Guess? Inc (GES) 2003 Q4 法說會逐字稿

Thank you for standing by and welcome to the GUESS conference call.

Today's conference including the question and answer portion is being recorded and being made available o the public.

Statements made in this conference call including, but not limited to, the company's expected results of operations are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are only expectations and involved known and unknown risks and uncertainties which may cause actual results in future periods and future events to differ materially from those that are currently anticipated.

Factors which may cause actual results in future periods to differ from current expectations include, among other things, the continued availability of sufficient working capital, the successful integration of new stores into existing operations, the continued desirability and customer acceptance of existing and future product lines including licensed product lines, possible cancellation of wholesale orders, the success of competitive products, and the availability of adequate sources for capital.

In addition to these factors the economic and other factors identified in the company's most recent annual report on form 10-K for fiscal year ending December 31, 2002, including, but not limited to, the risk factors discussed therein could affect the forward-looking statements contained herein and in the company's other current public documents.

Now at this time for opening remarks and introductions I'd like to turn the conference call over to Mr. Carlos Alberini, President and Chief Operating Officer.

Mr. Alberini, please go ahead.

Thank you.

Good afternoon and thank you for joining us today to discuss GUESS's 2003 fourth quarter finance results.

Joining me is Fred Silny, Senior Vice President and Chief Financial Officer of the company.

I will begin with an overview of our fourth quarter and then Fred will review our financial performance in more detail for the fourth quarter and fiscal year 2003, after which I will address our goals and outlook for 2004 and open the call for your questions.

Let me begin by saying that we are very pleased with GUESS's performance in the fourth quarter of 2003, which represents a marked improvement from a year ago.

We have seen a continuation of the positive trends that we have experienced since last spring and we are reaping the benefits of the initiatives that we have undertaken on both the operational and product sides of our business.

I would like to share with you a few highlights.

During the quart fourth quarter, all of our business segments, retail, wholesale, and licensing showed improved performance.

Our retail segment had the greatest gain with operating income up 160.4% for the period.

We have achieved strong comparable store sales growth in our retail stores reflecting the efforts that we have made to refine our product offerings in both our women's and men's lines as well as a significant growth if our accessories line.

The fourth quarter comp store sales increase of 11.7% has extended the strong momentum that we have seen since the second quarter.

Both our Canadian and factory stores performed particularly well during the period.

Margin performance in our business also improved due to higher product margins in both retail and wholesale as well as better leverage of the retail occupancy costs from comparable store sales growth.

In particular, we are pleased that our bottom line has started to reflect the efforts that we have made to utilize our resources efficiently and ensure that our cost structure is as streamlined as possible.

This has included looking for every opportunity to eliminate unproductive activities and improve expense management in our corporate offices as well as our retail stores.

This efforts have resulted in flat SG&A expense for the quarter despite a larger store base and over 500 basis points of improvement in our SG&A rate for the fourth quarter of 2003.

This improvement underscores the leverage of our retail business model and its significant opportunity for further profit growth.

While our wholesale business remains a challenge, we narrowed the loss in the fourth quarter with both higher sales and improved margin year-over-year.

Our strong focus on inventory management continued during 2003.

This efforts have resulted in a 12.7% decline in inventory levels from year end 2002 even as product sales increased 9.7% during the year.

Our inventory now consists of much fresher product, which should result in lower losses from off-price sales in the future and allow us to merchandise our factory outlet stores primarily with product that is specifically produced for those stores.

We have continued to strengthen our balance sheet in 2003 with the issuance of $75 million in secured notes in April of 2003 and the retirement of the $80 million of senior subordinated notes.

We ended 2003 with no borrowings under our $85 million bank credit facility.

The total outstanding debt declined by $13.5 million or 16.6% to $68.1 million at December 31, 2003.

We also ended the year with $71.7 million in cash and restricted cash compared to $31.8 million a year ago.

We implemented a new manufacturing system to gain further operating efficiencies through automation.

This system along with other actions that we are taking should result in improved product visibility and lower processing of freight costs in the future.

In addition a new inventory allocation system we are rolling out is resulting in improved inventory turnover and in stock positions in the stores and is contributing to higher store sales volume with less inventory.

