Guess? Inc (GES) 2005 Q1 法說會逐字稿

Good day and welcome 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 provision 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 acquisitions and new stores into existing operations, the continued desirability and the customer acceptance of existing and future product lines, including licensed product lines. Possible cancellations of wholesale orders, the success of competitive products and the availability of adequate source 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 31st, 2004, including but not limited to the risk factors discussed therein could affect the forward-looking statements made in this conference call and contained in the Company's other public documents.

Now at this time for opening remarks and introductions I would like to turn the conference over to Paul Marchiano, Co-chairman and Co-Chief Executive Officer of the Company. Please go ahead, Sir.

Good afternoon and thank you for joining us today to discuss Guess 2005 first quarter financial results. Joining me in the room here, my brother Maurice Marciano, Chairman and CEO, will be part of the Q&A. As well Carlos Alberini, President and Chief Operating Officer, and Fred Silny, the Senior Vice President and Chief Financial Officer of the Company.

I will begin within another review of the first quarter and then Carlos and Fred will address the financial performance in more detail and (indiscernible) statutes of 2005 and outlook. We will then open the call for your questions.

We are pleased to report that Guess earned a strong performance for the first quarter, achieving diluted earnings per share of $0.18 versus diluted earnings of $0.02 per share in a year ago period. Our results this quarter were higher than anticipated, largely reflecting the better-than-expected contribution for our European operation. Also a portion of this contribution has been planned for the second quarter of 2005. As you know, during the quarter we completed the acquisition of a former jeanswear license in Europe, including the purchase of 9 retail stores in key cities in Europe.

Strong results from this newly appointed business, coupled with the excellent sales in accessory in Europe contributed to higher European performance. In addition, we also saw improvement in our U.S. wholesale business in our licensing as well. Retail segment showed good sales growth in the quarter and margins were slightly higher than prior year. Thus (indiscernible) results when negatively impacted by higher selling and marketing costs during the period contributing to a higher loss than in a year period.

Now turning to our results. We announced today that for the first quarter ended April 2, 2005, Guess reported total net revenue increased by 40.6% to 250,000,000.6 from 153.3 (ph) million in last year's first quarter. The higher revenue reflects the increased contribution from Europe that I just mentioned. The higher retail sales dramatically in gross and licensing business which also exceeded our plan. Our retail segments generated net sales of 116.5 million during the first quarter -- an increase of 17.1% from 99.5 million in prior years for first quarter.

In U.S. and Canada, the increase was driven to comparable store sales increase of 4.5 and a large store base which represented 8.2 increase in an average square footage as compared to the same period last year.

Results from operations for the retail segment deteriorated for the quarter to a loss of 3.4 million from a loss of 1.7 million in the first quarter of 2004 reflecting (indiscernible) higher cost.

In performance products, (indiscernible) bottom (ph) dresses, women's tops and fancy knit tops performed well in young contemporary women. For the Marchiano brand, our contemporary new line that come in higher price points also performed well in our stores in the first quarter with strong sales growth in the period.

In our men's business, we saw good performance in our (indiscernible) bottom and knit socks. Accessories business continued to be a strong performer with increases in most product (indiscernible) including handbags, belts, jewelry and eyewear. As you know we continued to move forward to take advantage of the excellent potential in the accessory business in our existing stores and our new Guess accessories stores.

Now, turning to our licensing segment, this business performed better than our expectation in the first quarter. We have a net revenue of 11.4 million, an increase of $500,000 or 4.3 from the first quarter of 2004. I remind that this increase was in spite of the European acquisition which reduced our royalty stream from that business from the first -- from the quarter. (indiscernible) earning increase to 9.1 million from 9 million in last year first quarter.

The growth in this business was driven by our domestic licensees accreting most notably in our accessories business.

Now, I'd like to turn the call over to Carlos Alberini who will provide further detail on our financial performance. Carlos.

Thank you, Paul, and good afternoon. Let me begin by informing you that in the first quarter of 2005, the Company revised its segment reporting to include its European operations as a separate segment. We believe that this segment reporting better reflects how our four business segments -- those are retail, wholesale, European and licensing -- are managed and each segment's performance is evaluated.

In the wholesale segment -- which now includes our wholesale operations in the U.S., Canada, and internationally and excludes Europe -- first quarter 2005 revenues increased 10.6% to $31.1 million from 28.1 million in the same period in 2004. Domestically, our products were sold in approximately 940 doors at the end of the first quarter of 2005 versus approximately 860 doors a year ago.

Earnings from operations for the wholesale segment in the first quarter of 2005 increased to $2.1 million from a loss of 1.2 million in the 2004 first quarter. In terms of product trend, our domestic wholesale business saw solid performance from denim and (indiscernible) T-shirts in our young contemporary line. The men's line achieved gains in the denim business -- both fashion and basic.

