Guess? Inc (GES) 2004 Q3 法說會逐字稿

Good day and will come to today's Guess? conference call.

Today's call, including the question and answer portion, is being recorded and being made available to 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 involve known and unknown risks and uncertainties which may cause actual results in future periods and other future events to differ materially from what is 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 cancellations of our wholesale orders; the success of competitive products and the availability of adequate sources of 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 the fiscal year ended December 31, 2003, including but not limited to the risk factors discussed therein could affect the forward-looking statements contained herein and in the Company's other public documents.

At this time for opening remarks and introductions, I'd like to turn the conference over to Mr. Maurice Marciano, Co-Chairman and Co-CEO of the Company.

Please go ahead, sir.

Thank you.

Good afternoon and thank you for joining us today to discuss Guess? 2004 third quarter financial results.

Joining me today are Carlos Alberini, President and Chief Operating Officer and Fred Silny, Senior Vice President and Chief Financial Officer of the Company.

I will begin with an overview of our third quarter, and then Carlos and Fred will provide further details, after which Carlos will update you on the growth initiative we have underway and our outlook for the remainder of 2004.

Then, we will open the call for your questions.

We are pleased to report that Guess? turned in a strong performance for the third quarter, achieving diluted earnings per share of 27 cents versus diluted earnings of 15 cents per share in the year-ago period.

The improvement was driven by better results across all of our business segments, including strong growth in retail, higher contributions from licensing and improved results in wholesale due to increased international sales.

Overall net revenue increased 18.7 percent in the quarter and we delivered a 270 basis point improvement in operating margin as a result of 100 basis point gross margin increase and 170 basis point improvement in our SG&A rate.

Coupled with the better operating results, we continued to make strides in enhancing our financial strength and balance sheet.

We ended the quarter with 63.1 million in cash and equivalents versus 12.4 million a year ago and our debt level was at 61.5 million, versus 72.3 million a year ago.

At quarter end, cash and equivalents exceeded outstanding debt by 1.6 million, a 61.5 million improvement from last year's third quarter.

The highlight of the quarter was the launch of our two new concepts -- Marciano and our accessories stores.

As of today, we have opened four Marciano stores and three accessories stores.

We are pleased by the initial performance of these new concepts and we will elaborate a little bit further.

We also announced earlier this month our plans to buy our European jeanswear licensee.

This acquisition offers an attractive opportunity to significantly expand our European operations.

We expect to close this transaction in early January 2005, subject to the completion of final documentation and due diligence.

Our goal for this acquisition is to have approximately $100 million in revenues and be accretive to 2005 earnings.

So we are very excited by this acquisition.

And now let me turn the call over to Carlos to review the results for the quarter.

Thank you, Maurice.

We announced today that, for the third quarter ended September 25th, 2004, Guess? reported that total net revenue increased by 18.7 percent to $197.8 million from 166.7 million in last year's third quarter.

The higher sales reflect improved performance in our retail stores, increased revenue in our international wholesale business and growth in our licensing business.

All of our product categories achieved higher sales during the period, including our young contemporary line, our men's product, accessories and Marciano.

By segment, our retail stores, including full price retail, kids, factory outlet, Canada and e-commerce, generated net sales of $132.1 million during the quarter, an increase of 15.7 percent from 114.2 million in the prior year third quarter.

The increase was driven by the comparable store sales increase of 10.9 percent and a larger store base, which represented a 5 percent increase in average square footage as compared to the same period last year.

Earnings from operations for the retail segment increased to $12.8 million for the third quarter of 2004, a 34.3 percent increase from earnings of 9.5 million in the third quarter of 2003.

In the women's retail business, our young contemporary line performed well in most categories, generating improvements for the quarter.

We had strong results with dresses, shirts, sweaters and knit tops, but our non-denim bottoms business was soft during the quarter.

In the third quarter, we launched the Marciano brand, our contemporary line that commands price points.

This product is performing well in our stores and we expect the line to make a good contribution to our sales growth for the remainder of 2004.

As Maurice mentioned earlier, we have opened four Marciano stores to date and plan to open one additional store in the fourth quarter.

Our men's business has continued to perform well, in line with the trends of the past few quarters.

Woven tops continued to drive the business and we continue to see stronger results in men's denim pants.