We are continuing to strengthen our management team including restructuring our merchant organization to provide more focus on specific product categories and have an entire new team to develop and manage our GUESS Collection line.

This team is led by new a general merchandise manager we just hired with great experience in the contemporary fashion business.

We are enthusiastic about the potential of this line.

As we continue to strive to increase profitability and eliminate unproductive assets we have made a decision to exit our 10 kids stores, which resulted in a $1.2 million impairment charge in the fourth quarter.

These stores generated revenues of $6.1 million and had a combined operating loss of approximately $1.8 million in 2003.

We plan to close these stores in the second half of 2004.

In sum, we are pleased with the progress that we made in 2003.

There are sill significant opportunities to improve our operating performance, increase margins, and drive long-term growth, as I will discuss later.

Now, turning to our results.

We announced today that for the fourth quarter ended December 31, 2003, GUESS reported total net revenue increased by 19.1% to $199.3 million, from $167.4 million in last year's fourth quarter.

As I mentioned, this improved sales performance reflects the favorable trends that we are seeing in our retail stores and the positive impact that we have experienced from our product reposition efforts.

Notably, during the quarter we continued to see an improvement in our women's business as well as continued strong performance in men's.

We have also achieved significant sales growth in our accessories line.

We are pleased with the progress yet the retail environment remains highly competitive and wholesale segment continues to be challenging.

By segment, our retail stores including full price retail, kid's, factory outlet, Canada and eCommerce generated is $154.2 million during the fourth quarter, an increase of 17.7% from $130.9 million in the prior year fourth quarter.

The increase was driven by the comparable stores sales increase of 11.7% and a larger store base which represented an 8.2% increase in average square footage as compared to the same period last year.

The comparable stores sales increase reflects the improved results of both the men's and women's lines and our accessories business.

In addition to strong same store sales growth, our retail stores also increased their margins and managed expenses effectively to deliver a substantial improvement in operating results.

In the women's retail business our young contemporary line, which is our principle line, generated continued improved performance in the fourth quarter.

Non denim pants sold very well in the period.

We also had strong performance in T-shirts and active wear.

In men's, we continue to see improvement in men's retail with woven tops driving the business and we are working on re energizing the bottoms business.

In accessories the sales increases were drive bin strong results in watches, handbags and jewelry.

We ended the fourth quarter with a total of 265 stores including those in Canada of which 182 were full priced retail, 73 were factory outlet stores and 10 were kid's stores.

During the quarter we opened 6 retail stores and two factory stores and closed one kid's store.

In our wholesale operations fourth quarter 2003 revenues increased 29.7% to $34.2 million from $26.4 million in the same period in 2002.

Domestic wholesale net revenue increased in the fourth quarter of 2003 by $7 million or 40.9% reflecting both increased shipments and lower markdowns to our wholesale customers.

Our products were sold in approximately 850 doors at the end of 2003 compared with 860 doors at the end of 2002.

International wholesale revenue was about flat compared to the fourth quarter of 2002.

Our domestic wholesale backlog as of February 17, 2004 was $39.2 million, compared to $40 million as of February 16, 2003 or down 2.1%.

Consistent with our current strategy of immediates and injections of fashion product during the respective season, once again, we have left a considerable amount of our wholesale customers open to buy [INAUDIBLE], resulting in an inconsistent comparison year-over-year.

Our focus at this time remains from building the business in the most profit doors by working closely with the wholesale partners and ensuring the best position of our products on the selling floor.

Over the long-term, our objective is to reacquire lost doors.

In terms of trends in our wholesale business we saw solid performance from basic denim, sweaters, knit tops and logo T-shirts.

In men's, fashion wovens continued to perform well.

As we mentioned, the department store business continues to be challenging but we are pleased with improvement in the fourth quarter wholesale revenue and margin growth that resulted in the reduction in the loss from operations for the segment.

The operating loss for the wholesale segment decreased by $7.7 million, to $3.3 million compared with $11 million in the fourth quarter of 2002.

Now, turning to our licensing business.

This business continues to perform well with fourth quarter revenues of $10.9 million compared to $10.1 million in the fourth quarter of 2002.

Operating earnings increased to $9.1 million from $7.9 million in last year's fourth quarter.

I would now like to turn the call over to Fred.

Fred?

Thank you, Carlos.

Good afternoon.

