Guess? Inc (GES) 2005 Q4 法說會逐字稿

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 and 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 productlines including licensed productlines; the successful integration of acquisitions; new stores and new licenses into existing operations; the successful execution of our international growth strategy; possible cancellations of wholesale orders; the success of competitive products; the continued availability of adequate forces of capital; our ability to attract and retain key personnel; general economic conditions; acts of terrorism or acts of war; government regulations; currency 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 in 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.

Thank you.

Thank you for joining us today to discuss Guess? 2005 first-quarter financial results.

Joining us will be my brother, Maurice Marciano, Chairman and CEO;

Carlos Alberini, President and Chief Financial Officer -- Chief Operating Officer;

Fred Silny, Senior Vice President and Chief Financial Officer of the Company.

I will begin with an overview of our fourth quarter and then provide you with an update of our global expansion initiatives.

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

Finally Carlos will discuss the outlook for 2006 and then all of us will be available to answer your questions.

We're extremely pleased to report that Guess? turned in record earnings and record revenues since the company went public.

Q4 net revenue increased 23.5%, to $276.6 million.

Comp sales were up 15.9%.

Q4 net earning was 74% to $25.8 million.

For Q4 Guess? delivered diluted earnings per share of $0.57 versus diluted earning of $0.33 per share a year ago.

For the year net revenue increased 28% to $936 million and net earnings doubled to $58.8 million.

The Q4 performance closed a strong year for Guess? and reflects the progress we have made in our business.

All our statements, retail, wholesale, Europe and licensing show increase in earnings from operations in the fourth quarter of 2005 as compared to the same period a year ago.

We have solid revenue growth in retail mainly driven by comparable sales increase of 15.9% in the quarter.

This is our 11th consecutive quarter in positive comps sales.

Our business benefited from good product mix and strong accessory presence that delivered very healthy margin due to higher sales productivity, occupancy leverage and higher full price sales.

Also gift card sales in North America in 2005 doubled over 2004.

Overall the Company improved gross margin by 310 basis points in the fourth quarter.

We were very pleased with this increase which ultimately shows the result of our continued effort to create design and merchandise what the customer of Guess? ultimately has responded to time after time.

Coupled with our focus in improving sales and earning results, we continue to significantly improve our financial strengths as shown in our balance sheet.

We ended the quarter with $174 million in cash and restricted cash versus $170 million a year ago.

At December 31st, 2005, cash and restricted cash exceeded our spending debt by $100 million.

The 45 improvement from the 2004 year end even after taking into account the additional debt related to the acquisition of the European licensee in early 2005.

These financial results again show strong control and discipline of the entire organization and we continue to improve that.

Most importantly, we believe as we're building in our momentum to see such opportunities as a business expanse not only in the U.S. but also abroad.

As I mentioned in the last quarter conference call, our goal now is to grow earning consistently in double-digit in the next three to five years while earnings become more diversified.

We will continue to develop our multiple businesses balanced across multiple geographic regions.

Now about the retail business in North America.

Our strong performance reflects the successful product assortments in all our lines especially accessories which had the best year ever.

At the same time the discipline of our management and (indiscernible) allowed to us to achieve a more full point selling and keep our inventories clean.

In 2006 we will build on this momentum again.

Marciano Stores and Guess? accessory stores in North America are still in a testing period prior to any major expansion.

We believe that over time this concept can grow to become a significant chain.

In 2006 as we did in 2005, we will increase the number of stores in these concepts in key locations in U.S. and in Canada.

In 2005 we opened 37 stores in North America across all retail concepts.

In 2006, we plan to open another 38 new stores.

We will continue to invest in management structure here and abroad.

To accomplish this, we will be focusing on the globalization of the Guess? brand and the full year 2005 results show the early success on that strategy.

Our earnings for the year were more balanced geographically with North America contributing about half of it and Europe and worldwide licensing was the other half.

Europe has a very strong year with earning growth of over 250% increase.

We see several opportunities for growth around the globe especially in Europe, India, Asia and Mexico.

I'm confident today that we're executing a structure with a clear vision, the challenge is that we must focus on the consistency of our plan and that we feel better prepared and aligned today than we have ever been.

Our international business continues to grow not only for Guess?

Corporate but also for licensees as well.

