Guess? Inc (GES) 2005 Q3 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 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 desirability and customer acceptance of existing and future product lines including licensed product lines, the successful integration of acquisitions, new stores and new licenses into existing operations, possible cancellation of wholesale orders, the success of competitive products, the continued availability of adequate sources of capital, the general economic conditions, acts of terrorism or acts of war, government regulations, policy, fluctuations and possible future litigation.

In addition to these factors, the economic and other factors identified in the Company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, 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 would like to turn the conference call over to Paul Marciano, Co-Chairman and Co-CEO of the Company.

Please go ahead, sir.

Good afternoon, and thank you for joining us today to discuss Guess?' 2005 third quarter financial results.

Joining us will be my brother, Maurice Marciano, Co-Chairman and Co-CEO, 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 provide you an update of global expansion initiatives.

Then Carlos and Fred will address the third quarter and our financial performance in more detail.

Finally, Carlos will discuss outlook for the fourth quarter of 2005 and all of us will be available to answer your questions.

We are very pleased to report that Guess? achieved record revenues and record earnings for the third quarter.

Diluted earnings per share grew by 70% to $0.46 per share versus $0.27 per share last year.

During the quarter, our overall Company revenues grew by almost 34% compared to the third quarter of 2004, with our retail and European businesses contributing to this growth.

We believe that the significant revenue growths reflect a very positive customer response to our product assortment and mix, and also to consistent brand marketing.

The retail, Europe, and wholesale business segment posted better operating results during that period.

We run the business with clean inventories, which contributed to the improved margin.

We are very pleased with the progress made with our business in Europe and its integration, and we believe we are poised for solid expansion in international as well as in U.S. and Canada.

Our global initiatives and strategy will drive growth while we continue to protect the integrity of the Guess? brand.

Our goal is to continue to grow earnings significantly while earnings become more diversified.

With that in mind, our Company will be 25-years-old next year and we must and will execute our strategy with a clear vision of our brand.

This is how: 5 years ago, we began a complete repositioning and strategy change in North America.

We decided to transform our North American operation into a retail-focused business and gain a better control over the positioning of our brand.

The result of [inaudible] since then is that by year-to-date 2005, we have [inaudible] our North American revenue stream to over 80% direct retail and less than 20% wholesale.

The wholesale business is now [inaudible] with 2 other department stores.

Another step in executing the strategy was to require our jeanswear license in Europe at the beginning of 2005.

To date, while very pleased with the result of this acquisition and we have a strong expansion plan for Europe.

We also began expanding our accessory business in North America, Europe, and Asia and I was probably going to tell about this later.

As a result as you can see on page 5 of our press release for the first 9 months 2005, 38% of our earnings came for North America; 33% came from Europe, and 29% came from licensing.

This earning mix is far more balanced now after we completed our position in Europe.

To achieve that is to be a true global company with a well-balanced earnings strategy, with one for the U.S. and Canada, many retail; one for the international business, and one for the licensing earning worldwide.

Our goal is to grow earnings in double digits in the next 3 to 5 years and leverage ourselves to be less dependent on one segment or another.

In 2005, we are adding 37 stores in the U.S. and Canada and we plan to open around 40 stores next year in the U.S. and Canada.

Now, if you remember in July 2004 we announced the [inaudible] which was a test of the Marciano brand.

Our first Marciano store opened in September 2004, and as of today we have opened 13 Marciano stores in the U.S. and Canada.

And we plan to open another 13 Marciano stores in the U.S. and Canada for next year.

We are very pleased with the results of this contemporary women’s line and with the recent Marciano stores now represent a great opportunity in the U.S. as well as the international markets.

Also in July 2004, you remember that announced also a test of Guess? accessory store concept in the U.S.

After our first accessory store opened in Los Angeles as a test club, we proceeded to open 11 stores in North America as of today.

Additionally to that, licensees and distributors have opened 26 accessory stores outside the U.S. with 20 more to be opened in the next 60 days.

Combined with the U.S. and Canada stores, these make a total of 67 accessory stores worldwide to be opened by end of 2005 and that ‘s only 15 months after the very first store opened.

These accessory stores sell our licensee product only, no apparel, no dresses, no jeans, nothing except accessories.

The average size of these stores is about 700 square feet to 1,600 square feet, very easy to operate.

Some of its international locations opened now in Singapore, in Rome, in Florence and [inaudible] in Italy, in Mumbai in India, in Jakarta and SuraBaya in Indonesia, in Senengold [ph] in Malaysia, in Sydney and Melbourne, Australia, in Geneva, Switzerland, in Damascus, Syria, in [inaudible] Lebanon, in [inaudible] China, and in Hong Kong.

We plan to open another 100 accessory stores in the next 2 years in the U.S. and international.