Before I discuss our financial results in more detail, let me describe the contents of the press release just issued.

In addition to the actual release on pages 1 and 2, page 3 contains the consolidated statements of operations for the fourth quarter and fiscal year 2003 compared to the same period last year.

Page 4 contains segment data for our wholesale, retail, and licensing operations.

Page 5 contains the comparative balance sheets for fiscal year end 2003 and 2002.

Page 6 contains a cash flow statement and finally, page 7 provides retail store data.

Now, turning to the specifics of our performance for the quarter.

We announced today that for the fourth quarter ended December 31, 2003, GUESS reported net earnings of $11.8 million, or diluted earnings of 27 cents per share which included impairment charges of $1.6 million or $0.9 million net of tax or 2 cents per share.

This compares to a net loss of $4.6 million or a diluted loss of 11 cents per share for last year's fourth quarter which included restructuring, impairment, and severance charges of $8.5 million or $6.1 million net of tax or 14 cents per share.

As Carlos mentioned, net revenues for the fourth quarter increased 19.1% to $199.3 million from $167.4 million in the 2002 fourth quarter.

Overall, gross profit for the 2003 fourth quarter increased 33.6% to $76.2 million from $57.1 million in the fourth quarter of 2002.

Gross profit margin increased to 38.2% in the fourth quarter of 2003 from 34.1% in the same period of 2002.

The increase is attributable to improved margins at both retail and wholesale.

The improvement in retail margins reflects better product margin and the increase in comparable store sales, which is allowing us to better leverage our store occupancy costs.

The improved margins in wholesale reflect stronger performance in our full price domestic wholesale business and improved results in our off-price business.

As we have discussed expense control remains a key priority for GUESS.

We reported that SG&A expenses for the fourth quarter were $52.4 million, a .7% decrease from last year's $52.8 million.

The SG&A rate this quarter was 26.2% of net revenues, over 500 basis points better than our SG&A rate in the same quarter in 2002 which represented 31.5% of net revenues.

This improvement reflects the positive impact of the cost cutting actions we have taken over the past year and expense leverage on sales growth if our retail business, partially offset by the additional expense of operating 16 net new stores in the fourth quarter of 2003 versus the same 2002 period.

Earnings from operations improved from $22.3 million in the fourth quarter of 2003 compared with a loss from operations of $4.0 million in the 2002 period which included the previously discussed $8.5 million of charges.

The retail segment earnings from operations increased $15.4 million or 160.4% to $25.0 million from $9.6 million in the 2002 period reflecting the strong comparable store sales growth, improved margins and effective expense leverage.

The wholesale segment loss from operations was $3.3 million compared with a loss of $11 million in the fourth quarter of 2002.

This significant improvement was the result of higher sales and improved margins.

Licensing earnings from operations were $9.1 million versus $7.9 million in the prior year.

Corporate overhead decreased to $8.5 million from $10.5 million in the 2002 fourth quarter.

Last year's fourth quarter overhead included a charge of $1.4 million primarily for consolidation of facilities and severance.

Interest expense for the fourth quarter of 2003 was $1.6 million compared to $2.6 million for the 2002 fourth quarter.

Reflecting a lower interest rate on the secured notes we issued at the end of April and a lower borrowing levels in the period.

As Carlos mentioned earlier, we lowered our debt level and increased our cash position significantly from a year ago.

We are pleased with our most cost efficient and flexible capital structure to support the growth of our business.

We continue to improve our inventory management with resulted in overall inventory levels and less excess or obsolete inventory thereby reducing off-price sales and allowing us to improve margins.

Inventory levels declined 12.7% year-over-year in spite of a 19.8% increase in product sales during the quarter.

We ended the year with $83.5 million of inventory compared to $95.7 million at the end of 2002.

For the fiscal year ended December 31, 2003, the company reported net earnings of $7.3 million, or diluted earnings per share of 17 cents.

Versus a net loss of $11.3 million or a diluted loss per share of 26 cents in the comparable 2002 period.

The 2003 results include restructuring impairment and severance charges of $2.4 million or $1.4 million net of tax or 3 cents per share while the 2002 results include restructuring impairment and severance charges of $9.2 million or $6.2 million net of tax or 14 cents per share.