The performance of our business in Europe clearly exceeded our expectation.

Retail expansion will be rapid in 2006 mainly for growth store by licensees and distributors throughout Europe.

In 2005 in Europe, we along our licensees and distributors opened 34 stores in all concepts combined.

In 2006, we plan to open another 33 stores in Europe with a size between 1000 to 3000 square feet.

Asia and India are by far the newest of all the opportunities and I believe our Guess? brand is well-known throughout the region.

In 2005, our partners opened 45 freestanding stores in China, India, Malaysia and other countries.

In 2006, the same partners plan to open another 60 freestanding stores in that region.

In order to be able to (indiscernible) more effectively we're investing in a management team, infrastructure and customer support in that region and Asia.

In April '06, we will open a new showroom in Hong Kong to provide our distributors and licensees fast and easy access to all our lines, both apparel and accessories.

In total around the world including North America, 2006 we plan to open 155 stores compared to 135 stores in '05.

Licensing is another growth area for us.

As you know we launched a footwear license and perfume license both delivering very good results especially the footwear.

Our licensed accessory business performed well in 2005 and grew year-over-year despite the loss of the license revenue from our European licensee that we acquired.

Accessories plays a bigger role in our business every year.

All of the 155 stores opening in 2006 that I just mentioned will carry Guess? accessories such as watches, handbags, luggage, belts and fragrance.

In 2006, we're confident about our licensing business and we should once again see increased revenue as we will in North America and across the globe.

Now finally what else?

To summarize, we are pleased with the strength of our team and also our (indiscernible) of this past year.

Each product category in each of our retail, Europe and licensing segment is well poised for strong growth going forward.

By the end of the day, the cement of all of above is a Guess? brand, our marketing and our partners around the world.

We have today the same passion and commitment that we had when we started and we are committed to continue building on a strong leadership to fully achieve the growth potential of the brand.

Thank you and now we would like to turn the call to Carlos who will provide us with more detail on the fourth quarter.

Thank you, Paul, and good day.

We announced today that for the fourth quarter ended December 31st, 2005, Guess? reported that total net revenue increased by 23.5% to $276.6 million from $224 million in last year's fourth quarter.

Regarding fourth-quarter results by business, our retail segment, including full-price retail and factory outlet stores in the U.S. and Canada and eCommerce, generated net sales of $207.1 million during the fourth quarter, an increase of 20.5% from $172 million the prior year fourth quarter.

This growth was driven by the comparable store sales increase of 15.9% and a larger store base which represented a 7.4% increase in average store footage as compared to the same period last year.

Earnings from operations for the retail segment increased 50.8% for the quarter, to $36.4 million from $24.2 million in the fourth quarter of 2004.

This increase was driven by higher sales volumes and higher gross margins due to increased full price sales partially offset by higher SG&A expenses.

Our young contemporary and Marciano business were strong during the quarter.

Our men's business has continued to perform well and the accessories category continues to be a strong performer in the period especially handbags and shoes.

In our wholesale operations, fourth-quarter 2005 revenues were $33 million about flat to last year's fourth quarter.

Domestically, our products were sold in approximately 965 doors at the end of the fourth quarter of 2005 versus approximately 930 doors a year ago.

Earnings from operations for the wholesale segment improved by $2 million in the fourth quarter of 2005, to $3.1 million from $1.1 million in the 2004 fourth quarter driven by improved gross margins as a result of maintaining plan inventories, reduce of price sales and lower SG&A expenses.

Regarding our domestic wholesale backlog, there has been a change in the way we operate our business for both men's and women's product, as a result last year's backlog for product reflected a longer shipping period of about one month.

We estimate that if we work to exclude the additional orders from last year's backlog, then the current backlog will be down about 2.3%.

Not taking into account the impact of this change, our domestic wholesale backlog as of February 11, 2006, was $36 million compared to $42.5 million as of February 12, 2005, or down 16.4%.

Now turning to our licensing segment, this business continued to perform well with fourth-quarter net revenues of $13.7 million, an increase of $1.3 million or 10.1% from the fourth quarter of 2004.

Operating earnings increased to $12.9 million from $9.5 million in last year's fourth quarter.

This growth was driven by the strength of our accessories business including the new licenses Paul referred to earlier, partially offset by the loss of royalty income from our European jeanswear licensee which we acquired in January of 2005.

