. Consistent with this process, a review proceeding by a prosecutor in Italy was initiated with respect to one current and two former members of the Guess European management team and the Company’s former President (as the signing officer for certain Italian tax returns covering the relevant periods). In July 2013, the matter was closed based on the prosecutor's recommendation.
(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 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. The North American Retail segment includes the Company’s retail operations in North America. The Europe segment includes the Company’s wholesale and retail operations in Europe and the Middle East. The Asia segment includes the Company’s wholesale and retail operations in Asia. The North American Wholesale segment includes the Company’s wholesale operations in North America and export sales to 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. 
Net revenue and earnings from operations are summarized as follows for the three and nine months ended November 2, 2013 and October 27, 2012 (in thousands):
    
 
Three Months Ended
 
Nine Months Ended
 
Nov 2, 2013
 
Oct 27, 2012
 
Nov 2, 2013
 
Oct 27, 2012
Net revenue:
 

 
 

 
 

 
 

North American Retail
$
253,820

 
$
262,064

 
$
746,444

 
$
766,874

Europe
200,943

 
202,594

 
616,707

 
639,326

Asia
72,727

 
74,838

 
209,711

 
206,499

North American Wholesale
53,591

 
57,878

 
138,777

 
143,424

Licensing
32,416

 
31,454

 
89,784

 
87,364

Total net revenue
$
613,497

 
$
628,828

 
$
1,801,423

 
$
1,843,487

Earnings (loss) from operations:
 

 
 

 
 

 
 

North American Retail
$
6,206

 
$
8,952

 
$
12,363

 
$
42,703

Europe
13,538

 
14,572

 
47,595

 
51,675

Asia
5,894

 
7,799

 
17,897

 
17,693

North American Wholesale
12,102

 
14,888

 
29,229

 
31,935

Licensing
29,171

 
27,103

 
80,476

 
74,558

Corporate Overhead
(17,063
)
 
(15,197
)
 
(57,141
)
 
(64,005
)
Restructuring Charges
(1,889
)
 
—

 
(10,355
)
 
—

Total earnings from operations
$
47,959

 
$
58,117

 
$
120,064

 
$
154,559


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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 nine months ended November 2, 2013 related to plans to streamline and consolidate the Company's operations and reduce expenses in Europe, North America 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):
 
Nov 2, 2013
 
Feb 2, 2013
European capital lease, maturing quarterly through 2016
$
9,067

 
$
10,121

Other
2,470

 
94

 
11,537

 
10,215

Less current installments
3,924

 
1,901

Long-term capital lease obligations
$
7,613

 
$
8,314

Capital Lease
The Company entered into a capital lease in December 2005 for a new building in Florence, Italy. At November 2, 2013, the capital lease obligation was $9.1 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 at November 2, 2013 was approximately $0.6 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.
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. At November 2, 2013, the Company had $3.4 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 at November 2, 2013, the Company could have borrowed up to $141.2 million under these agreements. At November 2, 2013, the Company had no outstanding borrowings and $2.1 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 0.4% 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 $47.2 million that has a minimum net equity requirement, there are no other financial ratio covenants.

12
Table of Contents

Other
From time-to-time, the Company will obtain other short-term 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 nine months ended November 2, 2013 and October 27, 2012 (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
Nov 2, 2013