The 2002 results also include the previously mentioned litigation proceeds of $4.3 million or $2.9 million net of tax or 7 cents per share.

Earnings from operations for the year ended December 31, 2003 was $20.6 million.

This compares to a loss from operations of $8.5 million in the year ago period which again included the $9.2 million in charges and the $4.3 million litigation settlement.

Total revenues for the year increased by 9.2% to $636.6 million compared to $583.1 million in the same period in the same prior year period.

I would now like to turn the call back to Carlos it review our outlook for 2004.

Carlos?

Thank you, Fred.

I would now like to discuss some of the initiatives that we are undertaking in 2004 and then provide an overview of our outlook for 2004.

As I mentioned earlier, we are pleased with the products progress that we have made in the last year in improving our operating performance.

However, we realize that there continues to be significant opportunity for improvement.

As a result, we are looking at every opportunity to improve both retail and wholesale sales performance as well as reduce costs and expenses.

To this end, we are pursuing the following initiatives in 2004: We are continuing to restructure our merchant team to provide great greater focus on our various product categories.

As I mentioned earlier, we will be emphasizing GUESS Collection, our contemporary line that commands higher price points.

We are early in our efforts and if we are successful GUESS Collection could emerge as a separate brand.

Also, as I mentioned earlier we are closing our 10 kid's stores.

These will continue to operate through the summer and we anticipate that all stores will be closed in the second half of the year.

We are continuing to expand our retail store base in the U.S. and Canada.

The investment includes opening approximately 26 new stores in 2004 consisting of about 9 retail stores, and 17 factory stores.

Remodeling about 10 and relocating approximately 4 stores.

We also plan to close approximately 6 stores in addition to the kid's stores that I mentioned earlier.

We are continuing to work on our supply chain and along with the efficiencies from the recent systems conversion we expect further cost savings in this area.

Specifically we continue to work on the flow of goods from our vendors to our distribution center as well as to your stores.

We believe that these efforts will contribute to significantly reduce our overall freight costs.

The system conversions are also allowing us to better manage our inventory levels, resulting in a more efficient use of our inventory with less excess or obsolete inventory.

This should result in improved margins due to lower markdowns and less sales of distressed inventory in the off-price market.

Now, I will provide a brief update on the financial outlook for 2004.

Retail sales for the year are off to a strong start.

January 2004 comparable store sales were up 9.5% or 14.1% on a comparable 31-day basis.

We are seeing this trend continue into February.

On the women's side, non denim pants and T-shirts performed well.

In men's, woven tops and non denim bottoms drove sales.

Accessories also were strong especially watches and handbags again.

Inventories remain in good condition as we strive to minimize excess inventory in our chain.

Our focus in 2004 is on reduce returns to our warehouse from our own stores, thereby minimizing sales in the off-price channel.

In connection with this initiatives we expect to clear more goods at the store level.

Now, for the full fiscal year 2004, we expect comparable store sales in our retail stores will increase in the mid single digits range.

We expect total retail sales to increase in the high single digits to low teen range including sales from approximately 26 new stores and the contribution from the 20 stores that we opened last year in 2003.

On the wholesale side, we anticipate over all revenues to increase in the mid single digits for 2004 versus last year.

Overall gross margins are expected to improve about 200 basis points in 2004, reflecting improvements in both the wholesale and retail businesses from last year's levels.

We expect SG&A expenses for 2004 to increase in dollars in the low to mid single digits and to decrease as a percent of revenues from 2003 levels in spite of the expenses necessary to support the 26 new stores.

At the time that we close the 10 kid's stores we may have to take an additional charge relating to the rent due over the remaining lease term that cannot in some way be recovered.

This charge is not yet quantifiable but it is currently expected to be less than $2 million pretax.

We expect interest expense to be approximately $6 million in 2003 and the tax rate is expected to be 43%.

The trends for the year 2004 that we have just outlined also generally apply to our quarterly expectations except for wholesale revenue growth which is expected to be stronger in the second half of the year than in the first half and retail margins which are expected to be about flat in the first half of the year.

Finally, we expect inventory levels to increase percentage wise in the mid single digits by year end compared to year end 2003 and capital expenditures for 2004 are planned at approximately $30 million.

To position our more efficient plan at about $36 million for 2004.