In addition to international Guess? accessory stores we are opening Guess? and Guess? by Marciano stores in key cities in Europe and Asia.

This past year, along with our licensees and distributors we have opened 41 international stores.

Among them are Moscow, Russia, St. Petersburg, Russia as well, Ankara, Istanbul in Turkey, Athens in Greece, London in England, [inaudible] and [inaudible] in France, Rome, Verona, and [inaudible] in Italy, Prague in Czech Republic, 4 new stores in Bucharest, Romania, and Dubai in United Arab Emerits, Kiev in Ukraine, Mumbai India and Ho Chi Ming City in Viet Nam.

As you can see, these are just some of the key locations where Guess?

And Guess? by Marciano stores have already opened outside the U.S. and Canada.

IN 2006 we plan to open 32 of these apparel stores in Europe and 20 more around the world for a total of 52.

The average store ranges in size from 1,200 to 3,000 square feet.

This global expansion is possible through the strength of our brand and product that’s also to our [inaudible] licensees.

We have strong licensees and key [inaudible] as partners.

We have been in business with our Guess? handbag licensees for 13 years, with our eyewear licensees for 15 years, and our watch licensees for 23 years.

Perfume and footwear from our new licensee first achieved the product in July of this year.

We have a long-term relationship with the because we provide a strong brand, with marketing and advertising worldwide, a consistent image, a clear direction for product, and a true global strategy.

Also we offer multiple retail concepts as a Guess? concept, a Marciano concept, and accessory concept.

We believe we are one of the few true brands in the world that can provide all of this to our licensees.

Additionally, we continue to support our brand through worldwide advertising.

We are present in more than 350 different magazines, in 28 different languages.

We have a diversified business with a global reach and it is very well balanced, very unique, and also long-term opportunity if executed properly.

We no longer depend on one format or one distribution channel on one marketplace but rather on 3 diverse businesses;

North America, which is U.S. and Canada retail stores and wholesale; then international, including Europe which is growing rapidly as discussed; licensing finally both in U.S. and international.

As I said we have 2 new promising concepts that started just a year ago, which are the Marciano brand and the Guess? accessory stores.

We are very excited about our future, but the reality is that we must focus every day on one thing; the execution of the strategy.

The execution of our strategy of the last few years has positioned us for what we believe is an inflection point for our brands.

Thank you, and I now would like to turn the call to Carlos who will provide us with more detail on the third quarter performance.

Thank you Paul and good afternoon.

Turning to our third quarter results by business, our retail segment which includes full-price and factory outlet stores in the U.S. and Canada and e-commerce, generated net sales of $156 million during the third quarter, an increase of 18% from $132 million in the prior year third quarter.

The growth was driven by a comparable store sale increase of 8.9% and a larger store base, which represented a 9% increase in average square footage as compared to the same period last year.

Earnings from operations for the retail segment for the quarter increased to $18.8 million from $12.7 million in the third quarter of 2004.

In terms of product performers, Capri, shorts and woven tops and dresses performed in our young contemporary line.

Denim bottom, especially our embellished style, were strong at the end of the quarter.

The Marciano brand performed well in both our Guess? and our Marciano stores.

Our men’s business continued to perform well, particularly in knits.

Our accessories business remains a strong performer with increases in most product categories especially handbags, belts and jewelry.

New shoes and fragrance were introduced in July 2005 and are performing above our expectations.

Our licensing business continues to deliver solid performance.

For the period the revenue growth for this segment, excluding the European business we acquired, was almost 5%.

For reporting purposes, licensing revenues this year were reduced as a result of the acquisition of our European jeanswear licensee in January 2005, since these sales are now classified as revenues for the European segment.

As a result, our reported licensing revenues were down 2.7% to $13.9 million for the current versus the comparable period last year, but ahead of plan.

As we announced in a press release dated September 28, 2005 this year we successfully negotiated new and amended license agreement for watches, handbags, and eyewear.

This agreement will have a significant positive impact to both our financial position and the Company’s future earning per share.

Regarding our financial position, we have already received $43 million payments which are over and above the ongoing royalty stream.

In addition, this arrangement will provide for future payments of $50 million to be collected between now and 2012, again over and above the ongoing royalty stream.

So a total of $93 million will be collected by Guess? as a result of these negotiations on top of the ongoing royalties to be collected from each of these businesses in future years.

Regarding the Company’s future earnings, the increased revenues will only be recorded over the term of the new or amended agreements.

In this regard, almost no revenue has been recorded in the third quarter since the new terms begin either late in 2005 or in 2007.

However, a significant portion of this special performance-based compensation granted has been recorded as an expense during the period in accordance with the GAAP.

As a result, the Company recorded a decrease in earnings from operations in the licensing business of $4.2 million to $7.9 million in the 2005 third quarter from $12.1 million in last year’s third quarter.