Our domestic wholesale backlog as of April 30, 2005 was $44.5 million compared to $43.7 million as of May 1, 2004 at 1.8 percent. In our European segment net revenue in the first quarter of 2005 increased $41.8 million to $56.6 million from 14.8 million in the same period last year. The acquisition of our European jeans were licensee added $26.3 million of revenue while growth in our existing European business added 15.5 million of revenue.

Earnings from our European segment increased $10.6 million to $15.9 million for the first quarter of 2005 from 5.3 million in the prior year period. As Paul mentioned earlier a portion of this contribution to operating earnings had been planned for the second quarter but was realized during the quarter that just ended, as a result of increased shipments and improved operating leverage. We estimate that approximately $4.5 million of the increase in operating earnings over our initial expectation was due to the timing of bookings and shipments in the first quarter. Consequently we now expect a similar amount will negatively impact second quarter operating earnings for the European segment versus our original plan.

In Europe we had strong performance in handbags and shoes in our accessories wholesale business, and in knits and denim bottoms in our jeanswear business.

Let me now turn the call over to Fred to review the financial results in more detail. 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 first quarter of 2005 compared to the same period last year. Page 4 contains segment data for our retail, wholesale, European and licensing operation. Page 5 contains the comparative balance sheet. Page 6 contains cash flow data and page 7 provides retail store data.

As Carlos mentioned, in the first quarter of 2005 the Company revised its segment reporting to include its European operations as a separate segment. The European segment includes both wholesale and retail operations in Europe. The retail segment includes the Company's retail operations in North America. The wholesale segment includes the wholesale operations in North America and internationally, excluding Europe. The licensing segment includes the worldwide licensing operations of the Company.

All amounts for 2004 have been revised to conform to the 2005 presentation and are included as page 8 to the press release.

As Paul mentioned, he announced today that for the first quarter ended April 2, 2005, Guess reported earnings of $8.2 million or diluted earnings of $0.18 per share compared to net earnings of $800,000 or diluted earnings of $0.02 per share for the last year's first quarter.

Net revenues for the first quarter increased 40.6% to $215.6 million from $153.3 million in the 2004 first quarter. Overall, gross profit for the 2005 first quarter increased 56.5% to $82.2 million from $52.5 million in the first quarter of 2004. Gross profit margin increased to 38.1% in the first quarter 2005 from 34.3% in the same period as 2004.

This 380 basis point improvement was driven by increased margin on our retail segment and a higher percentage of European business in our overall revenue mix, which carries a higher margin. The increase in retail margins reflect better leverage of occupancy costs as a result of comparable store sales increases and better sales productivity of new stores.

We reported that SG&A expenses for the first quarter were $67.1 million, a 34.4% increase from last year's $49.9 million. The SG&A rate this quarter was 31.1% of net revenues, a 150 basis point decrease from SG&A rate of 32.6% in the same quarter in 2004. This lower SG&A rate reflected improved expense leverage on sales growth in the wholesale business, partially offset by reverse expense leverage in retail -- reflecting higher spending on advertising and store selling expenses.

On an absolute dollar basis, the higher SG&A expenses were due primarily to a higher level of advertising to support both the Guess and Marchiano brands and higher store selling expenses to support new stores and a higher sales volume. In addition, the European acquisition added approximately $7 million in SG&A costs.

Earnings from operations improved by $12.6 million to $15.2 million in the first quarter of 2005, compared with earnings from operations of $2.6 million in the 2004 period. Additionally our earnings have stayed in U.S. dollars, continue to benefit from the strong euro currency which is appreciated by approximately 6.5% against the U.S. dollar in the last 12 months.

Net interest expense for the first quarter of 2005 was $1.3 million compared to $1.3 million for the 2004 first quarter. Higher interest expense and higher average debt balance was offset by increased interest income on a higher level of invested cash. We ended the quarter with $92.7 million of cash and restricted cash versus $50 million a year ago. Our debt level increased to $107.8 million from $65.5 million at March 27, 2004. The increase is due to the debt associated with our European segment amounting to $56.1 million, partially offset by principal payments on our domestic long-term debt.

Accounts Receivable increased by $71.9 million from a year ago, due to the growth of our European business. As a result, Receivables for our European wholesale business totaled $86.4 million at April 2, 2005 versus $15.7 million a year ago. Of this amount, approximately $37 million is subject to either a guarantee as part of the purchase of the European jeanswear licensee or is insured for collection purposes.

The total acquisition price for the European business was $20.8 million including the retail stores acquired. In addition the Company assumed and refinanced $44.9 million of existing debt. The total investment represents primarily tangible assets acquired, including Accounts Receivable, inventory, fixed assets, in stores net of operating liabilities assumed.

We closed the quarter with $95.6 million in inventory, compared to 81 million at the end of the 2004 first quarter, an increase of $14.6 million. The increase was primarily attributable to our European acquisition, which had approximately $12 million of inventory.