Before we open the call for questions I would like to say that while we expect business to remain challenging for 2004, our objective remains to improve sales and margins while carefully managing costs and inventory.

We are encouraged by the results of the actions we have takes on the product side and remain optimistic that our efforts will result in improved performance over 2004 and over the long-term.

With that, as always, we thank you for your interest in GUESS and we would now be happy to take your questions.

Operator?

Very good.

Today's question and answer will be conducted electronically.

If you would like to ask a question you may do so by pressing the star key followed by the digit one.

Once again, star one for a question.

We will pause just a moment to assemble the question roster.

Our first question will come from Eric Beder with Northeast Securities.

Good afternoon.

Hi, Eric.

Great quarter.

Two or three questions.

One is a housekeeping question, what was the D&A for the quarter?

I think the total D&A for the year was $35 million and we will come back to you with the exact number.

Okay.

GUESS Collection, could you talk about what you are really trying to upgrade or change in the stores right now?

And when you mean a separate brand do you mean this could have its own chain of stores as GUESS has right now?

At some point, I mean, again, this is like we said, very early in this process.

We are -- we think that there is a significant opportunity for us to improve the sales in the GUESS Collection line and therefore increase the penetration of the line relative to the total store.

And that is where we are concentrating our efforts right now.

But, yes, we think that there is tremendous potential in that segment of the market and if we are successful, we would explore an alternative to look into a separate store format.

Of course, it would be significantly smaller than our current stores which carry, you know, a whole line of casual wear, men's and accessories and in that case it would be smaller store.

Eric, the depreciation and amortization for the quarter was $8.9 million.

Okay.

And just in the wholesale level, what are your -- regarded to your ---- to the people of this world what are they saying to you about what they want to see from you guys this year in terms of going into outlet and in terms of product they want to start seeing from you?

You know, I think that they are very excited about GUESS we have great relationships.

Nancy Shachtman does a terrific job with her team and she very close with all the majors and in specialty stores as well.

What we do our own critique of business and trying to look for opportunities to expand business and we work with them in talking about opportunities, you know, together.

And I think that we see that there is opportunity to increase our penetration of basics, which we think that some of our competitors have a higher penetration.

We think there are many product opportunities in the areas of both men's and women's.

In terms of women's, we are going to a more dressy type of part of the line.

We think that we will well penetrated with the casual part of the line but we see opportunities in dressy more clubby type of product.

And we are looking to develop those and some of that is being done with -- through immediate product but some of that is also in our existing line.

In the case of men's, the balanced part of the business is a clear area of focus and we have had some recent successes with that in both our rethey'll stores and wholesale as well.

Great.

Thank you.

You're welcome, Eric.

And we will next go to Holly Guthrie with Morgan Keegan.

Good afternoon, everybody and congratulations Carlos and Fred and to all your colleagues.

Great job.

Thank you, Holly.

Thank you.

Wholesale.

Going into the quarter you said that you thought that for the fourth quarter wholesale would be up around 12% and you were able to see that number.

Can you talk about what happened during the quarter to produce such a strong increase in wholesale if?

Yes, it is the increasing wholesale is probably a little bit misleading in a way because we had a big systems conversion that took place at the end of the year and as a result of that we shipped a lot of product that we had in our warehouse to make that conversion seamless.

And so on top of that tomorrow some of the revenues that you see in the fourth quarter were impacted by the early shipping of January product.

So that contributed to probably a slightly higher revenue for the quarter.

The other big contributor to the revenue growth is the fact that we provided less allowances to our customers because of products sold better than a year ago for the same period.

So -- and those allowances detract from revenues.

So because of number of allowances that we provided was lower than a year ago, therefore our revenues ended up being -- the revenues that we booked and reported ended up being higher.

So that contributed to the growth of revenues as well.

Excluding the early shipment, what kind of rate of growth did you see in the fourth quarter?

Well, I think at -- you know, if you look at that, the growth was about 29%.

And about 10 points of that would have been related to the early shipment.

And, you know, a considerable portion of the growth was also due to the margin allowances that I just mentioned.

Okay.

And does that mean that the stores --

There was some natural growth because the retailers were selling better, you know, we shipped more product out because sell-throughs and their appetites for receipts was higher than a year ago.