The benefits from the increased revenues will be recorded in a future period and the impact is pretty substantial.

We anticipate earnings per share for just the next 5 years to increase as follows: $0.07 for 2006, $0.17 for 2007 and 2008, $0.18 for 2009, and $0.15 for 2010.

All this is again, on top of regular royalties generated for the respective and assumes no change to existing sales volumes for their related product.

In the wholesale segment, which includes our wholesale operations in the U.S., Canada, and internationally, excluding Europe third quarter 2005 revenues decrease 9% to $31 million from the prior year period mainly due to reduced off-price sales.

Domestically, our products were sold in approximately 970 doors at the end of 2005 versus approximately 930 doors a year ago.

Earnings from operations for the wholesale segment in the third quarter of 2005 increased to a profit of $1.8 million from a loss of $700,000 in the 2004 third quarter.

Our clean inventory position resulted in reduced sales of excess product in the off-price channel, which contributed to better gross margin performance.

During the quarter, lower expenses also contributed to the improved earnings.

In terms of product trend, our domestic wholesale business saw good performance from denim, especially embellished denim and knit tops in our young contemporary line.

The men’s line achieved gains in the general business, both fashion and basic and in knit.

Our domestic wholesale backlog as of October 29, 2005 was $41.7 million compared to $43.8 million as of October 30, 2004, or down 4.7%.

In our European segment, net revenue in the third quarter of 2005 increased $47 million to $64 million from $17 million in the same period last year.

This increase reflected the impact of the acquired jeans for license and significant growth from the accessories business in Europe.

Earnings from operations from our European segment increased more than 3.5 times to $16.9 million for the third quarter of 2005 from $4.6 million in the prior year period.

Following the acquisition of our jeans for license in January of this year we have been focused on developing our business in Europe and maximizing the potential of the brand there.

We are very encouraged by this quarter’s performance, especially the significantly enhanced profitability, which came from both our apparel and accessories line.

Fred will now review the financial results in more detail, and our financial position at quarter-end.

Fred?

Thank you Carlos, and good afternoon.

Let me describe the contents of the press release just issued.

In addition to the actual release on pages 1, 2 and 3 page 4 contains the consolidated statements of operations for the third quarter and the first 9 months of 2005 compared to the same period last year.

Page 5 contains segment data for our retail, wholesale, European, and licensing operations.

Page 6 contains a comparative balance sheet.

Page 7 contains cash flow data, and page 8 provides retail store data.

As Paul mentioned, we announced today that for the third quarter ended October 1, 2005 Guess? recorded record net earnings of $20.7 million and diluted earnings of $0.46 per share compared to net earnings of $11.8 million or diluted earnings of $0.27 a share for last year’s third quarter.

Recorded earnings for the period included performance-based compensation expense discussed earlier of $2.7 million after tax of $0.06 a share.

There was no corresponding expense in the comparable prior year period.

Net revenues for the third quarter also posted a record, increasing 34% to $266 million from $198 million in the 2004 third quarter.

Overall gross profit for the 2005 third quarter increased 52% to $114 million from $75 million in the third quarter of 2004.

The gross profit margin increased by 510 basis points to 43.1% as compared to 38% in the same period of 2004.

Our European, retail, and wholesale operations contributed positively to the change in the gross margin rate.

We reported the SG&A expenses for the third quarter were $79 million, a 47% increase from last year’s $54 million.

This represents a $25 million increase.

SG&A expenses in our European operations increased by $12.5 million, or 50% of the total increase primarily due to our recent acquisition and our investment in infrastructure there.

SG&A expenses in the rest of the Company increased by $12.8 million, which includes a special $4.6 million compensation expense discussed earlier.

The SG&A rate this quarter was 29.7% of net revenues, a 250 basis point increase from our SG&A rate of 27.2% in the same quarter in 2004.

The special performance compensation expense represented 170 basis points of this rte increase.

Earnings from operations improved by $14 million to $35.5 million in the third quarter of 2005 compared with earnings from operations of $21.5 million in the 2004 period.

Net interest expense for the third quarter of 2005 decreased to $1 million compared to $1.3 million for the 2004 third quarter.

Increased interest income on a higher level of invested cash more than offset the increased interest on a higher average debt balance related to the European acquisition.

We ended the quarter with $142 million in cash and restricted cash versus $67 million a year ago.

During 2005 we successfully renegotiated license agreements for watches, handbags, and eyewear on terms that are significantly improved over our prior arrangements.

As Carlos mentioned, the renewal terms called for certain fixed rights cash payments which are over and above our normal ongoing royalty payments.

This year we have received $43 million, most of which was collected in the third quarter contributing to the increased cash balance.

Even if we assume no future increases to our future sales volumes for watches, handbags, and eyewear the fixed rights and the effect of all performance-based bonuses last about $0.02 earnings per share in the fourth quarter, $0.07 in 2006 and about $0.16 to $0.18 in each of the following 4 years.