 
Oct 27, 2012
 
Nov 2, 2013
 
Oct 27, 2012
Stock options
$
530

 
$
1,246

 
$
1,787

 
$
3,727

Nonvested stock awards/units
3,272

 
2,679

 
7,871

 
8,659

Employee Stock Purchase Plan
43

 
94

 
186

 
276

Total share-based compensation expense
$
3,845

 
$
4,019

 
$
9,844

 
$
12,662

Unrecognized compensation cost, adjusted for estimated forfeitures, related to nonvested stock options and nonvested stock awards/units totaled approximately $4.3 million and $24.3 million, respectively, as of November 2, 2013. This cost is expected to be recognized over a weighted-average period of 1.8 years. The weighted average fair values of stock options granted during the nine months ended November 2, 2013 and October 27, 2012 were $6.21 and $8.92, respectively. 
Grants
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. On March 28, 2012, the Company made an annual grant of 290,400 stock options and 292,800 nonvested stock awards/units to its employees. On June 21, 2012, the Company made a grant of 270,000 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 a new employment agreement entered into between the Company and Mr. Paul Marciano. The nonvested stock units have an initial vesting period of seven months followed by two annual vesting periods, subject to the achievement of performance-based vesting conditions for the last three quarters of fiscal 2014. The Company also granted a target of 143,700 nonvested stock units to Mr. Paul Marciano on July 11, 2013. 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 conditions for the last three quarters of fiscal 2014. Such shares are scheduled to vest on February 1, 2016.
On May 1, 2008, the Company granted an aggregate of 167,000 nonvested stock awards to certain employees which were subject to certain annual performance-based vesting conditions over a five-year period. On October 30, 2008, the Company granted an aggregate of 563,400 nonvested stock options to certain employees scheduled to vest over a four-year period, which were subject to the achievement of performance-based vesting conditions for fiscal 2010. During the first quarter of fiscal 2010, the Compensation Committee determined that the performance goals established in the prior year were no longer set at an appropriate level to incentivize and help retain employees given the greater than previously anticipated deterioration of the economy that had occurred since the goals were established. Therefore, in April 2009, the Compensation Committee modified the performance goals of that year’s tranche of the outstanding performance-based stock awards and options to address the challenges associated with the economic environment. During the first quarter of fiscal 2011, fiscal 2012 and fiscal 2013, the Compensation Committee modified the performance goals of the respective year’s tranche of the outstanding performance-based stock awards to address the continuing challenges associated with the economic environment. None of the modifications had a material impact on the consolidated financial statements of the Company.

13
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Consulting Arrangement
On June 18, 2011, Maurice Marciano, the Company’s then-serving executive Chairman of the Board of Directors, notified the Company of his decision to retire as an employee and executive officer effective January 28, 2012, the end of fiscal 2012. Mr. Maurice Marciano continues to serve as non-executive Chairman of the Board of Directors. In accordance with the terms of Mr. Maurice Marciano’s employment agreement, the Company and Mr. Maurice Marciano entered into a two-year consulting agreement, under which Mr. Maurice Marciano will provide certain consulting services to the Company through January 2014. In connection with the ongoing services to be provided, Mr. Maurice Marciano’s outstanding equity awards were modified to provide that all awards that would have otherwise been unvested and forfeited at January 28, 2012, will continue to vest in accordance with the original vesting terms for as long as Mr. Maurice Marciano continues to serve as a member of the Board of Directors of the Company. The original grant date fair value of the modified equity awards aggregated $4.7 million while the modified grant date fair value aggregated $5.0 million. As a result of the modification, compensation expense of $2.5 million was accelerated and recorded in the last eight months of fiscal 2012.
(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 November 2, 2013 with expiration dates ranging from 2014 to 2020.
Aggregate rent and property tax expense under these related party leases was $4.4 million for each of the nine months ended November 2, 2013 and October 27, 2012. 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 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 nine months ended November 2, 2013 and October 27, 2012 were approximately $0.5 million and $1.1 million, respectively.
Consulting Arrangement
After serving for over 30 years as an executive and leader for Guess?, 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 will provide 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 has a two-year term that commenced on January 28, 2012, provides for consulting fees of $500,000 per year and continued automobile use in a manner consistent with past practice. Total expenses incurred with respect to the Marciano Consulting Agreement were $0.4 million for each of the nine months ended November 2, 2013 and October 27, 2012.

14
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 nine months ended November 2, 2013 and October 27, 2012 were approximately $1.6 million and $0.4 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 2, 2013.
(12)
Commitments and Contingencies
Leases
The Company leases its showrooms and retail 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 3% 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 October 2018. As discussed in further detail in Note 9, the Company leases a building in Florence, Italy under a capital lease.
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.
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

15
Table of Contents

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 filed a writ petition in July 2013 challenging the Court's decision not to narrow the class definitions and is awaiting a ruling. 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 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 November 2, 2013 or February 2, 2013 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 nine months ended November 2, 2013 and October 27, 2012 were as follows (in thousands):    
 