Does that mean if you had -- you know, a certain run rate that some of that was pulled out of the first quarter and into the fourth quarter so your growth will look a little bit less in the first quarter?

Yes, that is correct.

On the other hand, you have a very clear estimation of what revenues are going to be in the first half of the year because of the backlog numbers that we provided, Holly.

So the backlog numbers are very clean as of current.

I -- okay.

Great.

That will be it.

That already, you know, cleans the future in terms of what we expect on revenues.

And what are your goals for debt reduction?

Debt reduction, I think that's the number, you know, based on the scheduled payments goes down by about $12 million.

We will confirm the exact number.

That's correct, Carlos.

We will pay down about $12 million on the secured notes during the year.

Okay.

And what is -- what will the impact be in the first quarter as you liquidate the children's stores in the business and then on the second half, the fact that they won't have the losses drag -- be a drag on the business?

Well, you know, we -- the cumulative loss last year of all those the kid's stores come bind was about $1.8 million pretax.

Obviously the stores loss more money in the first half of the year because of not having back to school or the Christmas season which are the higher selling seasons for us.

But, we would expect that the loss would be comparable to last year in the first half of the year, and then we would avoid the results of the second half.

Okay.

But exiting the kid's business is incorporated into the guidance that you gave?

Well --

The comp and the margin improvement.

In the guidance, so you know, I don't know what you're referring to.

But, you know, in terms of all the different components that we gave you in terms of sales growth and so forth definitely we are assuming the closing of the kid's stores by the second half as we mentioned in the initiative section.

Great, thank you.

You're very welcome, Holly.

Our next question is from Margaret Whitfield with Brean Murray.

Good afternoon and congratulation.

Thank you, Margaret.

How are you?

Good.

I wondered if you could comment on any increase in doors that you might be seeing here in '04.

Yes, we are anticipating that we will have some more increase in doors.

Actually as you heard, the doors at the end of the year were flat to last year, almost flat.

About 10 doors different.

And going into spring and summer we anticipate that we will have about 40 more doors all together between the men's business and women's business.

Okay.

And what might you see going into the second half?

Any further increases likely?

We are not speculating on that right now.

Um-hmm.

Because you know we are very conservative when it comes to this and until we see the actual buying we do not want to speculate on growth on that way.

Now, that being said, the numbers that we anticipate are -- we think conservative and we gave you a pretty good idea of what we anticipate for the second half if you consider that we want to see that business grow in the single digits and knowing that backlog which includes both spring and summer which is six months is flat.

Um-hmm.

So which would imply that we are anticipating growth in the second half.

The international wholesale was flat.

Could you comment on why that was?

I think that there was some timing but also the fourth quarter for international is not a very big quarter as I recall.

Um-hmm.

And so there is some timing.

Our business internationally is doing very well, actually.

So, you know, I don't think you shouldn't imply from there that the business is weak.

I think it is more of a timing issue.

But again the base is very small.

And GUESS Collection with the new team, when would we start to see products that exemplify their approach?

Very soon.

Very soon.

Could you comment on the direction they are taking in terms of price points?

More dressy higher price points.

We think we can command the higher price points and the initial tests have been very encouraging.

Thank you.

Thank you, Margaret.

And again, it is star one if you do have a question.

We will next go to Gabrielle Kivitz with First Albany.

Hi, congratulations.

Thank you.

Hi, Gabrielle.

First off, just on the men's bottoms, you had mentioned you are making some improvements there and I'm wondering the pickup that you saw in the men's non denim pants in February and January is that a result of some of the improvements that you made or a trend that has continued and we have yet to see the improvement?

No, it is a combination.

We definitely had some of the new product in the store is during the last few weeks and that new product, especially a couple of the styles have been selling very well so we are very encouraged.

I think I mentioned to you when we spoke before that we had new talent in the design team and for men's bottoms and that new styling is doing very well.

So many so much that is -- so some of that is contributing to the sales and has contributed to the sales of January sale and February.

Also the same type of product has been introduced in wholesale and is also doing well as well.

Great.

And then in terms of the new store openings for 2004, you gave guidance it looks like you're opening significantly higher number of factory stores to regular stores.

Is that consistent with your store openings for 2003 as well in terms of breakdown between factory and regular stores?

Is it conflicting you mean?

No, consistent.