I would like to emphasize that both the cash and book effect of the new fixed royalties, fixed fight payments are completely incremental to the ongoing royalty streams.

We believe that these fixed rights reflect a tremendous vote of confidence for the Guess? brand by our licensees.

Regarding our debt, the balance increased to $83 million from $62 million at September 25, 2004 with our European debt increasing by $33 million and our domestic long-term debt declining by $13 million.

Since the end of the first quarter this year, our debt in Europe has been reduced by $19 million.

Accounts receivable increased by $45 million from a year ago due to the growth of our European business.

Receivables for our European business totaled $68 million at October 1, 2005 versus $20 million a year ago.

Of this amount, approximately 30% is insured for collection purposes.

We closed the quarter with $126 million of inventory compared to $105 million at the end of the 2004 third quarter, an increase of $21 million.

This change was attributable primarily to our European business where inventories increase about $17 million.

Average per store comp inventories in North America for the third quarter declined by about 2% versus the prior year period despite the comp sales increase of 8.9%.

And the composition of our inventory reflected improved quality and aging.

In retail, we ended the third quarter with total of 305 stores in the U.S. and Canada, of which 187 were full-price retail, 95 were factory outlet stores, and 23 were new concept stores, which include 12 Marciano stores, and 11 accessory stores.

This compares to 269 stores a year ago.

During the quarter we opened 2 retail stores, 1 factory outlet store and 3 new concept stores and closed 2 stores.

Now Carlos will provide our outlook for the remainder of 2005.

Carlos?

Thank you Fred.

We reported today that for the fiscal month of October, which ended on October 29, 2005 comp sales increase by 12.3%, and total retail sales increased by 22.3% as compared to the prior year period.

Based on this trend, we believe that we are well positioned product-wise for the holiday season.

We expect comparable store sales in our retail stores to increase in the mid to high-single digits on a percentage basis in the fourth quarter over the same 2004 period.

We expect total retail sales, including new stores to increase in the mid-teens in the fourth quarter of 2005 over the respective 2004 period.

Like most wholesalers in Europe, our European business is cyclical with a focus on 2 seasons; spring/summer and fall/winter.

For that reason sales and profitability of this business is higher in the first and the third quarters of the year and lower in the other 2 quarters.

All this being considered, we forecast revenues for the European segment to double in the fourth quarter of 2005 as compared to the comparable period of the prior year.

As we indicated, we currently have a clean inventory position.

As a result, we are experiencing lower domestic off-price sales in 2005.

Full-price shipments are also expected to decrease slightly in the fourth quarter as compared to the year ago.

For these reasons primarily, wholesale revenues in North America are expected to decrease in the mid to high-single digits in a percentage basis in the fourth quarter of 2005 versus the comparable quarter of 2004.

Concurrently, we expect margins in this business to continue improving.

Licensing revenues plan to show a decrease in the low-single digits in the fourth quarter on a percentage basis as compared to the 2004 period.

We are forecasting gross margins to be up about 170 basis points in the fourth quarter versus the comparable period a year ago.

This increase primarily reflects occupancy leverage and improved product margins in the retail and wholesale businesses from last year’s levels.

SG&A expense in the fourth quarter of 2005 is expected to be up about 12% to 14% in comparison to the respective period in 2004.

Approximately 60% of this increase is due to our European business growth.

The SG&A rate in the fourth quarter of 2005 should be about flat with the comparable prior year period.

In order to support our European operation and the increase in the stores and sales growth in the U.S. and Canada, we expect average inventory levels for the fourth quarter of 2005 to increase approximately 25% over 2004 levels.

Net interest expense is expected to be slightly higher in the fourth quarter of 2005 versus the fourth quarter of last year, and our tax rate to be approximately 40%.

For 2005 we expect capital expenditures in North America to be approximately $42 million with gross expenditures of $48 million, less lease incentives of about $6 million.

In addition, we are acquiring a new headquarters building in Florence, Italy for our European operations.

This transaction is expected to close in December and will be accounted for as a capital lease total approximately $60 million in 2005 with subsequent build-out in 2006.

Lastly, the position of more decision [ph] for the Company is planned at about $34 million for 2005.

Before we open the call for your questions, let me reiterate our excitement about the future opportunities for Guess?

We are particularly enthusiastic about our global expansion initiatives and our balanced business model that Paul described to you.

Furthermore, we are confident about our product, and we look forward to reporting on our performance to you in the important holiday season.

As always, our team is focused on maintaining our fashion leadership and on executing our strategies effective.

Our balance sheet and cash flow remain strong, and we are staying focused on financial discipline.

With that, I would now like to open the call for your questions.

Operator?

[OPERATOR INSTRUCTIONS].