The accessories category continues to be a strong performer.

We ended the third quarter with a total of 269 stores, including those in Canada, of which 182 were full price retail, 79 were factory outlet stores, four were kids stores and four were new concept stores.

This compares to 258 stores a year ago.

During the quarter, we opened three new retail stores, two factory outlet stores and four new concept stores and we closed four kids stores.

We expect to close all but two kids stores by January 2005 and we anticipate closing these two remaining stores by the end of 2005 and do not expect the clothing to have a significant impact on 2005 operating results.

In our wholesale operations, third quarter 2004 revenues increased 21.4 percent to $51.4 million from 42.4 million in the same period in 2003.

The increase was driven by growth in international wholesale revenue of 10.6 million, an increase of 65 percent, partially offset by a decrease in domestic wholesale net revenue of 1.6 million, or 6.1 percent, reflecting lower shipments to our domestic wholesale customers, primarily the banner stores.

Domestically, our products were sold in approximately 930 doors at the end of the third quarter of 2004 versus approximately 825 stores a year ago and 850 doors at the end of the second quarter of 2004.

Earnings from operations for the wholesale segment increased to $3.8 million in 2004 from earnings of 2.4 million in the third quarter 2003.

This improvement was driven by higher sales and margins in our international wholesale business.

In terms of trends, our domestic business saw solid performance from premium denim, woven shirts and ponchos in our young contemporary line.

The men's line had improvements in the denim business, both fashion and basic.

The growth of our international business was driven by strong performance in handbags in Europe where the Guess? brand is well recognized.

We believe that the European market offers significant opportunity for growth.

Our domestic wholesale backlog as of October 23rd, 2004, was $45.6 million, compared to 44.1 million as of October 25th, 2003, or up 3.3 percent.

Now turning to licensing.

Propelled by the strength of the brand, this business continue to perform well with third quarter net revenues of $14.3 million, an increase of 4.2 million, or 41.1 percent from the third quarter of 2003.

Operating and earnings increased to $12.1 million from $8.5 million in last year's third quarter.

This growth was driven by our domestic licensees as a result of the strength of our accessories business.

Let me now turn the call over to Fred to review the financial results in more detail.

Fred?

Thank you, Carlos, and 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 third quarter of 2004 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, page 6 contains cash flow data, 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 third quarter ended September 25, 2004, Guess? reported net earnings of $11.8 million, or diluted earnings of 27 cents per share.

This compares to net earnings of $6.7 million, or diluted earnings of 15 cents per share for last year's third quarter.

As Carlos mentioned, net revenues for the third quarter increased 18.7 percent to $197.8 million from $166.7 million in the 2003 third quarter.

Overall, gross profit for the 2004 third quarter increased 22.2 percent to $75.3 million from $61.6 million in the third quarter of 2003.

Gross profit margin increased to 38.0 percent in the third quarter of 2004 from 37.0 percent in the same period of 2003.

This 100 basis point increase is attributable to higher licensing revenue.

In addition, we achieved improved margins at both retail and wholesale.

The higher retail margins reflect improved leverage of our store occupancy costs on higher comp store sales.

The improved margins at wholesale reflect better performance in our international wholesale business.

We reported that SG&A expenses for the third quarter were $53.7 million, an 11.6 percent increase from last year’s $48.1 million.

The SG&A rate this quarter was 27.2 percent of net revenues, 170 basis points better than our SG&A rate in the same quarter in 2003, which represented 28.9 percent of net revenues.

This improved SG&A rate reflects expense leverage on sales growth in our retail and wholesale businesses, partially offset by the additional expense necessary to operate 11 net new stores in the third quarter of 2004 versus the same 2003 period.

Earnings from operations improved by $8 million, or 59.8 percent to $21.5 million in the third quarter of 2004, compared with earnings from operations of $13.5 million in the 2003 period.

The retail segment represented $3.3 million of the improvement, reflecting the strong comparable store sales growth, improved margins and effective expense leverage.

The wholesale segment increased its earnings from operations by $1.4 million, or 57.4 percent, reflecting improved gross margins and revenue growth of 21.4 percent.

The licensing segment improved earnings from operations by $3.6 million, or 43.3 percent.