In retail, we ended the first quarter with a total of 289 stores in the U.S. and Canada, of which 184 were full price retail, 88 were factory outlet stores, two were kids' stores, 15 were new concept stores -- which included six Marchiano stores and nine accessory stores. This compares to 259 stores a year ago.

During the quarter, we opened one retail store, two factory outlet stores and four new concept stores and closed five stores.

I would now like to turn the call back to Paul to update you on the initiatives we have underway and our outlook for 2005.

Thank you Fred. 2005 initiative, we feel good about the progress we are making across the business both in terms of performance we generated this quarter as well as a step we are taking to provide for long-term growth and value creation.

While focused on maximizing the result of our core GAAP business improving our purchasing (ph) performance and pursuing the opportunities we have created in Europe and in our newer concept Marchiano stores and Guess accessory stores.

We're very pleased with the strong customer reception of our Marchiano brand is experiencing. It (indiscernible) to perform well in our Guess stores and in the stand-alone Marchiano locations that now open. We ended the first quarter with six Marchiano locations. We currently have eight and plan to open another seven this year.

We continue to be excited about the potential for Guess accessories. This category continues to be a strong performer for us and we see significant opportunity in the marketplace for the expansion of the high-quality branded accessories line and the compelling price point we offer. At the quarter end, we operated a total of nine Guess accessory stores in (indiscernible) and we are continuing to test and finetune this concept. Our plan called for the addition of three locations by year end.

Another major opportunity for us is in Europe where Guess has a very strong brand recognition but a low penetration in apparel sales. Relative to the size of the market and sales of over Guess product.

The acquisition of our jeanswear business we have, coupled with the new retail location we have acquired, provides a solid platform for expansion. We are continuing our work to achieve further operating improvement to increase the efficiencies of the business and reduce cost.

Among the most significant in the way are the following. We are focusing on several supply chain initiatives to reduce cost and increase speed and dependability. One of these initiatives is the extension of our (indiscernible) office to allow us to absorb directly from factories and move quality control and other production functions upstream to improve development cycle time and reduce costs.

Second is, the Company is working to increase inventory turns through improved systems, better planning and effective logistic execution. We are also working to improve our store operating performance for further cost-saving and increased Guess productivity including an aggressive store remodeling program and improved space allocation to develop (indiscernible) to our more profitable products activities (ph).

Now the outlook in more detail by Carlos Alberini. Carlos, please.

We announced today our resale sales results for April. Total retail sales for the four weeks ended April 30, 2005 were $39.4 million -- an increase of 8.4% from sales of 36. 3 million for the four weeks ended May 1st, 2004. Comparable store sales for the period decreased 1.2%. As we had previously anticipated, April sales were negatively impacted by the Easter shift into March. Consequently, the sales drop in April was primarily the result of lower traffic, partially offset by an improved conversion rate during the period and higher average unit prices.

We continue to expect comparable store sales in our retail stores to increase in the low single digits in both the second and third quarters of 2005 and to increase in the mid to high single digits on a percentage basis in the fourth quarter over the comparable 2004 period. We expect total retail sales to increase in the midteens in the second, third, and fourth quarters of 2005 on a percentage basis over the respective 2004 period. Total retail sales include sales from the 37 new stores planned in the U.S. and Canada for 2005 and also the contribution from the 34 stores opened in 2004.

Like most wholesalers in Europe, our European business is cyclical -- with a focus on two seasons. Spring/summer and fall/winter. For that reason sales and profitability of this business is higher in the first and third quarters of the year and lower in the other two quarters. We forecast revenues from the European segment to double in the second and fourth quarters of 2005 and to increase by about 3.5 times in the third quarter as compared to the comparable period of the prior year.

In addition, both in Europe and domestically, we shipped product to our wholesale customers in the first quarter of 2005 when a portion of those sales were originally forecasted for the second quarter of 2005. This had the effect of increasing wholesale and European sales and profitability in the first quarter of 2005, which will be partially offset in the second quarter. We currently have a very clean inventory position and as a result we expect to have lower domestic off-price sales in 2005. For this reason primarily, wholesale revenues in North America are expected to decrease in the mid single digits on a percentage basis in the second, third, and fourth quarters of 2005 versus the comparable quarters of 2004.

We expect increased licensing revenue from the launch of our new shoe licensee and the launch of the new fragrance line, both in the second half of the year. These increases, however, are not expected to fully offset the elimination of royalties from our recently acquired European jeanswear licensee. Consequently, license and revenue is planned to be down in the midteens in the second quarter of 2005, down in the low teens in the third quarter, and down in the mid to high single digits in the fourth quarter -- all on a percentage basis as compared to the comparable 2004 periods.

We are forecasting gross margins to be up about 270 basis points in the third quarter and up about 80 basis points in the fourth quarter versus the comparable prior period. This increase is primarily reflecting improvement in the retail business from last year's level and a larger share of revenues coming from the higher margin European business. Royalties are planned at a lower share of revenues versus 2004. As a result, overall gross margin in the second quarter of 2005 is forecast to be down about 120 basis points.