Dorothy Lakner, CIBC World Markets Corporation.

Thanks very much and congratulations on a great quarter.

Thank you Dorothy.

Just one housekeeping detail right off.

Could you talk about CapEx and G&A for ’06?

I know you gave them for ’05 but I wondered if you could just give us an idea for ’06.

And then just if you could talk a little bit about your experience in denim, obviously you missed out a little bit earlier this year and last year, but you really caught up and had very attractively priced denim product for the quality.

What’s your outlook on that going forward and into ’06?

Yes Dorothy with respect to the capital expenditures, as you know we did guidance on the current on the current when we report our fourth quarter earnings, so that will be in the February timeframe, and at that time we will talk about capital expenditures for the current year as well.

With respect to denim --

Yeah, with respect to denim -- this is Maurice, if you remember well the last conference call I made it a point to tell everybody that the denim by design, the denim was not a bulk of our line in that became for us only when you look at our revenue the denim is something like 25% of our revenue in our stores okay.

And this is exactly what we wanted.

We wanted to be -- we are being a lifestyle, the denim is important but we don’t want it to be the major part of our lives, of our business.

So by the same token though, because we are so focused on what we are doing in denim, we continue to experience, to have a good experience in the denim business because we didn’t over-blow it as our line.

Right and your certainly didn’t overdo it on the price.

What about on the accessory side?

You’ve really driven that business and you’re starting to open separate stores.

Where are accessories as a percent of the business in the stores right now, and where do you see it going?

Currently -- this is Paul, you are talking to all of u s now.

Currently in the retail stores U.S. and Canada the average range between 21% and 24% of total business in the stores.

And --

Is that including footwear, or just the accessories piece?

No, excluding footwear.

And that’s why you will see ’06, accessory is taking center stage of any new store opening that would be the center section of the store.

Great.

Jeff Klinefelter, Piper Jaffray.

Yes, congratulations as well; it was a terrific quarter.

Thank you.

A couple of questions for you; first of all let me start with the outlook or performance here in October and then the outlook for the fourth quarter.

Appreciating you’re probably maintaining your same guidance of mid to high-single digits as just sort of a conservative approach to the very conservative holiday season but with a 12 comp coming out of October, is there any reason given the mix of traffic versus transaction value that, and your inventory position that you couldn’t see the same trend with consistent traffic?

We are just being cautious and of course, we are very excited about our performance in October and it speaks well for the assortment of the mix.

We are very, very pleased with our inventory position, and we continue to see improving margins, so we are very happy about that.

But yes, we want to be conservative in the way we are looking at the fourth quarter.

Okay; any color on kind of the balance between number of transactions and transaction value?

Just curious what the kind of composition is of your trend here the last couple of months.

Well at the, our regular price business has been much higher relative to the total mix than a year ago.

And we have seen that in the third quarter, and that continues into the fourth quarter.

And of course, that is driving a higher average price.

Okay great; a couple of other quick questions; one in terms of your retail stores, we saw one of your new prototype stores today in the mall, Mall of America; it looked great.

But can you give us an update on how many of your stores are the old versus the new prototype currently?

That’s a good question.

Let us get back to you with that number.

I don’t have it at my fingertips.

I can tell you that this past year, this year, the current year we invested significantly in remodeling many of our stores, large stores, and we concentrated on those stores that were the volume drivers at first;

Southcoast Plaza, Roosevelt Field, I mean there are a lot of the big guns that have been remodeled but 2 of the new concepts, we are very excited about the new concept; we think it’s very contemporary, and really we have seen great performers from those stores that have been remodeled.

So we do plan, and we are throughout our planning process right now, but we do plan to make a significant investment again next year to really cover all the big stores.

And I can tell you that in the capital expenditures that I mentioned there are about 60 projects including new stores that were included in that total for the year, in 2005.

Okay that’s very helpful.

A couple of others;

Europe growth in the third quarter, could you give us a sense of where sort of the comp growth of Europe is currently tracking, either Maurice or Paul?

I mean obviously year-over-year you have big increases if you brought your license back in.

Yes Jeff we have a very small number of stores that will be, when you think about comps --

I meant your wholesale business is what I meant, just using comp.

Yeah, I mean we have strength on both sides.

Actually we are running ahead of our plans with the acquired business and also we had a tremendous quarter on the accessory side of the business that we had even a year ago.

So it came from both businesses and we are very excited about that because that also speaks about the tremendous opportunity for further development in that whole region like Paul said.

Okay, your forecast -- I’m going to miss it -- but your forecast for the fourth quarter in terms of European revenue growth and licensing revenue growth?

European we said double but it’s on a very small base.

But it’s double the business of last year.

Keep in mind that the fourth quarter in Europe is kind of a weak quarter.

Right.

Right now the portion of business that’s driving the retail is very small compared to the wholesale in Europe.