Three Months Ended
 
Nine Months Ended
 
Nov 2, 2013
 
Oct 27, 2012
 
Nov 2, 2013
 
Oct 27, 2012
Interest cost
$
586

 
$
598

 
$
1,758

 
$
1,794

Net amortization of unrecognized prior service cost
(58
)
 
155

 
253

 
465

Net amortization of actuarial losses
277

 
835

 
831

 
2,505

Net periodic defined benefit pension cost
$
805

 
$
1,588

 
$
2,842

 
$
4,764

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.
As a non-qualified pension plan, no dedicated funding of the SERP is required; however, the Company has made, and expects to 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 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 $51.7 million and $47.9 million as of November 2, 2013 and February 2, 2013, 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 $1.3 million and $3.8 million in other income during the three and nine months ended November 2, 2013, respectively, and unrealized gains of $0.9 million and $1.6 million in other income during the three and nine months ended October 27, 2012, respectively.
(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.

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The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of November 2, 2013 and February 2, 2013 (in thousands):
 
 
Fair Value Measurements at Nov 2, 2013
 
Fair Value Measurements at Feb 2, 2013
Recurring Fair Value Measures
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange currency contracts
 
$
—

 
$
509

 
$
—

 
$
509

 
$
—

 
$
1,358

 
$
—

 
$
1,358

Available-for-sale securities
 
10,764

 
—

 
—

 
10,764

 
12,630

 
—

 
—

 
12,630

Total
 
$
10,764

 
$
509

 
$
—

 
$
11,273

 
$
12,630

 
$
1,358

 
$
—

 
$
13,988

Liabilities:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Foreign exchange currency contracts
 
$
—

 
$
2,476

 
$
—

 
$
2,476

 
$
—

 
$
5,552

 
$
—

 
$
5,552

Interest rate swap
 
—

 
650

 
—

 
650

 
—

 
852

 
—

 
852

Deferred compensation obligations
 
—

 
7,380

 
—

 
7,380

 
—

 
7,574

 
—

 
7,574

Total
 
$
—

 
$
10,506

 
$
—

 
$
10,506

 
$
—

 
$
13,978

 
$
—

 
$
13,978

 
There were no transfers of financial instruments between the three levels of fair value hierarchy during the nine months ended November 2, 2013 or during the year ended February 2, 2013.
The fair values of the Company’s 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 exchange 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 Company’s 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 November 2, 2013, available-for-sale securities consisted of $10.2 million of corporate bonds with maturity dates ranging from November 2013 to September 2014 and $0.6 million of marketable equity securities. At February 2, 2013, available-for-sale securities consisted of $10.3 million of corporate bonds, $1.8 million of certificates of deposit and $0.5 million of marketable equity securities. 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 comprehensive income (loss) related to available-for-sale securities owned by the Company at each of the periods ended November 2, 2013 and February 2, 2013 were $0.1 million.
The carrying amount of the Company’s 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 Company’s debt instruments (see Note 9) are based on the amount of future cash flows associated with each instrument discounted using the Company’s incremental borrowing rate. At November 2, 2013 and February 2, 2013, 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, plant, 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

17
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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 asset’s ability to continue to generate income from operations and positive cash flow in future periods or if significant changes in the Company’s 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 management’s 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 store’s future cash flow. The Company also considers factors such as: the local environment for each store location, including mall traffic and competition; the Company’s 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 Company’s results of operations.
The Company recorded impairment charges of $0.8 million and $3.9 million during the three and nine months ended November 2, 2013, respectively, and impairment charges of $3.6 million and $3.7 million during the three and nine months ended October 27, 2012, respectively, related primarily to the full impairment of long-lived assets for certain under-performing retail stores in North America and Europe. These impairment charges, which exclude impairment charges incurred related to restructuring activities, were included in SG&A 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.
(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 in Canada, Europe 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 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 November 2, 2013, credit risk has not had a significant effect on the fair value of the Company’s foreign currency contracts.