Oh, consistent.

You know, we had obviously we look at capital in a very, very careful way and we because we had very strong performances in both Canada and factory outlet stores this past year, we did devote more capital in our planning phase to those two segments.

And we think that we are under penetrating some of our factory outlet stores and they are big cash producers and we want to pursue that.

In the the case of Canada, we think we are under penetrated in factory relative to full price retail stores and we think it is healthy to run with a better mix so we are pursuing those as well.

But it is very consistent with our store expansion, yes, for sure.

Um-hmm.

And then lastly on the wholesale business, you know, you mentioned that the strong sell-throughs allowed you to provide less allowances.

Is there any reason that we shouldn't expect that sort of level of improvement to continue or that strength to continue going forward?

No, it is always a function of how good the product is.

And, you know, we think that our product continues to get better and we will -- you know, we strive for that every day.

You know, I think at the same store sales growth that we have had in our own stores is a testament to how much better the product, you know, has been.

And typically, that type of trend also translates in our wholesale segment since the customer looks for the same type of styling and fashion and on price.

So if we were to X out the early deliveries which were about 10 percentage points it looks like you would have done 19-20% growth in the wholesale business in the quarter.

Could we assume that your guidance for mid single digit growth for the wholesale business could be conservative then if you were to continue to perform --

No, no, I don't think that that is -- that it would be appropriate and I'll tell you why, Gabrielle.

A year ago I'm talking about fourth quarter of 2002 we gave an enormous amount of money in markdown allowances because at the time the product was not selling well.

Okay?

So then when you are comparing to those numbers obviously that dropped a lot of the growth in net revenues that we booked this past quarter.

Okay?

But now because last year overall I'm talking about 2003 the product sold better throughout the year then we are not up against those kind of markdown allowances being given in any of the quarters that we are facing for 2004.

Okay.

You cannot translate that.

You know, we frankly see this single digits growth in wholesale to be an adequate statement of what we see for the business right now.

Now, most things can get significantly better, we can you know maybe the injections and the immediates during the season sell through great.

We are putting a lot of emphasis on our basics business as I mentioned before.

And we see big opportunities there.

Nancy Shachtman, again, has been focusing on the assortment of for basic and quick replenish and we are taking a little more inventory risk and buying more inventory to support -- better support that business.

We think that we were great in controlling inventories but in a way we probably did not maximize the sales because of being so careful and not taking inventory risks so we are supporting her with a little bigger open to buy.

So we can react to business trends more effectively.

But all that being said I think that the guidance that we gave is pretty accurate relative to how we see the business today.

Great.

Thank you so much.

You are very welcome.

We will next go to Jeff Van Sinderen with B. Riley and Company.

I'm not sure, maybe I ---- but earlier you were talking about the retail stores in closing the kid's stores and you made some sort of comment about the first half loss being the same year-over-year.

I wasn't sure if you were talking about the net income loss for the whole company or if you were talking about just for the kid's -- just for the retail portion of the business or what that was?

No, I did not talk about the loss in the first -- unless you are talking about the kid's stores.

Yeah, it was around the kid's stores, I just wanted to clarify that.

No, but just in case let me just repeat what I tried to say.

The kid's stores all combined lost $1.8 million and what I tried to say was that in the first half of the year because the sales productivity is much lower during that period the loss would be significantly bigger than what you would see in the second half of the year.

Okay.

And then along those lines is there anything else you can say in terms of what we should look for, I know you gave pretty specific guidance in terms of some of the line items.

If you put that into a model, which we haven't had a chance to do yet, any sense of what the earnings progression might look like for this year?

We do not as a policy of our company we do not provide earnings guidance.

But we think that we have gone out of our way to provide you with all the information you need to come up with a reasonable model based on what we anticipate.

Okay.

Fair enough.

And then finally, let me ask you in terms of the factory outlets since you are opening more stores there, is the product the same that you are shipping to the other retail stores and using that as an outlet or secondary product or actually manufacturing separate product for the factory outlets?

We try to manufacture separate products.

We work with a target mix of business.

Some of the product that is sold in the factory outlet outlet stores is excess inventory or inventory that was transferred from some of the other channels, either retail or wholesale.

But the majority of the product that you see there currently and this is because we have been able to manage inventories very effectively is produced for those outlet stores specifically.