In our European segment, net revenue in the fourth quarter of 2005 increased $16.3 million to $22.9 million from $6.6 million in the same period last year.

This increase reflects the growth of our accessories business in Europe and the result of our acquired jeanswear licensee which benefited from $7.6 million of shipments in December of product from the spring of 2006 collection.

Earnings from operations from our European segment increased to a profit of $.2 million in the current year fourth quarter as compared to a loss of $1.6 million in the same period last year.

As we have mentioned before, our business in Europe is largely a wholesale and operates with two primary selling seasons, spring/summer which ships in the first quarter of the year and fall/winter, which ships in the third quarter.

The second and fourth quarters of the year are relatively small sales quarters.

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

Fred?

Thank you, Carlos.

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, 2 and 3, page 4 contains the consolidated statements of operations for the fourth quarter of 2005 compared to the same period last year.

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

Page 6 contains the comparative balance sheets.

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

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

We announced today that for the fourth quarter ended December 31, 2005, Guess? reported net earnings of $25.8 million or diluted earnings of $0.57 per share.

This compares to net earnings of $14.9 million or diluted earnings of $0.33 per share for last year's fourth quarter.

As Carlos mentioned, net revenues for the fourth quarter increased 23.5% to $276.6 million from $224 million in the 2004 fourth quarter.

Overall, gross profit for the 2005 fourth quarter increased 33.2% to $117.7 million from $88.4 million in the fourth quarter of 2004.

Gross profit margin increased to 42.6% in the fourth quarter of 2005 from 39.5% in the same period of 2004.

This 310 basis point improvement was driven by improved gross margin performance in all of our core business segments and occupancy leverage in our retail business.

We reported that SG&A expenses for the fourth quarter were $74.3 million, a 19.3% increase from last year's $62.3 million.

This represents a $12 million increase.

SG&A expenses in our European operations increased by $7 million representing almost 60% of the total increase primarily due to our recent acquisition and our investment in infrastructure there.

Additional SG&A expenses domestically were due primarily to higher levels of domestic store selling and bonus expenses compared to the prior year due to the substantial growth partially offset by lower advertising expenses.

The SG&A rate this quarter was 26.9% of net revenues, a 90 basis point decrease from our SG&A rate in the same quarter in 2004 which represented 27.8% net revenue.

This lower SG&A rate reflected better expense leverage on revenue growth in our retail and European businesses and effective cost control on our wholesale licensing businesses.

Earnings from operations improved by $17.3 million or 66.1% to $43.4 million in the fourth quarter of 2005 compared with earnings from operations of $26.1 million in the 2004 period.

All of our business segments showed improved earnings from operations in the quarter.

Corporate overhead increased in the fourth quarter of 2005 to $9.3 million from a $7.1 million in the 2004 fourth quarter due primarily to increased bonus and charitable contribution expense in support of Katrina relief.

Net interest expense for the fourth quarter of 2005 was $.7 million, .3 million lower than the 2004 fourth 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.

Debt at year end totaled $74.3 million compared to $54.8 million at December 31, 2004, with our European debt increasing by $31.9 million and our domestic debt declining by $12.4 million.

Since the end of the first quarter this year, we have paid down debt in Europe in the amount of $24.2 million.

Accounts receivable increased by $27.8 million from a year ago, of which 26.8 million was due to the growth of our European business.

Of the total amount of receivables in Europe, approximately 25% is insured for collection purposes.

We continue to see the benefits of our inventory management efforts.

Inventory at the end of 2005 was $122 million compared to $82.3 million at the end of 2004, an increase of $39.7 million.

About 70% of this change was attributable to our European business where inventories increased by $28.2 million as we prepare for spring shipments.

In North America, average per store comp inventories for the fourth quarter increased by 11.2% versus the prior year while comp sales increased by 15.9%.

We believe that the inventory investment we made in key product categories which had experienced strong trends this past year was a key factor in the comp sales growth that we achieved.

We ended the fourth quarter with a total of 315 stores in North America including those in Canada of which 191 were full priced retail, 99 were factory outlet stores and 25 were new concept stores.

At year end we had 14 Marciano Stores and 11 Guess? accessory stores.

This compares to 287 stores a year ago.