Corporate overhead increased to $7.2 million from $6.9 million in the 2003 third quarter.

Interest expense for the third quarter of 2004 was $1.4 million, compared to $1.7 million for the 2003 third quarter, reflecting the lower debt levels in the period.

Compared to a year ago, we have lowered over debt level by $10.8 million and increased our cash position by $50.7 million.

We closed the quarter with $105.5 million of inventory, compared to $104.7 million at the end of the 2003 third quarter, in spite of operating 11 more stores at our same-store sales growth.

For the nine months ended September 25, 2004, the Company reported net earnings of $14.7 million, or diluted earnings per share of 33 cents, versus a net loss of $4.5 million, or a diluted loss per share of 10 cents in the comparable 2003 period.

The 2003 results include restructuring, impairment and severance charges of $0.8 million, or $0.5 million net of tax, representing 1 cent per share.

Earnings from operations for the nine months ended September 25, 2004 was $29.3 million.

This compares to a loss from operations of $1.7 million in the year ago period, including the $0.8 million charge.

Total revenues for the period increased by 15.5 percent to $505.3 million, compared to $437.3 million in the same prior year period.

I would now like to turn the call back to Carlos to review the growth initiatives underway and our outlook for the remainder of 2004.

Carlos?

Thank you, Fred.

In our last conference call, we discussed several initiatives that we've taken at Guess? to lay the groundwork for long-term growth.

I would like to update you on our progress.

At that time, we also provided some guidance on our outlook for the year within the context of this new initiative.

I will provide an update on our expeditions for the fourth quarter.

In the last conference call, we discussed our plans for Marciano and accessory stores.

We're on-track and expect to have five Marciano stores and six accessory stores opened by year end.

As mentioned earlier, we are encouraged by the performance of the stores that just opened.

We continue to expand our core retail stores in the U.S. and Canada.

We plan to open a total of 23 new Guess? stores in 2004.

We're also remodeling about 14 stores this year, relocating approximately four stores and plan to close approximately 13 stores this year, which include seven Kids stores.

Capital expenditures for 2004 are now expected to be approximately $32 million and depreciation and amortization is planned at about 36 million for 2004.

Based on current sales trends, we expect comparable store sales for the month of October, which closes this coming Saturday, to increase in a mid-single digits on a program basis.

Based on these trends and our plans for the holiday season, we now expect for the fourth quarter of 2004 comparable store sales in our retail stores to increase in the mid-single digits.

We expect total retail sales to increase in the low to mid-teens on a percentage basis, including sales from the new stores and the contribution from the 20 new stores that we opened in 2003.

On the wholesale side, we anticipate overall revenues to increase in the mid-single digits on a percentage basis for the fourth quarter of 2003 versus the same period in 2003.

Net licensing revenues are expected to decrease in the mid-single digits.

Overall, gross margins are now expected to improve by approximately 300 basis points in the fourth quarter of 2004, reflecting improvements in both the wholesale and retail businesses from last year’s levels.

Regarding SG&A expenses, we expect them to increase in the fourth quarter of 2004 in the low teens and to also increase slightly as a percent of revenues from 2003 levels.

The increase includes expenses necessary to operate the new stores, as well as additional expenses related to the positioning and launch of the new brand.

Finally, we expect average inventory levels in the fourth product to increase modestly due to the increase in stores and sales growth.

Interest expense is expected to be $1.5 million in the fourth quarter and our tax rate to be approximately 42 percent for the balance of 2004.

Before we open the call up for questions, let me reiterate our excitement about the initiatives that we have underway, both to build on the progress that we have been making in our core business while pursuing promising new opportunities for growth.

We're working hard to optimize our financial performance through sales and margin expansion, while keeping a careful eye on costs and we are focused on long-term success and shareholder value.

We entered the critical fourth quarter period feeling good about our business and our outlook.

Thank you.

This is Maurice Marciano.

I would like to add just a few things in conclusion.

As regarding our stores, the new concept, the Marciano and the accessories, intentionally, we want to keep these stores, the number of these stores, for the next probably eight to 10 months to approximately 10 to 12 stores in each concept.

And this is in order to make sure that we fine-tune very well each concept and that we measure the penetration of each product in this concept and to check also exactly the right size of this concept.