SG&A in 2005, as a percentage of revenues, is expected to be up about 30 basis points in the second quarter, up about 250 basis points in the third quarter, and down about 30 basis points in the fourth quarter in comparison to their respective periods in 2004. The increase in the SG&A rate in the third quarter, compared to the prior year, is due primarily to advertising investment in North America and the additional overhead in Europe necessary to support the seasonally strong sales quarter.

SG&A dollars are expected to be up about 25% for the full year 2005 compared to 2004, approximately two-thirds of which is due to our European business growth. In order to find our European acquisition and the increase in stores and sales growth in the U.S. and Canada, we expect average inventory levels for 2005 to increase approximately 20% over 2004 levels. Interest expense is expected to be about $7 million in 2005 and our tax rate to be approximately 41% for the year.

Lastly, we expect capital expenditures for 2005 to be approximately $42 million before lease incentives of about (technical difficulty). The precision amortization is planned at about $34 million for 2005.

Before we open the call up for questions, let me reiterate our excitement about the future opportunities for Guess. We feel good about the progress we are making and the strategic initiatives in place to drive future growth. We remain confident in our outlook for 2005 that we have just shared with you. As always, our team is focused on maintaining our fashion leadership and we are in a strong denim cycle -- one of Guess's core strengths. Our balance sheet remains strong and we remain focused on financial prudence and discipline -- and with that I would now like to open the call for questions. Operator.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Margaret Whitfield with Ryan Beck.

Good afternoon and congratulations. I wondered, Paul, if you could comment -- I know that the product has not been influenced as yet totally by Guess -- what might be in the offing for Europe in the second half of this year in terms of product?

Yes. About Europe -- Carlos mentioned just before. It's a very different format of business than America. We have five seasons here and we have only two seasons in Europe. So the big bulk of shipment always happens in January and February and a little bit of March. Then, basically, August and September and then after that, it winds down a little bit. So the second quarter, we should not expect big numbers from Europe.

Do you plan any changes in the merchandise offerings in the second half of the year?

On the second half of the year, yes. Mainly about the line extension and the product offered, I think the full impact will be at the second half of the year.

Let me answer your first question because I think it was more related to the line, right?

Right.

That was the offering of the line. I handle more the design. We do have a full team of design which we always had in Europe and what we're going to do now is, it's going to be more influenced by us here. And the goal will be to have practically 50% of the line -- which will be the same, which would be a common line between Europe and here. So with the other 50% we are going to address a particular taste of the different markets. And the other thing that we're doing also is we are consolidating all the sourcing for Europe and for US. That's how our office in Hong Kong is going to really help doing all that. So that we are consolidating a lot of things going forward.

Will the Marciano and Accessories have a role in Europe?

The Accessories, yes. The Marciano -- we still have our licensing in Europe for the Guess collection line. There it's called Guess by Marciano instead of just Marciano in Europe. And it's a different line from here.

Our line, Marciano -- here it's designed separately. All the designers both from the licensee and the Marciano designers here -- they are constantly in touch. They communicate constantly. But they really address their particular customers in both continents.

What do you need to see to satisfy you to consider a broader rollout of Marciano and Accessory stores in '06?

Basically right now we are opening a lot of stores accessories outside U.S. but through distributors and licensees. Between now and the end of the year we should be 53 stores opening.

Really?

Yes.

53 outside of the U.S.?

Outside the U.S. which are not operated by us. We have only one operated by us which is in Florence, Italy -- which is our pilot store. But these are -- don't forget they are small boxes and operated by distributors in Middle East, distributors in Southeast Asia and distributors in South Africa and South America. But they're not operated by us. So basically we buy the product from the licensee and that's the numbers that we know are committed to be open by the end of the year.

But that's outside the U.S., I repeat.

How about inside the U.S.? How many do you think you'll open next year?

In 2006 -- we don't have the number but like I tell you, is for 2005 this year. By the end of the year we will have 12 doors open.

What's happening -- and we have known that from the beginning -- is we will open anywhere between 10 to 15 stores in both the accessory and the Marciano between U.S. and Canada. Then we will let the store operate for a period of time, anywhere between 6 to 12 months. For us to really finetune all these concepts -- because these are new concepts for us -- and to really finetune the penetration of these products in the stores and to figure out exactly what is the right box for each of these concepts, once we have that operating for the 6 to 12 months then we will roll out the both concepts. (MULTIPLE SPEAKERS) with the right box and the right mix of products.

By the box do you mean the size or the location?

I mean the size. The square footage. We don't know yet, what is the right square footage for Marciano. Is it going to be 2000? Is it going to be 3,000? We don't know yet. So we are in the process. So far we are exceeding our plans in the stores. And it's a good sign but we have to keep pushing to figure out exactly what's going to be the final square footage.

So the stores today are in varying sizes? Or are they all about 2000 square feet?