During the quarter we opened 10 stores, four full priced retail, four factory outlets and two Marciano.

Internationally outside of North America we also ended the quarter with 315 stores of which 264 were Guess? and Guess? by Marciano retail stores and 51 were Guess? accessory stores.

Of the 315 stores, 16 were owned and operated by Guess? and 299 were operated by our licensees or distributors.

During the fourth quarter, we opened 32 international stores, net of closures, two by Guess? and 30 by our partners.

For the year ended December 31, 2005, the company reported net earnings of $58.8 million or diluted earnings per share of $1.31 versus net earnings up $29.6 million or diluted earnings per share of $0.66 in the comparable 2004 period, doubling net earnings.

Earnings from operations for the year ended December 31, 2005, were $101.8 million.

This compares to earnings from operations of $55.5 million in the year ago period.

Our operating margin in 2005 was 10.9% versus 7.6% in 2004 reaching our double-digit goal this year earlier than expected.

Total revenues for the year increased by 28.4%, to $936.1 million compared to $729.3 million for the prior year.

Capital expenditures for 2005 were $48.8 million before tenant allowances of $5.7 million.

Almost all of this amount was for stores and other infrastructure investments in North America.

In addition, we entered into a $16 million capital lease for our new European headquarters building.

The tax rate was 39.8% for the 2005 year as compared to 41.7% last year.

I would now like to turn the call back to Carlos who will provide you with our outlook for 2006.

Carlos?

Thank you, Fred.

We are pleased with the 2005 financial results and as Paul mentioned earlier, there are significant opportunities to drive long-term growth in all our business segments.

I would now like to provide an update on our financial expectations for 2006.

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

We plan to open a total of 38 new stores in 2006 and to close 10 stores during the year, four of which closed in January already.

Outside North America our partners plan to open a total of 117 stores of which 40 will be Guess? accessory stores and 77 will be Guess? and Guess? by Marciano retail stores.

All of these stores will be opened and operated by licensees and distributors.

Capital expenditures for 2006 are planned at about $60 million or $53 million net of tenant allowances of $7 million.

This includes retail expansion and remodeling, systems and other infrastructure in North America and capital investments in Europe and Asia.

Depreciation and amortization is planned at about $40 million for 2006.

Based on our current strength and our plans for the year by season, we expect 2006 comparable store sales in our retail stores to increase in the mid single digits on a percentage basis over 2005.

We expect total retail sales to increase in the 11% to 13% range including the new stores net of the impact of the stores that we are closing.

In the wholesale segment, we anticipate overall revenues to be about flat in 2006 versus last year.

In our European segment, we expect 2006 revenues to increase in the mid to high teens on a percentage basis over 2005 from growth in both the apparel and accessories businesses.

In our licensing segment, we expect that licensing revenue in 2006 will increase in the high single digits on a percentage basis over 2005.

Overall gross margin is expected to improve by about 40 basis points in 2006 reflecting improvement in the retail and wholesale businesses from last year's levels.

In addition, the higher margin European business continues to be down by a higher portion of our overall business in 2006.

We expect SG&A as a percentage of revenues to be about flat with 2005 including the impact of the expensing stock options under the new accounting guidelines.

This rule change is expected to amount to approximately $3 million pretax for 2006 or about $0.04 per share.

Also included in SG&A are increased marketing costs and additional expenses to run our newer stores.

We expect average inventory levels for 2006 to increase approximately 10% over 2005 levels due primarily to the increase in stores and sales growth in both North America and Europe.

We expect interest expense to be fully offset by interest income this year thanks to our strong cash position.

Lastly, our tax rate is planned at 39.8% for the year.

Let me now provide you with our quarterly view of the business.

Regarding our first-quarter expectations, as you know January comp sales were very strong.

We reported a 31% comp increase for the month.

We believe that are stronger inventory position which included early deliveries of spring fashions, gift card redemptions and the warmer weather against snowstorms a year ago all had a positive impact on those results.

Our February business is expected to deliver comp sales in the mid single digits with much stronger margins than a year ago due to significant increases of full price sales and overall less promotional business across our regional formats.

The adverse weather in February has impacted our business in the Northeast where we had significant store closures as a result of the recent snowstorm.

For March there is a shift in the Easter calendar.

Easter this year falls on the third Sunday in April versus the last Sunday in March a year ago.