So like that, after that test, we're going to re-expand both of these concepts.

And we really believe that there is a tremendous growth in both of these.

And as Carlos mentioned, we're very pleased with the results so far.

The second thing is regarding Europe.

And I mentioned earlier that we're very excited about the acquisition of back (ph) license.

And not only for the existing business, but for the tremendous growth which lies ahead, because there are quite a few countries where we have -- which are basically untouched.

And lately, just very recently, few stores have opened in Eastern Europe and they are performing -- not by us, but distributors there -- and they are performing very well.

And the distributors there really want to open much more stores.

So we see a tremendous growth, not only in Europe, in the regional countries of Europe, but in all of the new countries of Europe, all of the Eastern countries of Europe.

So that is what I wanted to mention.

And with that, as always, we thank you for your interest in Guess? and we will now be happy to take your questions.

Operator?

(Operator Instructions).

Jeff Klinefelter, Piper Jaffray.

First of all, congratulations on your third quarter.

Good job.

A few questions for you, maybe first of all of the Marciano product that is in your existing stores.

Can you talk a little bit about generally how much space that is taking up in your stores?

What product did it displace?

Is it having any sort of an impact on the average transaction value in your stores?

Just maybe just a little bit more on the characteristics of that product?

Second question would be on the number of doors.

It looks like you made a lot of progress adding department store doors this last quarter.

Is that something where you see that bumping up over the next several quarters and getting back up above 1000 before year end?

And then I guess just lastly, Carlos, if you could just recap one more time and maybe start with that on the guidance for the fourth quarter, just make sure that we had this right.

I understood that on the SG&A, it would be up -- did you say it would be up low double-digits as a percent over year-over-year?

It's slightly over the rate from last year.

10 to 20 basis points over LY (ph)?

We can't quantify that, but it's slightly over the rate.

Okay.

And then margin’s up 300 basis points.

And the, could you just run through the top line again on three components?

What do you want to start with?

You decide.

It sounds like guidance.

Let's get that out of the way, then get the fun stuff.

We said that retail sales, same-store sales, we expected them to increase in the mid-single digits -- okay? -- comparable store sales for our retail business.

We expected retail sales to increase in the low- to mid-teens.

This includes all of the new stores, okay?

On the wholesale side, we expected overall revenues to increase in the mid-single digits.

And on in-licensing (ph), we expected a decrease, a slight decrease in the mid-single digits. (multiple speakers) gross margins 300 basis points improvement;

SG&A rate, we expected the rate to be slightly higher than last year for the same period, and the increase in overall dollars to be in the low teens.

Thank you.

Margaret Whitfield, Ryan Beck.

I don't think we're ready yet.

There was a previous question from Jeff.

It was regarding Marciano's.

And Marciano, if you go to our stores, it's occupying, I would say, 20 to maximum 25 percent, but no more than that.

It's rather around 20 percent of the floor.

So that is for the Marciano.

And the product is very well-received by our customers, even in the Marciano stores.

The one thing that I would like to mention, one very interesting facts.

One of the stores, Marciano's, that we have open is in the La Plaza Mall in McKinnon (ph), Texas.

And there, this is the only shopping center where we opened a Marciano store and we actually pulled out all of the Marciano merchandise from that store, from the Guess? store, and then now so you end up with a Guess? store and a Marciano store in the same shopping center.

And the interesting fact is that the Marciano store is performing above plan and the Guess? stores has not decreased in business.

So it is a little -- I know it's a little bit only to talk about that, but we are very happy about that and I hope that we're going to see that as a pattern while we're opening more Marciano stores.

So that's very encouraging price.

So that's what I have to say about Marciano.

Did you have another question?

He had another question on the door counts.

And really, this is of (multiple speakers).

On the door counts for wholesale.

We don't see the door count going to 1000 by the year end.

As you might know, we are riding through the holiday season and this is not the time when you open new doors right now.

Okay?

So now we can take one more question.

Margaret, your line is open.

Could you elaborate on what is going on in wholesale?

The backlog was up low-singles, but you had lower shipments into department stores.

And I wondered if the U.S. component of wholesale had an improvement in operating income for the period?

And then I have another question to follow up.

Margaret, our backlog is typically about six months out.

It could be a little less than that, depending on when you're taking the read of the backlog.