They are varying sizes between 1500 up to 4000 square feet, which could open in Las Vegas in August.

This is for Marciano?

Marciano.

How about the accessories? Are they in varying sizes, too?

Exactly. It varies from 900 square feet to 2400 square feet. So we are testing different size and profitability, which one is the right formula after that to roll out in U.S. and Canada of course, which is a tremendous market for us.

Great. Congratulations.

Jeff Klinefelter with Piper Jaffray.

Congratulations as well. It's a fantastic start to the year. A couple of questions -- one would be on accessories. It sounds like accessory trends are very strong and I recall coming out of the end of last year that I think you were more positive at that time on the Marciano store test, accessories, mixed results. Sounds like the trends must have turned and you're seeing a significant improvement in business.

Can you talk a little bit more about that? Has it improved dramatically? What are the catalysts for that?

You mean the difference between the Marciano concept and the accessory concept?

Just in terms of accessories themselves as a category in your stores and I guess as a stand-alone store as well. It seemed to be (MULTIPLE SPEAKERS) -- Go ahead.

That is -- what you just said is correct. In fourth quarter for accessories was a little slower in terms of trends that what we have seen in the previous, actually, 2 1/3, 3, years; but that trend has reinvigorated this quarter. We are having a very healthy accessories business. Obviously that type of trend is also translating to better performance in the accessory stores.

That being said, don't take away the strength or our optimism about the Marchiano stores. Because they are doing very very well.

No, definitely I noted that was a noticable change in accessory trend. A couple other things. In terms of comps and, Carlos, you can talk about this -- the plans to low single digit. You are seeing strength obviously in the numbers product categories in your stores that will provide a comp catalyst, as you move through the next couple of months. In terms of comparison, this May and June are really the most challenging two-year comparisons you have in the year. Do you feel like -- what are the catalysts to provide that stable low single digit positive comp. Is it denim build or is it anything in particular that gives you that confidence?

Yes, actually, the (indiscernible) was April and especially with the shift of Easter. We were -- of course, the fact that we dropped a little bit in April was something that we were anticipating because of the Easter shift. We were encouraged by some of the fundamentals of that trend. We did have a drop in traffic which was fully expected because of that, the holiday moving into March. But we converted better which is a very key measurement for us. And on top of that, of course we got the benefit of higher unit prices. We think we don't see anything that should change in those two factors -- as a matter of fact, we feel pretty good about the assortment (ph) going into this month and next month.

Our deliveries have been pretty much on time. We have a lot of May product that is already being in the stores, or going to the stores. And we -- you know we were not in a great position in denim at the beginning of the first quarter. And that has been rectified with a lot of strength of several categories, including men's, including accessories, including Marciano -- which is up against low numbers from last year.

So we are confident that the inventory position is very clean. If anything we are very lean. We -- a year ago, we had much more clearance products in the store and in the pipeline than we do now. So we feel that we have great opportunity to continue to comp positively.

Lastly, one -- Carlos, could you repeat again your gross margin guidance for the next three quarters and, again, why Q2 was down so much from last year and then -- ?

Q2 is down because of the penetration of licensing royalties as a percent of the total business. And of course that is almost pure profit so every time you take some royalty dollars out of the mix then your margin is going to suffer. Our guidance for the third quarter is margins up 270 basis points and for the fourth quarter, up 80 basis points.

We said that for the second quarter because of that very same issue I just mentioned -- margins -- we're expecting them to be down 120 basis points.

Lastly, Maurice, you've always had your finger on the pulse of what's going on with respect to some of these fashion trends. What -- it's been a big denim run. Anything you're seeing out there in terms of trend changes? Support for the existing trends. Denim, pricing, anything else you're saying?

The things that I see is really rather the opposite. I see a strengthening of the higher price point denim. Like the $100 and up has become basically the main for the upper market, not for the entire market but -- for the upper market, for what we call the better market. And now you have some denim going above $200. But they're pushing the envelope there.

So denim is going to remain strong and, now, what we are doing is also pushing other non denim categories there. (indiscernible) The knitwear for men -- the knitwear is strengthening and we see the women's top stock weakening for fall but it's going to be all picked up by knitwear and by sweaters. So the great thing in the men's line also is that the men's have become already and continue to be much more fashionable than they used to be. Therefore (indiscernible) customer, less traditional. Men's are more open to fashion which is a great thing for us.

Holly Guthrie with Morgan, Keegan.

Good afternoon and congratulations, everybody. First, just going, back, Carlos, could you, going back to the gross margin question. You said royalty income would be down or revenue excuse me net royalties would be down in the second quarter. Can you just go through what is different between the first quarter and the second quarter as far as the royalty line goes?

We are -- the major issue is our expectations for most of the licensee performance for the second quarter. And the offset -- because we are removing that stream of royalties from Europe, so that is a big number for the second quarter. So now remember, of course, when we came into the first quarter we had lower expectations, we have lower plans for royalties. And we were very fortunate because many categories outperform our expectations and that's how we ended up offsetting that loss from -- because of the acquisition. So we were very, very happy with -- very pleased with those results, of course.