We expect the shift to impact April positively at the expense of March business.

As a result, March comps are expected to be nearly flat with the prior year and April up in the low teens on a percentage basis.

All these factors considered, we expect comp sales to increase about 10% in the first quarter and total sales to increase in the mid teens on a percentage basis over the corresponding 2005 period.

Also impacting first-quarter results is the early shipment of spring product in Europe during December I mentioned earlier which had a pretax contribution of about $2.3 million or about $0.03 per share.

For the remainder of the year, we expect comp sales to increase about 10% in the second quarter with the Easter shift benefit and to grow in the low to mid single digits in the second half of 2006.

We expect total retail revenues to increase in the mid teens in the second quarter by about 10% in the second half of the year again, all on a percentage basis over the corresponding 2005 period.

As a result of the store closings related to the merger of Federated and May Company, wholesale revenues are expected to decrease in the mid to high single digits on a percentage basis in the first half of 2006 versus the first half of 2005.

We believe that in the second half we can offset this loss with wholesale revenues increasing in the low to mid single digits on a percentage basis in spite of the lost stores due to the merger.

European revenues are forecast to increase in the high teens in the first quarter of 2006 compared to the first quarter of 2005 net of the $7.6 million of spring 2006 products shipped in December.

European revenues are expected to increase about 40% in the second quarter of 2006 and grow in the low teens in the second half of 2006 both on a percentage basis over the respective prior year periods.

Licensing revenue is planned to be up in the high single digits in all quarters of 2006 and this includes the revenue recognition related to the new license agreement announced in the third quarter of 2005.

Overall gross margins are forecast to be up about 80 basis points in the first quarter of 2006, up 160 basis points in the second quarter of 2006, and about flat in the second half of 2006 all compared to the corresponding periods of 2005.

The improving gross margins in the first half of the year come primarily from the North American retail and wholesale businesses where we anticipate better product performance and a cleaner inventory position compared to last year.

At this time we do not anticipate a significant improvement in margins in the second half of the year since in 2005, we had substantial success with full price selling and occupancy leverage due to high sales growth.

SG&A as a percentage of revenues is expected to be up about 190 basis points in the first quarter of 2006 and up about 140 basis points in the second quarter as we invest in marketing efforts to support the global expansion of our brand and infrastructure for international growth including Europe.

For the second half of the year, we expect the SG&A rate to decline about 240 basis points in the third quarter and to be down about 50 basis points in the fourth quarter all compared to the corresponding periods of 2005.

As you may remember in the third quarter of 2005, we recognized a special performance-based compensation expense of $4.6 million pretax which will not recur in 2006.

As we discussed in the press release last week, we have added some key new members to our team and also realigned our existing management to better capture our global opportunities.

We are very pleased to welcome Steve Pearson and Laurent Marchal to our company.

Steve joins us as Executive Vice President and Chief Supply Chain Officer and has experience in this area with the J. Jill Group and over twenty years at The Gap.

Laurent will join us as President of Guess Canada.

He has been the Managing Director of Zara Canada and previously President and CEO of Sodexo Canada.

These are two areas for growth and operating improvement opportunities and I strongly believe the caliber and experience that they bring to Guess? will serve us well to take the company to its next level of growth and profitability.

During 2005, we identified global supply chain as a significant area of opportunity for us and opened our sourcing office in Hong Kong.

That office now has about 40 employees.

Our continuing emphasis on the global supply chain should result in reduced product cost, better quality and faster speed to market.

We continue to be optimistic about our European business.

Much of our business there is to wholesale customers.

And I'm pleased to report that our spring/summer line has been well received at market by our customers.

In 2005, our operating margin reached 10.9% exceeding our double-digit goal earlier than originally anticipated for this important financial measure.

In 2006, our goal is to reach an 11.5% operating margin.

Better product coupled with good inventory control and effective expense management should lead to expanding margins in North America and Europe as well.

In addition, we should again benefit from [marketing] leverage this year.

In conclusion, we have a series of strategic initiatives under way that we believe will contribute nicely to future sales and earnings growth.

Our team is focused on maintaining our fashion leadership and serving our customers on all -- at a consistent basis with the image that the Guess? brand represents.

Our management is strong and we will continue to run our business with financial prudence and discipline.