So, obviously, we are picking up some of this spring backlog in the number that we shared with you and summer.

So, as a result -- then, you can conclude that our business, including new year, is better than it has been, in terms of demand.

That's why you see that revenues for this year were under pressure, but our backlog is up.

So business is getting better.

And in part, that is a function of opening (ph) more doors, as we were talking before.

With respect to the operating performance, it has been better.

We picked up $1.6 million, I believe, in operating earnings for the quarter.

And so now, that is the total wholesale business.

And as we said during our prepared remarks, that strength came from the international business.

Our U.S. business is still operating softly with earnings under pressure because of the deteriorating revenues that we expect.

If you're going to hold to a limited number of new concept doors for next year, could we conclude that there would probably not be any meaningful impact either way on the bottom line in '05?

No.

We had -- '04 has been under pressure also in margins.

The product did not sell as we had planned.

And as a result of that, we did have a margin -- a negative impact on that.

We expect that next year, we're going to do better.

No, I mean in terms of the Marciano and accessories stores, in terms of limiting the number of stores until you fine-tune it in '05? (MULTIPLE SPEAKERS).

No, no Marciano and accessories.

I think it's going to have a limited impact because of the small number of stores that we're going to have for most of the year, okay?

The full impact, what we're expecting is the full impact of these two concepts to reap that effect, really in 2006 and the year beyond that, of course.

Okay.

And finally, it seems like from the last time you provided guidance, the top line outlook has been diminished just a little, in terms of the retail and the wholesale segment.

Are you seeing something out there, in terms of impact on consumer spending from higher gas prices?

Is there something out there that you're putting into your forecast for the fourth quarter?

We try to be realistic.

And based on the current trends, I mean hopefully we will do better.

But our sales in October -- we are estimating that they're going to run in the mid-single digits.

And that's where we have the fourth quarter pegged at.

So I think that it has been more difficult.

October was not as strong as the trends that we saw in September.

The good news is that there are many categories that are really still doing very, very well and how we see opportunities going into the new year as well.

So it is just, I don't know if this is a macro issue.

Our traffic in the stores has been very steady and very healthy.

Finally, licensing, you're forecasting that to be down mid-singles, although you had a nice increase for the period.

What's happening there?

Is it just timing issues?

There are a few things that are impacting that business with us taking, with the proposed acquisition of the Europe licensee.

There's going to be some transition there that's going to have impact on revenues.

There are some other international licenses where business has been and is forecasted to be somewhat weak.

Our kids business continues to be tough and with closing the stores, obviously, that is not helping the overall revenue.

And we are also transitioning with our shoe license being terminated as well.

So there are a few areas that are going to put some.

But we have a new licensees for shoes.

Okay.

So all of these revenues have been impacted to a certain extent.

And again, we're trying to be conservative and hopefully, the numbers that we are giving you today, we're going to be able to meet and exceed hopefully.

Thank you.

Dorothy Lakner, CIBC World Markets.

Thanks.

Good afternoon everyone and congratulations on the quarter.

Just a question on the new concept stores.

One, on the accessories stores, are those locations near or adjacent to a Guess? store, or are you trying different things there to see what works?

Secondly, on the Marciano stores, as Maurice was saying, you have one store where you pulled the Marciano product out a Guess? store in the same mall.

Are you going to do that with all of them, or again, are you just going to try different things to see what works best?

And then, secondly, there's been a lot of press recently about the shipping logjam in Los Angeles and the ports, and I'm wondering if you're being affected at all, or what color you can give us on that issue?

Thank you.

Okay, let me just address the accessories store.

The first store we opened, accessories store, is in the Grove.

We do not have a Guess? store there.

We just opened our first Marciano store there.

So that is one where there is not another Guess? presence in that same mall.

Now the other two stores that are open, one is in the Florida mall and we do have a Guess? store.

The other one is Park Place in Arizona, and we also have a Guess? there.

In terms of your second question, about Marciano.

About the Marciano, the intent will be to do that.

As we go into open the Marciano stores in shopping centers, we will then pull the Marciano merchandise from the Guess? stores.

That's the plan right now.

We might want to change and keep a part of it, or whatever.

But as we as that plan being successful, then we will continue to do that.