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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 income 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 qualifying as cash flow hedges or net investment hedges are reported in net earnings as part of other income and expense.
Summary of Derivative Instruments
The fair value of derivative instruments in the condensed consolidated balance sheets as of November 2, 2013 and February 2, 2013 was as follows (in thousands):
 
 
Derivative
Balance Sheet
Location
 
Fair Value at Nov 2,
2013
 
Fair Value at Feb 2,
2013
ASSETS:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Other current assets
 
$
311

 
$
387

Derivatives not designated as hedging instruments:
 
 
 
 
 
 

Foreign exchange currency contracts
 
Other current assets
 
198

 
971

Total
 
 
 
$
509

 
$
1,358

LIABILITIES:
 
 
 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts:
 
 
 
 
 
 
   Cash flow hedges
 
Current liabilities
 
$
1,468

 
$
2,904

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Foreign exchange currency contracts
 
Current liabilities
 
1,008

 
2,648

Interest rate swaps
 
Long-term liabilities
 
650

 
852

Total derivatives not designated as hedging instruments
 
 
 
1,658

 
3,500

Total
 
 
 
$
3,126

 
$
6,404


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Derivatives Designated As Hedging Instruments
Cash Flow Hedges
During the nine months ended November 2, 2013, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$103.5 million and US$16.2 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of November 2, 2013, the Company had forward contracts outstanding for its European and Canadian operations of US$102.9 million and US$12.7 million, respectively, which are expected to mature over the next 14 months.
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 nine months ended November 2, 2013 and October 27, 2012 (in thousands): 
 
Gain/(Loss)
Recognized in
OCI
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income (1)
 
Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
 
Three Months Ended
Nov 2, 2013
 
Three Months
Ended
Oct 27, 2012
 
 
Three Months Ended
Nov 2, 2013
 
Three Months
Ended
Oct 27, 2012
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
(694
)
 
$
(1,876
)
 
Cost of sales
 
$
1,344

 
$
3,697

Foreign exchange currency contracts
$
(17
)
 
$
(174
)
 
Other income/expense
 
$
4

 
$
288


 
Gain/(Loss)
Recognized in
OCI
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income (1)
 
Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
 
Nine Months Ended
Nov 2, 2013
 
Nine Months
Ended
Oct 27, 2012
 
 
Nine Months Ended
Nov 2, 2013
 
Nine Months
Ended
Oct 27, 2012
Derivatives designated as cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign exchange currency contracts
$
3,785

 
$
4,942

 
Cost of sales
 
$
2,216

 
$
6,854

Foreign exchange currency contracts
$
401

 
$
448

 
Other income/expense
 
$
98

 
$
584

 __________________________________
(1)
The ineffective portion was immaterial during the three and nine months ended November 2, 2013 and October 27, 2012 and was recorded in net earnings and included in interest income/expense.
As of November 2, 2013, accumulated other comprehensive loss included a net unrealized loss of approximately $0.2 million, net of tax, of which $0.4 million will be recognized in other expense or cost of product sales 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
 
Nine Months Ended
 
Nov 2,
2013
 
Oct 27,
2012
 
Nov 2,
2013
 
Oct 27,
2012
Beginning balance gain (loss)
$
1,558

 
$
7,993

 
$
(1,782
)
 
$
4,259

Net gains (losses) from changes in cash flow hedges
(657
)
 
(1,892
)
 
3,495

 
4,875

Net gains reclassified to income
(1,086
)
 
(3,471
)
 
(1,898
)
 
(6,504
)
Ending balance gain (loss)
$
(185
)
 
$
2,630

 
$
(185
)
 
$
2,630

As of February 2, 2013, the Company had forward contracts outstanding for its European and Canadian operations of US$106.9 million and US$40.3 million, respectively, that were designated as cash flow hedges.