We had not anticipated that is going to happen every quarter. That's a big hold that we are losing because of the acquisition in terms of royalties.

Yes I'm impressed with how quickly you guys have gotten Europe up and running. So congratulations on that.

Going to an SG&A question, you said that your European acquisition added $7 million to the first quarter. Was that a onetime cost? So if you back that out, were you looking at something more on the lines of 60 million in SG&A in the first quarter? Or (MULTIPLE SPEAKERS) addition.

No, it wasn't a onetime cost. This business, the good thing about the European business is that when you get a lot of revenues at that point, you get a lot of expenses in order to generate those revenues. Then if you don't get that much in revenue like in the second quarter, we don't anticipate the same kind of expense to continue. So it wasn't a onetime issue but it was related to the amount of volume that we generated in that first quarter with European acquisition. Is that clear?

Yes. Very clear.

We don't anticipate to have the same kind of increases in the second quarter or in the fourth quarter. The third quarter is going to be significantly higher because, again, we are going to generate a lot of additional volume.

Going to the comp, the April comp. You used to disclose first-half versus the second half of the month, which was the stronger, which was weaker. Do you feel comfortable talking about whether the second half was stronger?

And of course, the first half excluded Easter versus a year ago so the first half was weaker; but that was more natural, related to this traffic issue.

Was the second half positive? Do you feel comfortable saying --?

We are not talking about those things and don't take it as a yes or a no. We are trying to be consistent with the disclosure, Holly.

On to sourcing -- I know you have also been spending a lot of time in the Far East developing the direct sourcing. Could you talk a little bit about some of the cost savings and when you think you will start to realize some of those savings from the direct sourcing?

Yes. We have not given any kind of credit to those initiatives in this year's guidance on the margins. Actually we have not -- of course long-term we do expect to get significant synergies and efficiencies over there and lower cost. But we have not included those in any of the numbers that we share with you. The main reason for that is that we think that, right now, we are just getting the operation up and running. And it's going to take some transition time before we start realizing those benefits.

So we don't think that the benefits are going to be big this year. We think we are going to start next year with some significant benefits.

Dorothy Lakner with CIBC World Markets.

Good afternoon, everyone, congratulations. Going back to what I think Maurice was saying earlier about designing or having more of the product that you're selling in Europe, the influence by the U.S. I just wondered what the timeframe is on that? I think Maurice had mentioned 50% would be the same product as in the U.S. whereas, now, it's designed in Europe if I understood correctly.

So what is the timeframe for changing all of that? Then, also, just a second question I guess for Carlos, on what -- I think you broke out what the operating earnings were that you got in the first quarter from the European operation that you were expecting in the second. I wondered if you could do the same thing for sales? How much you expected to fall into the second quarter that you actually got in the first quarter?

Regarding what I said before, it's going to take -- we don't want to make a revolution here. So it's going to take some time. We're going to do it progressively and already we have started on two groups for this fall. And we are going to continue as we develop the line. There's no real science there. This is -- when I said the 50% is really a goal but we are going to do it as we have all the designers and the merchants really agreeing on the trend being the right trend for both markets. See what I mean?

So hopefully by next year, we are going to be substantially there in 2006 but if we are not at 50% it's not -- I say, it's not going to be like cast in stone. We are all going to work towards that.

Dorothy, with respect to your question it's kind of hard to do precisely but the number is anywhere in the teens in millions.

Erin Maloney with Merriman Curhan Ford.

Hi. Good afternoon. Just a couple of questions first. I apologize if I missed this on the call but I was wondering if you could talk about your new store openings for the full price Guess stores and outlet stores in '05?

Yes. I think we gave you some.

I know you talked about Marciano Accessories -- I wasn't sure if I just missed the Guess stores.

No, no, that's okay. We plan to open, for the full year in retail, we opened one store in the first quarter and we plan to open nine in total and close three; and in factory we plan to open 12 in total. We opened already two in the first quarter and we plan to close one.

And then, the two remaining kids' stores -- is there a timeline for the closure of those or are they going to be closed?

Yes we are going to be remaining with only one kids' store by the end of the year. So we are closing three this year.

On the increase in advertising and sourcing expenses on the retail side of the business and it sounds like in your guidance, those expenses are going to remain a little bit higher going forward for the rest of the year. I was just wondering particularly on the advertising side, what are the changes there? Your traditional advertising, your kind of print advertising, etc. -- is it more in-store? Changes to in-store advertising?

Yes. This is Paul. The first quarter was unusually high for the simple reason that it's the key magazines it's February, March, April that really come out mid-January mid-February mid-March when you line up publications. Then after that, the second quarter, is much slower months for advertising because there are not specific trend in magazines of May, June, and July. They are very slow months. Then it picks up again on the third quarter and it's slowed down on the fourth quarter. So it should stabilize much more and kind of decrease a little bit through the rest of the year. I'm talking about percentage.