And is there anything specific that you're going to be moving back into that space in the Guess? stores?

Basically, what we're doing is we're increasing the space for the other products.

We're increasing the penetration of other products.

And it's like in any business.

You just analyze your business by product and you give space to all of the performance product in the store.

You give more space to the one performing the best.

Great.

One last question, just on the domestic wholesale business.

Carlos, you were saying that the product hasn't sold as well as you've planned.

Are there specific areas where you think you're making progress?

Yes, as a matter of fact, yes we do.

Men's has been steadily improving.

And even when our men's product was doing extremely well in our own stores but we were still having a tough time getting the same kind of sell-throughs in department stores and the wholesale side, and now that is reverting in a very, very significant way.

Then on the women's side, denim is selling very, very well.

Basic denim is selling well.

So we're seeing a lot of improvement.

It's just I think that our product is getting better into next year.

I think that the design is, the reception we got from the retailers has been much improved and we can really anticipate that things are going to get better in that area.

But it's one day at a time for us.

Dorothy, you also asked for the port delays.

And we are experiencing, as everyone else, some delays in our cycle time.

We are doing everything we can to really anticipate and make some changes.

One thing that is helping us a lot is that a lot of the product of course comes through L.A., and we do have a facility here in L.A. that we put in operation this year.

So that adds some flexibility to the model.

In some cases, we can bring some product into our L.A. facility and do the initial distributions from here and then do replenishment from our main facility, which is in Kentucky.

So that gives us a little time to be able to get to the stores faster.

We are looking at '05 with a very critical eye because we don't see that this situation is going to improve very quickly.

And we are thinking about what is it that we need to do on a medium-term to make sure that we are not going to be impacted.

Most of the holiday goods are kind of like in the water or in the rail already going to Kentucky and we are intercepting some of those deliveries to, again, to reach the stores sooner.

But I think we're not going to experience a significant, negative impact, for the time being.

So, would you say there's more probably concerned about what happens to the spring or the first quarter product than the holiday?

No, no, no.

That's not what Carlos was saying.

It's more that we don't expect this situation to resolve very quickly.

It's not going to worsen, but rather the opposite.

For us, we are taking right now, anticipating that this situation is not going to resolve very quickly.

If it resolves quickly, then it's all gravy.

But we're going to take action to make sure that we're not going to get impacted by this.

Thanks.

Holly Guthrie, Morgan-Keegan.

Thank you and good afternoon everybody and congratulations.

First, a question for topline, going back to your guidance for Q4, wholesale up mid-single digits.

That's a pretty significant slowdown from the 21 percent increase you saw in Q3.

Is that mid-single digits, is that just domestic, or is that the total wholesale?

That's total wholesale.

That's total wholesale.

And you're right, Holly, the issue is that the third quarter is the strongest quarter in the European marketplace.

So we don't anticipate for that acceleration and that kind of growth to continue to the fourth quarter.

As you may know, in Europe, there's only two seasons.

It's not like here where we have four seasons.

We show only two collections in Europe.

One is spring/summer, the other one is fall/winter.

And you always make your deliveries at the beginning.

Like for spring/summer, it's January, February and a little bit in March; and for fall, you shift basically everything like in August/September and very little in October.

And then after that, it's all like replenishment and things like that.

And then there's a little blip in December when we stop shipping there, all of the basics, we stop shipping there in December.

Okay, and onto gross margin.

The gross margin increase of 100 basis point this quarter, the third quarter, could you talk a little bit about why -- that's a little bit below what I was looking for.

Does it have anything to do with the smaller runs because of the startup of some of the new concepts?

Not really, Holly.

This goes back, you may remember, and you're right.

We had expectations to do better in margins for this quarter.

You may remember that coming out of the month of September, we made the comment that our business was a little more promotional than what we would have liked.

And we have the inventory, and of course we're very committed to managing inventories aggressively and keeping inventories clean and we had to be a little more aggressive with pricing to be able to move the product.

And we were successful, but of course, the margin did not have the kind of increase that we had originally anticipated.

In addition to that, there were some other issues that affected the margin, like the kids stores.

We're getting out of all of those kids stores and our margins were under pressure just to clear all of that inventory.

We had success with occupancy because of the increased same-store sales.