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Net Investment Hedges
During the nine months ended November 2, 2013, the Company purchased U.S. dollar forward contracts in Europe totaling US$17.9 million to hedge the net investments in certain of the Company’s international subsidiaries that were designated as net investment hedges. The Company had no forward contracts outstanding for its European net investments as of November 2, 2013.
There were no amounts recognized in the foreign currency translation adjustment component of accumulated other comprehensive income (loss) during the three months ended November 2, 2013. The Company recognized gains, net of tax, of $0.2 million in the foreign currency translation adjustment component of accumulated other comprehensive income (loss) during the nine months ended November 2, 2013. There were no amounts that were recognized or reclassified into net income during the three and nine months ended November 2, 2013.
As of February 2, 2013 and October 27, 2012, there were no forward contracts that were designated as net investment hedges.
Derivatives Not Designated as Hedging Instruments
As of November 2, 2013, the Company had euro foreign currency contracts to purchase US$132.5 million expected to mature over the next 13 months and Canadian dollar foreign currency contracts to purchase US$8.8 million expected to mature over the next one month.
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 nine months ended November 2, 2013 and October 27, 2012 (in thousands):
 
Location of
Gain/(Loss)
Recognized in
Income
 
Gain/(Loss)
Recognized in Income
 
Gain/(Loss)
Recognized in Income
 
 
Three Months Ended
Nov 2, 2013
 
Three Months
Ended
Oct 27, 2012
 
Nine Months Ended
Nov 2, 2013
 
Nine Months
Ended
Oct 27, 2012
Derivatives not designated as hedging instruments:
 
 
 

 
 

 
 

 
 

Foreign exchange currency contracts
Other income/expense
 
$
(1,916
)
 
$
(3,359
)
 
$
1,133

 
$
2,861

Interest rate swaps
Other income/expense
 
$
(22
)
 
$
37

 
$
174

 
$
42

As of February 2, 2013, the Company had euro foreign currency contracts to purchase US$90.2 million, Canadian dollar foreign currency contracts to purchase US$39.7 million and GBP£4.7 million of foreign currency contracts to purchase euros.
(16)
Subsequent Events
On December 4, 2013, the Company announced a regular quarterly cash dividend of $0.20 per share on the Company’s common stock. The cash dividend will be paid on January 3, 2014 to shareholders of record as of the close of business on December 18, 2013.


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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 Notice 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 and closings, plans regarding business growth and international expansion, e-commerce, 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 2, 2013 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. Information relating to these segments is summarized in Note 8 to the Condensed Consolidated Financial Statements. Management evaluates segment performance based primarily on revenues and earnings 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. The North American Retail segment includes the Company’s retail operations in North America. The Europe segment includes the Company’s wholesale and retail operations in Europe and the Middle East. The Asia segment includes the Company’s wholesale and retail operations in Asia. The North American Wholesale segment includes the Company’s wholesale operations in North America and export sales to 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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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.
Recent Global Economic Developments
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 for some time. In Europe, sovereign debt issues, government austerity programs and bank credit issues continue to affect the capital markets of numerous European countries, resulting in reduced consumer confidence and discretionary spending in those countries. These circumstances have had, and are expected to continue to have, a negative impact on our business, particularly in our more mature markets in Southern Europe. These conditions could have a greater impact in our multi-brand wholesale channel, particularly in Italy, where many customers are relatively small and are not well capitalized. We continue to see evidence of a more cautious consumer in China, where the economy has shown clear signs of slowing.
Foreign Currency Volatility
Since the majority of our international operations are conducted in currencies other than the U.S. dollar (primarily the euro, Canadian dollar and Korean won), currency fluctuations can have a significant impact on the translation of our international revenues and earnings into U.S. dollar amounts.
During the first nine months of fiscal 2014, the average U.S. dollar rate was weaker against the euro and the Korean won and stronger against the Canadian dollar compared to the average rate in the same prior-year period. This had an overall positive impact on the translation of our international revenues and earnings for the nine months ended November 2, 2013 compared to the same prior-year period.
 In addition, some of our transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars, Swiss francs and British pounds, exposing them to exchange rate fluctuations when converted to their functional currencies. Fluctuations in exchange rates can impact the operating margins of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates. Relative weakness in the euro versus the U.S. dollar resulted in higher costs of U.S. dollar denominated purchases of merchandise in our European operations and resulted in an unfavorable impact on product margins during the first nine months of fiscal 2014 compared to the same prior-year period. In the future, if the euro weakens versus the U.S. dollar at the time U.S. dollar denominated inventory is purchased relative to the purchases of the comparable period, our product margins in Europe could continue to be unfavorably impacted. The Company enters into derivative financial instruments to offset some but not all of the exchange risk on foreign currency transactions. For additional discussion regarding our exposure to foreign currency risk, forward contracts designated as hedging instruments and forward contracts not designated as hedging instruments, refer to “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”
Strategy
International Growth. Despite the difficult economic conditions described above, our key long-term strategies remain unchanged. Global expansion continues to be the cornerstone of our long-term growth strategy. Our combined revenues outside of the U.S. and Canada represented approximately half of the Company’s total revenues for the nine months ended November 2, 2013, compared to one-fifth in fiscal 2005. We expect to continue to expand in our existing international markets, particularly in less mature markets like China, Germany, India, Mexico, the Middle East and Russia. At the same time, we plan to develop in newer key markets such as Brazil and Japan.