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

We feel good about our progress that we made in 2005 and we believe we have laid a strong foundation for the future.

As always, we thank you for your interest and support.

Operator?

(OPERATOR INSTRUCTIONS) Jeff Klinefelter with Piper Jaffray.

Congratulations to everyone on a fantastic year.

Couple questions, maybe starting off with Europe, clearly it has been a very strong catalyst within your growth this year.

Maybe Maurice and Paul, if you could talk a little bit about that?

How very quickly after acquiring the business what sort of enabled you to have that kind of success immediately integration wise?

And then going forward how do you anticipate that growing?

You outlined some store expansion plans which sound very good.

Anything else you can share with us in terms off a will this growth continue at the same rate?

Will it be at the same margin levels?

What opportunities do you have to improve the profitability of that segment?

Jeff, this is Maurice.

And I'm back in L.A.

First of all, let me tell you, Carlos mentioned earlier the reception of the line.

And he was mentioned the spring/summer.

What he was referring there is the reception by the consumer rather than by our customers which mean the retailers.

The line that we are showing right now which is also very well received by the retailers then is the fall/winter line.

We are seeing in the orders we are getting from these retailers, we are seeing substantial increase to the previous order from the last season.

We are very, very happy with that.

Two things, first of all we have to realize that our business in Europe since we have taken -- since we have taken over, it's a really nice business but I mean it's nowhere near where it can be.

So we have a tremendous amount of growth to go.

And we realize that.

Like in all the Northern countries, like Germany and Norway and Denmark and all that, we are like inexistent there.

So all that part of Europe has to be deadlocked.

Even in England we are just starting.

We have like no -- when we took over we had like no business from when we took over from the licensee.

So since we took over, we really refocused the line.

We really put back all the design and all that know-how of Guess?.

We have a much better control on the product and all that.

We've done the business a little bit differently in a way that we have been able to improve the quantity and lower the prices that we are selling to the customers.

Because we've changed from like distributors to agents.

All that has contributed to the success of the line.

Now the other thing that we are doing and Paul mentioned that, we are opening, we are really focusing on opening a lot of retail stores with partners in Europe where our third-party are opening several -- each one is opening several stores both in Italy; we're starting now in Spain; we're starting in England.

We have a lot of third parties who are opening Guess? retail stores.

By the same token, we are putting together a great structure there to support the growth of these stores.

So that is our plan for Europe.

That is great, Maurice.

In terms of kind of thinking about that business going forward, in terms of the growth rate and profitability, how should we think about sort of the operating profit potential of that business?

I would imagine it's clearly higher than the U.S. operating margin or segment profit.

But what sort of -- is there such thing as a normalized rate at this point that we can think about as that business grows?

Jeff, this is Carlos.

I think that this past year the European business delivered a very nice operating margin.

Remember we brought the business from the beginning of the year last year and it was a very clean inventory situation going in and so forth.

I think that if we can continue with that type of operating margin, we will be very pleased as we invest in infrastructure.

And that's kind of like what we're thinking about the business for this year.

Okay and that operating margin, Carlos, would be somewhere in the sort of the high teen range?

Yes.

Great.

And then one other question, Maurice, would be on the accessories business.

Clearly that has been successful for you.

Can you tell a little bit more about what percent of the business currently is accessories maybe in your store and then what percent might that grow to as part of your strategy to become more balanced between accessories and apparel?

This is Paul.

The percentage of our business in accessory in our stores is around 22%.

We believe that it is going to increase and mainly for one reason; footwear is a very, very strong product for us and the partner we have which is Mark Fisher ex Nine West Family & Co., an amazing operation and amazing management.

So we see that business really growing rapidly not only in America but everywhere and specifically Europe.

Europe already, we believe that the business of footwear between '05 and '06 most likely will increase between 50 and 60%.

So to give you an idea about the percentage in our stores, we might gain like 2 or 3 points in the stores, coming like 25 maybe or 26% all accessories combined including footwear.

Great.

Thank you very much.

Good luck everyone.

John Rouleau with Wachovia Securities.

Great quarter.

And fabulous year.

So much going on here I'm wondering -- I've got a couple of different areas I want to focus on.

I know the product is kind of evolving here.

The product in Europe is a little different than the product in North America and my guess is that they are starting to align themselves a little bit closer.