It’s mostly wholesale there.

Another thing on licensing, we’re saying a decrease in the low-single digits in the fourth quarter.

Okay great, and then just lastly in terms of your licensing versus wholesale territories, what should we anticipate going forward?

Are there other licensed territories globally that you would ultimately bring back in like your European license or will you maintain Europe and North America and then continue to license other territories for both wholesale and retail?

Yes, this is Paul.

There are 3 -- I’m on my way right now after tomorrow to Hong Kong and Singapore -- we have 3 or 4 territories that we consider maybe either joint venture or direct and that will include possibly a territory like maybe Korea, Japan, China and their key location for us, and Mexico which is next door to us because we really consider that part of North America today.

And the operation we made in Canada has been extremely successful for us what we made 4 years ago.

We have now 50 stores direct in Canada and then to open maybe another 10 or 15 next year.

So this is very, very profitable for us to have done that.

We think that 3 or 4 major countries will come in the radar in let’s say the next 24 months to make a decision of joint venture or direct versus licensees.

Okay great, thank you very much.

John Rouleau, Wachovia Securities.

Hey guys, fabulous quarter.

Hey John how are you?

Good thank you.

My question has to do with your, I guess your retail stores in Europe.

I know you have a handful of those, so you have both retail stores that are now Company-owned and operated and then your licensing stores in Europe.

Will the majority of the growth in Europe be licensed?

Will it be a mix of both?

How should we kind of think about that?

And I’m assuming that it’s going to be included in kind of product revenues and not licensing, and that’s where those sales are going to fall.

Okay I can answer you that.

The growth in Europe in ’06 and ’07 in retail stores -- I’m not talking about accessory stores now, retail stores -- we come on a very large majority by distributors or French ID [ph].

If Guess? decides to open some strategic location, ID, Barcelona, Paris, London, Milan, which we have already in Milan but we plan maybe to open another one.

That will be considered as a decision as a CapEx strategy investment.

Otherwise, 90% of the stores opening would be done by third parties.

Got it, and then that’s literally like a franchise situation where they provide the inventory at some cost and t hen it becomes wholesale revenue to you?

Is that the way you account for that?

Exactly, exactly and it comes from different parts.

They are free to buy the line from Europe, which is located in Florence, the showroom or in the U.S.

And that’s their choice.

They can buy from both places but it’s booked as wholesale business.

So very little if any CapEx for that type of situation?

[Inaudible].

Okay and then you mentioned this was the retail sales.

Would the accessory stores differ?

In fact, the equation we go even bigger.

It means that the demand we have was a long-term relationship we have with distributors around the world, so demand is so big that we are slowing down the demand of accessory stores to keep very strong control of image, quality, location, and performance.

But that will also be under a franchise-type situation?

Absolutely.

By third parties if that’s what you mean.

Yes, yes okay.

Great and then just talking about the new licenses, the shoes look great;

I think they’re selling very well, at least that was your comment, and the fragrance as well.

The shoes I think are by Mark Fisher; maybe you could remind us who’s doing the fragrance and just give us a little bit more color on both of those and what you’re seeing there.

The fragrance is done by Paul Lucks and we will launch The Man [ph] in spring ’06 and we will launch the seventh fragrance for women in summer ’06.

And we have been trending above the plan that we have.

That’s for fragrance.

Okay and is the strength coming out of your own stores or the department stores or both for fragrance?

Both and for footwear we have been introducing this new licensee which is somebody we knew for like 20 years which is Moxy [ph] from Nine Wear.

And we have done only woman right now; we have not touched men’s shoes, which is a big category for us.

We have not touched athletic, which will be as big as we used to have, and we have not touched kids.

We want to move cautiously step by step to secure market share of what we believe is priority.

Priority for us is the woman’s shoe, and we are above expectation we have as well in department stores, in retail stores.

Great and then just circling back to denim a little bit.

I think the comment was that denim picks up at the end of the quarter and was very good, very strong at the end of the quarter.

Was there anything special, did you introduce the new line?

Again, I’m going to go back to one of the speeches I gave -- this is Maurice -- speeches I gave I think just before the summer at a conference in New York.

And where I said that in the denim, I believe very much into the high-end denim, into the premium denim, but with a lot of very ornamental, with embroidery, with rhinestones and all that, and it’s exactly what has been happening during the third quarter.

All the best selling has come from these very elaborative jeans which are high-quality, but where the customer is clearly seeing the value.

So we’ve had a great success with that.

Yes well the crane is definitely rising to the top because everybody else is starting to say that denim is starting to slow a little bit.

You don’t have to reinvent it all the time.

And my last question, regarding North America square footage growth kind of next year; you laid out some store growth.

What does that equate up to in terms of square footage growth for next year?

John you can think about this year as a good proxy for that.