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Productivity Improvements. Our goal is also to drive growth by enhancing the productivity of our existing operations. 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. We will continue to regularly assess and implement initiatives that we believe will build brand equity, grow our business and enhance long-term profitability in each region.
North American Retail. In North American Retail, we plan to increase retail sales and profitability over the long-term by improving the productivity and performance of existing stores, increasing our mix of product offerings at lower price points and shortening our supply chain calendar to allow more flexibility to react to the latest trends. We will also continue to emphasize our e-commerce channel as we deploy our omni-channel retail strategy. In fiscal 2014, we have reduced our store openings in the U.S. and Canada as compared to fiscal 2013 as we focus on improving the performance of existing stores. During the first nine months of fiscal 2014, we opened eight retail stores in the U.S. and Canada and we plan to open 11 retail stores in total across all concepts in these two countries during fiscal 2014. In addition, we plan to remodel key existing locations as part of the roll-out of our new store designs.
Europe. In Europe, over the long-term, we will continue to focus on developing new markets in Northern and Eastern Europe where our brand is well known but still under-penetrated. We have flagship stores in key cities such as Barcelona, Dusseldorf, London, Milan and Paris. During fiscal 2014, we have strategically reduced our store openings in Southern Europe as compared to fiscal 2013 so we can focus on improving the performance of existing stores. Together with our licensee partners, we opened 74 stores in Europe during the first nine months of fiscal 2014 and we plan to continue our expansion in Europe, primarily in Northern and Eastern Europe, by opening between 90 and 95 retail stores in total during fiscal 2014, about one-third of which will be operated directly by us. In addition, we also acquired four stores from one of our European licensees.
Asia. We see significant long-term market opportunities in Asia and we have dedicated capital and human resources to support the region’s growth and development. We and our partners have opened flagship stores in key cities such as Beijing, Hong Kong, Macau, Seoul and Shanghai, and we have partnered with licensees to develop our business in the second-tier cities in this region. During fiscal 2013, we also partnered with a licensee in China to help our expansion efforts in the northern part of the country. In China, where the economy has shown some signs of slowing, we have begun to see evidence of a more cautious consumer.  As a result, we have lowered our expectations for our China business for the remainder of fiscal 2014 in order to protect our licensee partners and to ensure that we continue to have a solid foundation for long-term growth in the region. Our strategy in South Korea, with a combined 348 stores and concessions at November 2, 2013, is to improve productivity and expand distribution for both our GUESS? and G by GUESS branded locations. We are also in the process of establishing our direct operations in Japan where we expect to open our first stores in fiscal 2015. We and our partners opened 40 stores and 45 concessions during the first nine months of fiscal 2014 across all of Asia and plan to open between 90 and 100 retail stores and concessions in total across all concepts in Asia during fiscal 2014.
Capital Allocation
The Company’s investments in capital for the full fiscal year 2014 are planned between $70 million and $80 million (after deducting estimated lease incentives of approximately $4 million). The planned investments in capital are primarily for store remodeling programs in North American Retail, expansion of our retail business in Europe and new store openings in North America.
Other
The Company operates on a 52/53-week fiscal year calendar, which ends on the Saturday nearest to January 31 of each year. The three and nine months ended November 2, 2013 had the same number of days as the three and nine months ended October 27, 2012.
The Company reports National Retail Federation (“NRF”) calendar comparable store sales on a quarterly basis for our physical stores in the U.S. and Canada excluding the results of our e-commerce sites.  A store is