And then on the wholesale side, we -- I mentioned that our business was under a little bit of pressure because of slow selling in some of the categories.

And for that reason, our margins had some negative impact on that.

We, again, in an effort to keep inventories clean, we moved some excess inventory during the quarter, and that has an impact on the bottom line as well.

Okay.

And back to sales.

With licensing being down or expected to be down mid-single digit in the fourth quarter, you had mentioned a little bit of transition from the acquisition of your European licensee.

Wouldn't you pick some of that up in the wholesale side, or am I missing something there?

We are not going to own the business until the acquisition takes place, which we are anticipating to occur in January.

So until that time, it's the licensee who (multiple speakers)

None of the revenues will translate into our revenues until January 3rd.

And what did you mean when you said that part of the reason for the licensing being down in the fourth quarter was the transition from --?

Only because we are preparing for the Company to complete that acquisition.

So there are -- and these people are still, obviously, the licensees are still running the business.

But we are anticipating that there's going to be a little bit of that transitional type of impact.

So a onetime contraction?

Exactly, which might or might not happen, but we want to be conservative about it.

Great, thank you and good luck in the holidays.

Kristen Chen, Pacific First Equity.

I wanted to follow-up about I guess the wholesale question.

It looks like increase the number of doors from 850 to 930, as you said in the call.

Is that a number that you think can go higher, or is that sort of a number that you are happy with?

Of course, we would love to see this business grow and we're doing everything in our power here to make that happen.

Now that being said, we want for sales to be healthy in the retail stores.

And we think that is the number of doors, based on our current trends, is a profit.

We were fortunate that we got some additional doors and many of our partners are very excited about the opportunity to continue to grow the business together.

Part of what is happening here is that, in order to get a healthier business, the retailers are trying to size their buy to keep a very healthy rate of sale.

And in some cases, you're going to have more doors, but that does not necessarily translate into many more (indiscernible).

Basically what we have to do is, now that we have more doors, we just have to perform well in these doors.

And as we are performing well, then we will move into more doors.

But, we have to give the time first.

Usually, it takes at least one season, and a season for department stores is six months.

And then from performance, then they will decide to expand or not to expand.

So it's a little bit early to talk about it, so that's why -- I just don't want to anticipate things which might not happen, so we will do everything to make it happen, as you can imagine.

And then with respect to October trends that you're seeing on the retail side, the guidance that you're giving for same-store sales, what trends are you seeing that lead you to give that guidance?

In our case, our fiscal month of October ends this coming Saturday.

So we will have pretty good visibility on what those numbers are looking like.

And the trends have been -- overall, I don't know if you're asking for product category performance?

Yes, that's sort of what I'm getting at, like what are you seeing (multiple speakers)?

Well, the products (ph), then I can answer that.

For product, the denim is performing very well for us, both for men and women.

The Marciano product is performing very well as well.

The Marciano is doing really well.

And the accessory business is also doing very well.

There is -- then usually during the holiday season, specifically for women, we have a great pickup, as you probably know, in all the gift giving, like sweaters and things like that -- all of the items that usually everybody picks up as a gift.

And the same thing for accessory.

We have some spatial package accessories specifically for gifts.

So that is the trend that we see there.

Are you flowing the product into stores differently this October versus last year, in terms of timing of the markdowns, as well as the new product that's starting to drift in for holiday?

No, not really.

The pattern usually for holiday is a very steady pattern.

You know approximately when you want to get your goods in which are specifically holiday.

You don't want bring it too early because then you have to mark it down very early.

So you want to be right on time.

So we're doing that.

And same thing for all the sweaters, all the gift pack accessories that I was talking about.

So all of that is going to have an impact I think starting now in November, usually.

That's when it starts.

Also, our inventory position is healthier than it was a year ago at this time, and that is one of the main drivers of the margin growth expectation for the fourth quarter, the 300 basis points that we're talking about.

So we're better positioned.

In fact, while we saw some deceleration at that rate of sale that I was talking about in October, our business is healthier in terms of mix.

Okay.

And then it looks like your tax rate is going down.

What is driving that?

Not enough.

I agree with you on that one.

We just look at the tax rate of course constantly, and based on what we have seen for the total year, based on earnings projections and everything else, then we make our determination as to where the tax rate has to be for full year, and that's (indiscernible) we are correct.