And we want to keep it that way.

Okay.

Very good.

Thanks very much.

You're welcome.

And our next question then have from John Rolo with Wachovia Securities.

Wachovia Securities, your line is open.

Can you hear me?

Yes, we can.

Okay, great.

Sorry about that.

Carlos.

Hi, Carlos.

Hi, how are you, John?

Good.

My question is in regards to the wholesale environment, specifically department stores right now.

I know the last couple of quarters sell-throughs haven't been that great and that reflects the backlog and new order going forward.

There seems to be some what of a shift in terms of where they are focusing their resources and maybe that little more on contemporary giving up a little on the status denim and junior side of the business.

If that is the case do you see limited upside even with good sell-throughs going forward?

And maybe you can just talk about the moving parts of that.

Yes, I mean I think that the fact that they are moving towards more contemporary type of product, I think we capture that and because of that we are working on that part of the line.

You know, we see the same type of opportunity.

And frankly, they have expressed interest in us pursuing those type of products.

Now, with respect to the moving away from the status brands, I think that they want GUESS in their stores and they want us to be successful in growing the business together and they have been very, very supportive of our efforts.

I think that time will tell.

We think that there is a place for GUESS in department stores and it is a pretty prominent one and, you know, we -- as we continue to improve our product lines I think that there is a customer there very anxious to see, you know, that type of assortment.

And as we continue to develop more of the dressy part, I think we can capture that customer base that you are referring to.

Is it fair to say that they showed probably a bit more enthusiasm behind the introduction of the Collection product versus the, you know, the traditional status product or -- or --

No, no, I think that the -- I think that they want for us to preserve the character of the brand and the casual part of the brand which has been very successful.

We just think that there is an opportunity for incremental sales here as opposed to shift in the assortment totally and walking away from the other business.

Got it.

Okay.

Second question revolves around the productivity of particularly maybe the men's wear.

At one point you had a successful men's business and the men's industry has been tough over the past couple of years.

We are starting to hear that is picking up a across-the-board.

Quat quantifying or going into detail wondering what the productivity was in the peak years in the men's side.

How much room is there to improve the productivity versus where it was historically or maybe where you are on the women's side.

John, I don't have specific numbers per square foot by product category but over all there is substantial opportunity for us to grow in our own stores and this applies not just to men's and it toes apply to men's but also to the other categories.

I'm talking about if you look at our peak year in terms of sales activity which I believe was 1999 we delivered $440 a square foot and this past year we I think we closed with short of $350.

So, there is sub substantial opportunity.

Of course, we a different chain of stores today than we did back in '99.

There are a lot of new stores that should have more potential to become mature for sales productivity growth.

But, that being said, I think at every area offers tremendous opportunity for growth.

Okay.

And then final question.

You touched upon opening the outlet stores and the success of that, those stores and also kind of you know making merchandise specific for that channel.

You know, but at the same time you're trying to balance the image of the full line stores and obviously the -- you know, the better product that you're going to be putting in there into that channel with the inventory at the outlet.

I mean how do you balance that, is there any risk that at some point maybe you have too many outlet stores and potentially degree the integrity of the full price product or wholesale product?

No, we don't view it that way at all.

You know, GUESS is still under penetrated relative to the apparel business overall and relative to the size and significance of the brand.

We have many less outlet stores than many of our competitors in the category.

Look at whoever you name they probably have many more outlet stores than we have.

We don't see that to be a risk.

That being said, the brand is the most significant thing and we protect every step we make has the brand and -- as focus.

And so every time that we open a factory outlet stores we look at what type of impact that could have in terms of brand image.

So, but, I don't think that -- I don't think we are at any risk of damaging the image of the brand.

Also, I think that we offer great product in our factory outlet stores as well.

Well it is true.

It is all about the product.

Keep it up, guys, good work.

Thank you.

There are no further questions at this time.

I would like to turn the call back to Carlos Alberini for closing remarks.

Well, I just want to say thank you again for your attention and your interest in the company.

We are very optimistic about the future.

We think we have a significant strength, we have a great network, a good business model.

We think we can generate significant cash flow growth and that is where our focus is.

Thank you again.

This does conclude today's conference call.

We do wish everyone a good day.

Thank you.