24
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considered comparable after it has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store is removed from the comparable store base until it has been opened at its new size, in its new location or under its new concept for 13 full months.
Executive Summary
Overview 
Net earnings attributable to Guess?, Inc. decreased 7.2% to $34.0 million, or diluted earnings of $0.40 per common share, for the quarter ended November 2, 2013, compared to net earnings attributable to Guess?, Inc. of $36.6 million, or diluted earnings of $0.43 per common share, for the quarter ended October 27, 2012. 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. These actions resulted in restructuring charges for the quarter ended November 2, 2013 of $1.9 million (or $1.4 million after considering the $0.5 million reduction to income tax expense as a result of the charge), or an unfavorable after-tax impact of $0.02 per share. Excluding the impact of the restructuring charges and the related tax impact, adjusted net earnings attributable to Guess?, Inc. was $35.4 million and adjusted diluted earnings was $0.42 per common share for the quarter ended November 2, 2013. References to financial results excluding the impact of the restructuring charges are non-GAAP measures and are addressed below under “Non-GAAP Measures.”
Highlights of the Company’s performance for the quarter ended November 2, 2013 compared to the same prior-year period are presented below, followed by a more comprehensive discussion under “Results of Operations”:
Operations
•
Total net revenue decreased 2.4% to $613.5 million for the quarter ended November 2, 2013, from $628.8 million in the same prior-year period. In constant currency, net revenue decreased by 4.1%.
•
Gross margin (gross profit as a percentage of total net revenue) declined 220 basis points to 37.2% for the quarter ended November 2, 2013, compared to 39.4% in the same prior-year period.
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Selling, general and administrative (“SG&A”) expenses decreased 5.9% to $178.4 million for the quarter ended November 2, 2013, compared to $189.5 million in the same prior-year period. SG&A expenses as a percentage of revenue (“SG&A rate”) decreased by 110 basis points to 29.1% for the quarter ended November 2, 2013, compared to 30.2% in the same prior-year period.
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The Company incurred $1.9 million in restructuring charges during the quarter ended November 2, 2013.
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Earnings from operations decreased 17.5% to $48.0 million for the quarter ended November 2, 2013, compared to $58.1 million in the same prior-year period. Operating margin decreased by 140 basis points to 7.8% for the quarter ended November 2, 2013, compared to 9.2% in the same prior-year period. The restructuring charges of $1.9 million negatively impacted the operating margin for the quarter ended November 2, 2013 by 30 basis points.
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Other income, net (including interest income and expense), totaled $4.0 million for the quarter ended November 2, 2013, compared to other expense, net of $0.7 million in the same prior-year period.
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The effective income tax rate decreased 180 basis points to 33.0% for the quarter ended November 2, 2013, compared to 34.8% in the same prior-year period. 

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Table of Contents

Key Balance Sheet Accounts
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The Company had $360.3 million in cash and cash equivalents and short-term investments as of November 2, 2013, up $65.7 million, compared to $294.6 million as of October 27, 2012.
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During the fourth quarter of fiscal 2013, the Company paid a special cash dividend of $1.20 per share of the Company’s common stock, totaling approximately $102 million.
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The Company invested $22.1 million to repurchase approximately 0.9 million of its common shares during the first quarter of fiscal 2014.
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Accounts receivable, which relates primarily to the Company’s wholesale business in Europe, and to a lesser extent, to its wholesale businesses in North America and Asia and its international licensing business, decreased by $65.1 million, or 20.1%, to $258.9 million at November 2, 2013, compared to $324.0 million at October 27, 2012. On a constant currency basis, accounts receivable decreased $72.7 million, or 22.4%.
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Inventory increased by $4.6 million, or 1.1%, to $426.9 million as of November 2, 2013, compared to $422.3 million as of October 27, 2012. When measured in terms of finished goods units, inventory volumes increased by 3.6% as of November 2, 2013, when compared to October 27, 2012.
Global Store Count
In the third quarter of fiscal 2014, together with our partners, we opened 51 new stores worldwide, consisting of 29 stores in Europe and the Middle East, 18 stores in Asia, three