Just a housekeeping question, --what was CapEx for the quarter?

It was $10.6 million.

Thank you.

John Rouleau, Wachovia Securities.

A couple of questions.

You mentioned that the Marciano product is taking up roughly 20 percent of the mix in the Guess? stores.

How does that compare to what the old collection line, if you will, was as a percentage?

And what I'm kind of getting it, is if you look at the total product that is in those stores today, including the Marciano product, is there more product in the stores, the same, less -- where is the product level in the stores.

It's basically, I would say basically the same, a little bit more than last year.

And you have to remember that we launched that line in the end of August, end of August, beginning of September.

So it has been really just 60 days.

So when you launch a new line, you don't want to be overly aggressive.

And that is why I mentioned, we're very pleased with it.

And the thing is, as this line is going to perform better and better, we're going to see more stores, the Marciano stores, increasing in number.

And then we're going to see quite a few stores, Guess? stores, being completely free of Marciano goods, rather than having more Marciano goods.

In the existing stores where they keep the Marciano goods, then we will increase the penetration.

The Marciano line, that is more or less a derivative of the old collection as well?

It's even more contemporary.

It went up basically a notch or two between contemporary and young designer.

What has collection kind of been running as a percentage of the mix in the stores?

Was that roughly 20 percent previously too?

Yes.

It was around that.

It was around that, around 20 percent.

Like we said, John, our plan is that the contribution of this line to total revenue should continue to increase.

The fourth quarter is planned more aggressively than what we saw in the third quarter as the brand has been launched.

And so our inventory position should grow as we go into the fourth quarter.

Next question, as far as the accessories are concerned, I know that category continues to be very good as a category.

But if you break that down and look at some of the components -- watches handbags, luggage, jewelry -- are there any real standouts?

What are the top two or three, is it just good the board?

Well, the quarter had great success with handbags.

We had said this in the past that the business is very strong.

Eyewear was strong, women's (indiscernible) was strong.

Watches.

Watches.

Watches is one of the biggest also.

I would say handbags and watches are the biggest.

Okay.

And luggage, is that an incremental new product category in the accessories?

Yes, but it's just starting.

It's almost like tom have fun.

Last question really has to do with the international business.

And I'm a little unclear as to how you categorize some of the international sales.

You had alluded to the wholesale side, and then you had said you're having some nice success in Eastern Europe on the retail side.

So is that all wholesale business, and is the growth coming from (multiple speakers)?

If you think about it, the retail stores opening in Eastern Europe, our licensees, our current licensees there, are sending them product.

So for them,. it's wholesale (indiscernible).

But those are Guess? stores operated by a third party, and you don't license them, but they're Guess? stores?

They are Guess? stores.

They are entirely Guess? stores, stand-alone Guess? stores.

And is that where you see most of the growth coming from in Europe?

No.

This is part of it.

You are adding this, you're adding that.

We have, for example, a big opportunity in Spain where the business is not currently we think as strong as it should be.

And we believe that we can make it much stronger when we take over.

And then you have England and Germany, which is very, very small.

So we can address that as well.

And all this is wholesale.

Then you have all of the Eastern Europe, and we're even talking to a party in Russia, but it's a little bit early to discuss that.

We have nothing to announce there yet.

But we're talking to a party in Russia and this again is a big market.

So that is why we see all of the potential there, and that's why we're so excited by this acquisition of license.

So is it more product-driven, just taking stronger control of the product and tweaking the product for Europe, is it execution?

It's a little bit of both.

Product, because we're going to direct the design over there.

We have a design studio in Florence, in Italy.

I don't know if you about it.

So we're going to direct the product.

And in terms of also of operation and all that, we think we can be more efficient, yes.

Great, thanks?

That is all the time we have for questions today.

Mr. Marciano, I'd like to turn the call back over to you for closing remarks.

Thank you.

So, again, we have so many things on our plates right now that we are really excited by everything that all of the different businesses that we have and all of the opportunities that we have ahead of us.

And we will to everything to optimize all these opportunities.

And thank you now for your interest in Guess? again and we look forward to keeping you updated on our progress in the future and making announcements as things happening.

Thank you very much.

That concludes today's conference.