This year we will end up opening about 37 stores and we will grow square footage by about 8% to 9%, and I think that’s a very similar type of number that you will see next year.

Okay, including the new Marciano stores?

Yes, all that the 40 stores will include all the, even if we are opening new [inaudible] and so forth.

Great okay, thanks guys.

Eric Vetter, Brean Murray.

Good afternoon guys, great quarter.

Thank you.

Could you talk a little bit -- I’m sorry how many accessory stores are you opening between the U.S. and Canada next year?

You told the [inaudible], how many accessory stores is that going to make?

We are still refining all the numbers.

We don’t have the final numbers.

Of course, they are including that 40 store number that Paul mentioned.

But we are in the final revisions of those now.

Okay I guess the question is that in your own stores, where do you see the longer-term growth rates in terms of the amount of Marciano stores you have and accessory stores?

Where do those go?

Long term do you mean in the U.S. and Canada?

Yes just the ones you own in the U.S. and Canada.

Okay Marciano long term could be I think 120 to 150, and long term we talk about 5 years; that’s what I call long term.

And then accessories I would say maybe between 50 and 70, 5 years.

On U.S. and Canada only.

The world is the place where we think it could be in the hundreds.

When you look at the accessory stores the flow of the accessory stores has to be a little bit -- does it have to be quicker in terms of getting product in weekly, the accessories in the main stores you have to do because you have to keep the freshest newest in the accessories or is that already being done throughout the chain?

I’m sorry, I didn’t understand the question.

Okay, in terms of the accessories flow, like you bring in apparel every week.

Is it the same in the accessory stores?

How many times do they get shipment?

Is it weekly?

Much, much slower, and much more studied and much more predictable than apparel.

It means that easily could be just once a month.

But we do replenishment because you don’t have the fat base of fashion.

We sell some of the same watch for 6 and 7 years and they still maintain best seller.

We still sell some eyewear for 4 years that sells, and that we’ve just been tremendously mark down in clearance that we normally have in apparel which the consumers keep chasing the new trends.

And that’s why we’re creating some handbags called “Timeless”.

Timeless will be something that we do year-in, year-out, year after year just changing the coloration of these bags because the customer wants some studied design and we have seen it in the global design for 3 years straight, basically the same handbag but changing coloration like you see with Coach, or like you see with Gucci.

And do you plan on introducing new categories in terms of accessories?

I know you did luggage this year, and a lot of that sold in larger stores than the accessory stores.

Are there categories that you sit there and say we need to be here and we aren’t here at all?

Well, it would be some side show accessories like we are talking to you like key chains, weather accessories like scarves and gloves, which is a good business too.

But we do not pay licensee for that; we’ll have that produced through existing licensees.

Great; great quarter guys.

Thank you.

Holly Guthrie, Morgan Keegan.

Thank you and let me add my congratulations; great job everybody.

I was just wondering if you could talk about your initiatives for direct sourcing out of Hong Kong and when you have what the expectations are as far as the timing for impact to your margins?

Yes Holly, as you know the office was opened only a few months ago.

We are fully staffed from where we wanted to be by this time; we have about 40 people there, and we are going slowly trying to do things in a very rational way.

We are thinking about what makes sense strategically to place in some product through this office.

And, but we are being very careful the way we are planning on this.

We don’t want to really overstate what we can do in our optimism.

And we are not including in our plans any significant impact on margins even for next year, to answer your question.

Now, that being said, we think that long term there is tremendous potential here to improve margins as a result of placing production direct as we are doing.

But at the same time, we have to build the volumes slowly and we think that’s going to offset in a way through the costs that we’re incurring to support the office any margin improvement that we may see next year.

Okay great, thank you.

And I was just wondering if you could give me some more details about the month of October, if you could talk about regional performance, first half versus second half performance for different categories, Men’s, YC, Marciano.

Okay maybe we can make just a few comments, and I’m sure that you’ll be talking to Fred later on, right?

But overall the second part of the month was stronger than the first part of the month, and I think that may have something to do with the weather change.

Also we in terms of product categories we continue to have and I think we addressed that in the speech in a way, we continue to have very strong momentum in the YC, the Young Contemporary line, denim bottoms was very strong in October and all the new stuff is selling very, very well as Maurice mentioned.

Non-denim bottoms, Capri, woven tops did very well.

In terms of Men’s knit tops continue to do well as you know;

Women’s continues to be more challenging and accessories was just a very, very strong month all the way around again in the typical product categories that we mentioned; handbags did very well; wallets, jewelry and shoes was a great month.

Like Paul mentioned they continue to build this business; we see a lot of opportunity and we are also seeing significant improvement in margins in the shoe business as well.

Also was traffic as strong as a total comp or was traffic a little bit weaker?

No traffic was a little weaker.

We did have greater conversions than a year ago so we are very happy about the [inaudible].