Maybe you can talk about the evolution of the product in North America versus Europe and where that kind of lies?

I think Maurice discussed this in a previous call in terms of trying to get the two lines to merge --.

Let me interject.

Hi, John.

This is -- to understand the strategy here this is going to be one of the biggest missions for Steve Pearson who just joined us.

He's going to be two really put together the two lines and our goal will be to have very quickly probably something like 50% or even a little bit more of the lines being exactly the same line.

Being exactly the same product.

And then it's okay to have another 50% or a little bit less specific to each market.

But by doing at least this 50%, it's going to give us a tremendous power with our vendors and all that, a great leverage in terms of cost and all that with our vendors.

It's going to -- and by the same token which is very important, it's going to reduce all development costs because right now we have all the development costs of the full line here and development costs of a full line in Europe.

So all that is going to be eliminated.

So this is what we are working on right now.

Terrific.

And Fred or Carlos, I'm wondering if you can just help us a little bit with -- because you are opening so many international stores and a lot of those being licensed, can you just walk us through a licensed apparel store and then a licensed accessory store when you sell an item, how that gets classified?

How the revenue is going to be -- you've got three or four buckets of revenue now, how we need to build our models around the international licensed stores in the revenue side?

Well, this is Paul.

Basically you have different ways as one when it's a franchise, it's basically to buy wholesale.

So they buy all licensed product accessories and they buy from our line and apparel.

So we have, if your question is to know if these stores pay any royalty to Guess?, the answer is no.

About these stores, Guess? stores.

If your question is to know if these stores pay a royalty in accessories stores to Guess?, the answer is yes.

Okay.

So a standard apparel store that sells the young contemporary line will generate a wholesale sale, not a royalty, and then any accessories that they sell will generate a royalty income?

A royalty income.

Yes.

And the accessories stores will generate two stream of royalties.

One is a license, you sell any product in that store with the royalty to Guess? but on the top of that the owner of that store will pay royalty to Guess? as well as an operation to have the right of Guess? name of accessories stores.

Got it and then on the revenue segment reporting side, you're reporting Europe, a segment to Europe now.

That's really all of international and is there -- how much of that is retail versus wholesale?

How do we think about that segment?

The retail piece is very small.

We have 19 stores.

We will have -- but the lion's share of that business is wholesale, John, and all that includes not only the apparel line from the business that we acquired but also the ongoing accessories business distribution which includes small leather goods, even shoes, handbags and so forth.

Okay.

And then regarding, Maurice, regarding the bottoms business, I mean we have been in a very strong bottoms environment.

It was denim last year.

I think denim continues to be pretty good.

I know cargoes and khakis and twills have started to pick up a little bit.

You guys look like you are properly aligned for that.

Maybe you could just address what's going on on the bottom side?

Sure.

I tell you what though.

You know the denim business continues to be strong for us.

For us it's normal because we are -- we started as a denim company and we evolved into a lifestyle.

But the denim business continues to be strong.

Denim constantly I think I mentioned on the call, constantly evolves.

You reinvent all the time.

That is one part.

But you are absolutely right that now they khakis and the cargoes mostly the cargoes for us because the khakis we have never been good at khakis.

It's like we cannot get arrested with khakis.

For the cargoes, the more casual and all that definitely all the non-denim is getting stronger and stronger for us.

When you look at your assortment for spring and over the next several months are you where you want to be as far as the denim and cargo assortment is concerned?

Yes.

The answer is yes.

And there is more than cargoes though.

You know for us don't forget in women's there is a lot of very feminine looks like in skirts, dresses are getting very strong also.

We have all that.

Great.

Thanks, guys.

Christine Chen with Pacific Growth Equities.

Congratulations on an amazing, amazing quarter.

Can you talk a little bit about your wholesale strategy in the U.S.?

Obviously you will lose some doors from Federated and may Company for the first half of the year.

But over the longer-term is the plan to grow the number of doors or is it to be more productive in the doors that you are in?

Yes I think it is no secret to anybody that Federated with the consolidation of May Company and Federated, Federated is going to -- is dropping quite a few doors.

By the same token then, our combined business is going to contract a little bit but we have that already planned in the projection that Carlos mentioned earlier.