So are you increasing the number of magazines you are in or the spreads or what is the overall increase?

I don't discuss that on the sense that it varies. It could go to Billboard to (indiscernible) to phone booths to magazine to inside malls. We vary a lot during the year of strategy for the advertising.

I have one more question on your U.S. wholesale business. I think you said due to less clearance sales you're going to forecast sales declines for the rest of year. Is this still -- should this still be a profitable business on an operating income basis for the year?

Yes, that's what we anticipate. Of course that's also a function of margins; and in that forecast we anticipated that the product will continue to sell well. And on the level of margin allowance is going to be consistent with prior period. Before that happens, yes, we do anticipate to be profitable on the U.S. wholesale -- not U.S. just North America wholesale business.

(OPERATOR INSTRUCTIONS) Christine Chen, Pacific Growth Equities.

Congratulations on a great quarter. Wanted to ask CapEx for the quarter. Did I miss that?

It was 9.8 million.

And that includes the new lease accounting issue in there?

Yes.

When is the Marciano store going to open in August and where is it going to open?

You talk about the largest ones. It will be in Fashion Shore Shopping Center August 15 in Las Vegas.

But (indiscernible) already open.

I'm sorry?

We have already eight Marciano stores open.

Right, the one that Paul was referring to? That was your question -- the Fashion Show -- the 4000 square foot one.

Right. I was wondering when that was going to open. And then, can you talk a little bit -- I'm looking at your quarter and it looks like everything, except for retail operations, was profitable from an operational standpoint. And I'm just wondering, is that -- if I look back historically, it seems like Q1 is usually when the retail operations are not profitable and the rest of the year, it is. And I am just wondering what kind of seasonality would that be attributed to at the retail level?

It is, that is absolutely correct. For us, as a first quarter is a test quarter. Especially because we are on a calendar year unlike many retailers so we have the month of January, which is a very low productivity month in addition to February, which is also a low productivity. So for us, it is very difficult -- the profitability model with all the (indiscernible) are necessary to fund the operation.

(MULTIPLE SPEAKERS)

Right, so you have the big issue that it is low productivity plus big clearance month so the margin (MULTIPLE SPEAKERS)

And you have all the fixed costs including occupancy that you have to carry. So it's challenging for us in the retail sector.

John Rouleau, Wachovia Securities.

Nice quarter. High fives all around. Number of questions here. Drilling down on Europe a little bit here, it looks like the jeanswear side came in more or less where I think I was modeling at 25, 26 million let's call it. Retail was in line. The upside was really on the other component of Europe. What's -- I think you touched upon it but if you start to strip away, what's really driving that? Accessories you said was very good but maybe you can just talk around that a little bit more?

I think, really, based on I don't know what you had in your model in terms of the pieces but I can tell you that, for us, both pieces of the business -- the Macro acquisition, the European acquisition and the Guess Italia, you know -- the previous business that we had which is primarily small leather goods and accessories and shoes -- both big businesses exceeded our expectation. So we got good traction and performance and profits from both.

It was -- and you're right. The ongoing business and accessories in Europe has been very, very strong.

Do you attribute that to merchandise changes that you made?

(indiscernible) product.

Great? Well, of course it has to be -- I'm not being facetious, it has to be a great product if you're getting numbers like this.

But I mean, how much have you changed product versus -- how much do you think is a reflection of just a very strong accessories market worldwide?

I think it is also the distribution. A couple of years ago Paul and Maurice saw opportunity in Europe and they put the structure in place -- an organization with great people. And they started to really set up distribution and now we're starting to see the results of that effort and it has been outstanding. Now of course you do need great product to be able to do that effectively but we have had good product for a long time. And because it was not distributed ever there we didn't get this kind of results.

I think that's the organization that they put in there.

This is Paul. We are looking, maybe, I mean we have many different opportunities and structures you could double up in the next 18 months. Our total experience in Europe, mainly about distributing directly ourselves. The licensees product like the footwear and handbags in Europe like we do currently, we saw the benefit and we saw the result of it. We might extend that to different parts of the world if we put the structure in place -- maybe in Asia, maybe in Middle East. And this is a very visible possible thing. That's one.

Two. As you know, Canada was a licensee for 12 years I think, 11 years and at one point we acquired back the license in Canada three years ago and I just came back yesterday from Canada touring all the stores in Montreal and Toronto and the business is booming in Canada. We opened two Marciano stores in the last two weeks. We believe that the experience of Canada has been extremely positive and profitable. And that was three years ago and now Europe -- we just did that a year ago and now we are really in full operation. We are looking in opportunities to internalize certain categories or certain countries around the world because we have many licensees and but only if we are certain about the positive results of what real effect it would have. But we are looking also about maybe a joint venture, similar to what Coach did in Japan and which has been a tremendous success there. And Japan remains a challenging country for many years for us, and we will continue to persist and work very hard on that, because we believe that Japan is key to a major success in Asia. As much as Korea, which is very (indiscernible) there.