We think that we are getting a lot of traffic that is in the malls right now.

And that speaks volumes for the product.

Okay and I just wanted to go back and visit receivables quickly.

I know you said that it was $68 million and I think about 30% was insured.

If you could go through and tell us a little bit about the allowance, and I think that’s come down pretty substantially, and if you could talk about where you think that’ll be at the end of the year.

Well Holly looking at receivables in total, and your question about the reserve; the reserve for the third quarter stands at $2.7 million and looking at it sequentially that compares to $1.6 million at the end of the second quarter and $1.7 million at the end of the first quarter.

And then your question about what’s the insured section, insured portion.

At the end of the third quarter, about 30% of the European receivables are insured and at the end of the second quarter it was about the same amount, about one-third.

Okay great, thank you.

Erin Maloney, Merriman Curhan Ford.

Thank you, good afternoon guys.

I was just hoping you guys could talk a little bit on holiday; just wondered if you could tell in particular when your holiday started to be set, and then also just some trend in the merchandise going in to the holiday season.

Well we are seeing some product as we speak actually and some of the product has already been set.

So the next couple of weeks you’re going to see a significant change.

But a lot of the product is already on the floor t his holiday.

Okay great, and could you just talk a little bit about the trends?

Obviously you’ve talked about denim a little bit but any other trends you’re seeing on the Men’s, Women’s and Accessories businesses?

I mentioned the things that have been very strong in October Erin; denim bottoms, non-denim bottoms, Capris, woven tops in women’s.

We had a great style in bustier type of tops that did very well.

It was also a feature in our campaign.

Sweaters al=re also trending well.

And in accessories I mentioned our accessories business was very, very strong.

Handbags, probably the number one performer of the whole category; belts, wallets, and jewelry.

Okay great and then I was just curious where you guys stand as far as any store closures remaining as a result of the hurricane in Florida and obviously Louisiana?

All of them are open by now; we did have an impact during the month, and obviously we were able to offset that with very strong business from event hose stores that were open during the time other than the hurricane.

Okay great, thank you.

Christine Chen, Pacific Growth Equities.

Congratulations everybody on an amazing quarter.

Thank you.

I just have a couple of questions; can you talk a little bit about any differences in sales momentum or trends between your full-price stores and your factory stores?

Yes, they are in very different situations Christine.

I think we have had more than 3 years of great performance in the factory outlet stores, so of course, they are up against a much healthier business, but nevertheless they did have a tremendous October.

And in the case of retail stores we see that more as a big opportunity to continue to grow and get to a more the type of performance that we would expect from those stores.

And obviously we expect more growth.

And they did have a great performance in October as well.

And then with respect to the consolidation going on in the department store; a lot of the vendors last week were quite nervous about that, and I know you’ve talked about Federated potentially being more beneficial to you guys.

Have there been any conversations with Federated?

No -- this is Maurice -- not really because right now they are really concentrating on their consolidation inside and the merger -- the integration of the 2 businesses, of the 2 companies and they don’t have very much time right now to talk to anybody.

But the good thing is that really now wholesale is such a small part of our business now that, even when we did some exercise in terms of the overlap of doors, it was very small, small number that would be affected.

We are knocking on the doors of Federated and their companies, so the merger is going to have very, very little effect if any on our business.

We would expect rather the opposite, our business to go up with them.

And then in terms of if you look back historically, it looks like peak operating margins were about 15% in 1999.

What do you think it will take to get you back to those levels?

Well we have said that we expected next year to be in double digits and we are very, very excited about that, we think that that is just the beginning when you look at some of the vertical integrators retailers even in the U.S. many of them are much higher than that.

So we see a lot of opportunity.

And in our case we even have the help of a very strong licensing business.

So we’re not talking about 15% that you saw in ’99 in the next year or 2, but we do believe that there is tremendous opportunity to grow our operating margins.

Okay and then just some housekeeping question;

I might have missed it but what was CapEx for Q3.

Christine we didn’t actually say it on the call but the number is $13.5 million.

And I know you did mention this; how much did the watch license [inaudible] for Q3 and Q4 for this year?

I think you said $0.02 for Q4 and I don’t --

Well we didn’t say anything for Q3 because obviously we recorded a significant charge in that quarter.

So in reality the impact of the new licenses was a [inaudible] for the quarter.

Got it, okay thank you very much and congratulations again.

Thank you.

Ladies and gentlemen this ends the q-and-a session for today.

I will now turn the call back over to management.

This is Paul Marciano; thank you for your interest in Guess?

We look forward to keeping you updated on our progress in the future and we will talk to you in the first quarter 2006.

Thank you again.

Good bye.

Thank you for your participation in today’s conference ladies and gentlemen.

This concludes the presentation for today.

You may now all disconnect and enjoy your day.