As far as we are concerned is with Federated what we are doing is we are really concentrating on the top doors and always trying to grow our business on the top doors of Federated.

So it's not going to have a big impact for us.

I think that this is a very exciting time for us.

Our wholesale business is really having a very strong trend and a lot of the bottoms that Maurice was referring to are selling very well at point-of-sale right now.

We of course the loss of doors is going to impact the first half but we feel that we because the product is significantly better and selling so well at retail is also selling very well at wholesale.

So we are excited about the opportunities there now.

And then Fred for the options expense can I assume that it is evenly spread out across the quarters?

Yes.

It's about a penny a quarter.

Right and then the tax rate in '05 moved around quite a bit even though the annual tax rate was 39.8%.

Do you expect to see that movement in '06 as well?

Is it because of Europe?

We think in '06 we're anticipating 39.8%, and it seems that that is where our rate has settled for right now.

Okay.

Thank you.

We are working on it.

Aren't we all.

It's an ongoing project.

(OPERATOR INSTRUCTIONS) Holly Guthrie with Morgan Keegan.

Congratulations everybody.

Question on Europe, let me see, I thought that when you guys first acquired Europe that you were focusing on growing the wholesale account and that retail really wasn't a focus at this time last year.

Could you talk about where you are in that evolution?

Are you moving onto retail as the second part?

And I guess if you could kind of categorize how much growth in each area wholesale versus retail that you have?

That would be great.

This is Paul, Holly.

In fact you are correct on both.

We are, our focus is wholesale but the strategy is retail.

But retail not of planned by us or planned by partners.

If you talk about how many stores Guess?

Inc., Guess?

Corporation or Guess?

Europe is going to open itself, it means us.

For '06 most likely would be 1 out of 33.

So these 32 stores we will be buying all wholesale from our company that is one side.

And then we have the multi-brand stores including department stores for example next month we're going to open I think 15 doors with Gallery Lafayette in Paris and 12 doors with (indiscernible) and we're going to start with in Spain and that is wholesale as well.

But we continue to believe the same as in America that to strengthen the brand everywhere in the world, more retail stores are open to identify the brand as it is, the stronger we would become and strong as a wholesale would become as well.

We will not pursue personally as a company a strategy to open directly stores in Europe because of capital expenditure intensive.

Okay?

Okay.

And I guess if you could address although you're not nearly as far along in Asia but if you could talk about what the strategy in Asia is?

This would be even more clear.

We don't intend to open any stores neither in Asia or India or China directly.

All of them that you heard to be open for example in 2006 that region opened 60 freestanding stores and we don't count any shopping shops.

We don't cut any corners.

We don't count any with brand customers.

This would be done for partners a lot of them long-standing partners, like FJ Benjamin who has been with us 15 years who just got another distribution of GAP and Banana Republic who have been partner for a lifetime for us.

And open new partners in China and the new partners in India who plan to open in 2006 25 stores of Guess?.

And India is a major market for us again.

The same speech is would be that everyone of these stores will carry without failure all accessories of Guess? which we will directly to relative streamline.

And then just going back to Europe.

What percentage of the stores -- of the wholesale accounts, excuse me, in Europe are carrying more than just the denim and the accessory business?

Really the other parts of your business, how many of those stores or a rough percentage?

I'm sorry, I'm not understanding the question.

Looking at the other product lines outside of just denim and accessories that we see here domestically, what percentage of your account I guess either retail or wholesale -- or no, I'm sorry just focus on wholesale right now -- what percentage of those wholesale accounts are buying those other products besides denim?

Maybe I will say I assume you are talking about the licensee of Guess?

Europe which is called (indiscernible) Europe which is Guess? by Marciano which is not done by us, it's a licensee.

It will be an average of 25% in the store, 25 to 28% in the store, any given store in Europe.

And it's a very successful line as well.

It is a licensee which is a contemporary line in Europe and in Asia.

Thank you.

There are no more questions at this time.

I would now like to turn the call over to Paul Marciano for closing remarks.

Again thank you for your interest in Guess? and we apologize if it was a little bit longer, the presentation on our side.

We will try to make it shorter on the next presentation but that was a full quarter and full year.

We look forward to keeping you abreast about the progress we're making in the future and thank you again.

Thank you.

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

You may now all disconnect.

Enjoy your day.