So these are the possibilities we have looking forward to our very, very strong possibilities.

And going back to the 50% overlap comment between Europe and North America, does that mean that North America -- the Europe product is going to start to look more like North America or vice versa, that North America products are going to look more like Europe? I am assuming that also means that you're going to expand the categories out of Guess Italia. Right now, it's leather goods, accessories, and shoes. But it will start to look more like the product categories that you have here in the States.

Yes, exactly. Due to the fact now that we control completely the Europe products and design, I think it's a natural that like any other major brand -- global brand -- starting from U.S. and there are not that many -- the product has to be really consistent across the globe. It cannot be one line here, one line there. It can be some variances but the majority of the line has to be identical also for the consistency of image of the design. You cannot do three different images around the world. It has to be the same.

Isn't the European line positioned a little bit differently? It's a little bit more up scale, a little more higher price? It's a different product from a fashion and a positioning standpoint, is it not?

Definitely. Definitely. But on the other hand if you have followed the price point, for example, of a bottom denim in the last three years from the 59 in department stores it went to 69; from 69 you went to 79 in our stores, an average (indiscernible) denim is around $100. Which was not the case three years ago. So we are moving both ways on the (indiscernible) action. We go higher in our stores in U.S. We have been growing a little bit because now we control completely the product. So (indiscernible) these expenses of royalties and we can adjust the price to (indiscernible) in Europe.

Switching gears here for a little bit, as far as accessories are concerned, I know with some of the Marciano stores, when you open a o Marciano store, you pull some of that product out of the Guess stores. Are you doing something similar with the accessory stores? When you open an accessory store in a mall that has a Guess store, are you pulling accessories out?

Absolutely not. To the opposite. Right now, again, I've just visited Canada but just before that I was in Florida at the beginning of the week. And we open accessory stores and these stores have not reduced their space in accessory and the business has not been affected by the store opening in the same ,all. So we don't reduce the space.

Good. I like the answer to that question. Thank you.

Hope Case with Glen Mills.

Congratulations on a great quarter and I have to tell you, having just been in Europe, the product looks great. So it shows. Can you talk a little bit more about how the European business is going to interact with the U.S. business in terms of crossbreeding product? On the accessories and the shoe side, specifically.

On the shoes side I can address you that; Maurice will addressed the apparel and.

The accessories and the shoes -- that's sort of basically the same.

(MULTIPLE SPEAKERS)

But I'm not done -- it's -- what I was referring to was really the jeans were licensed that we just acquired. So this is what I was addressing and on that one, it is so easy because already we have all the denim. Okay? And the denim's a given. So we should have the same denim we might have like a specific fit for Europe -- one specific fit. But most of the denim should be the same. Then after that you go into the different categories, in knit wear and sweaters. And it will be pretty easy to have the same product. At least half of what I was referring to, 50% of the product, being the same. Both here, I mean, and Europe. So that's what we are working to.

In what kind of the timeframe will that be?

Probably by next year because we just took it over. So it's going to take like two, three seasons. Three seasons of Europe, not three seasons over here. Which means, by next year.

But keep in mind and I think I have always referred to this before. This is already happening. I just came back from Hong Kong two weeks ago and there were a couple of programs where both teams were using the same sources. And it goes back to the beginning and the development of the product but it's also, what kind of fabric you are going to use? And who is going to make the product? Using common sources, I think, is a great step in that direction too, in addition to the design.

So the teams are basically acting as what, at this point?

There's a lot of collaboration (MULTIPLE SPEAKERS)

There's a lot of collaboration (MULTIPLE SPEAKERS)

Collaborated effort is a better way to say that. Would you give me an update though on, however, on the shoes and some of the progress here?

The shoes, as you know, the license have been fine. The Marc Fisher Company which is the Fisher family from Nine West. And it will be in full effect of shipping nationwide retail stores and department stores starting in back to school which is July in two months. We have reviewed the line in Las Vegas just two months ago. And the new production was being developed and coming out and we are very happy with it but I think, again, I'm looking at the opportunity outside the U.S. But the potential of the footwear and outside the U.S., the potential is going to be as big as in America.

So what kind of timeframe can we look for outside the U.S.?

I can tell you exactly. By back to school 2006, we should have covered at least Europe, Middle East and Asia initial shipment.

So, fall, so for back to school in the U.S. fall '05 and fall '06 in Europe and Asia?

Absolutely.

Terrific. Congratulations. The product looks great.

We have no further questions at this time.

So is the last question? So thank you very much for your interest in Guess and we look forward to keeping you updated on our progress in the future and to the next conference call. Thank you again.

That does conclude our conference again. Thank you all for your participation. We hope you enjoy the rest of your day.