Guess? Inc (GES) 2006 Q1 法說會逐字稿

Good day, 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. Please note that during the course of this call the company may make forward-looking statements regarding future plans or future financial performance, including expected results of operations and projections for current and future periods. Forward-looking statements are only expectations, and involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from what is currently anticipated. Additional information concerning factors that could cause actual results to differ materially from current expectations is contained in the company's most recent annual report on Form 10K and other filings with the SEC, including the risk factors discussed therein. At this time for opening remarks and introductions I would like to turn the call over to Paul Marciano, Co-Chairman and Co-CEO of the company, please go ahead.

Thank you. Good afternoon, thank you for joining us to discuss Guess? 2006 first quarter financial results. Joining me is my brother, Maurice Marciano, Co-Chairman and Co-CEO, and Carlos Alberini, President and Chief Operating Officer.

We are very pleased with our performance this quarter, which followed record earnings for the 2005 fiscal year. In the quarter our earnings per share increased by 89% to $0.34 from $0.18 last year. Net revenues grew by 20.1%. Operating margin rose 300 basis points, to 10% from 7% of last year's first quarter. The company had an increase of gross margin of 190 basis points in this period, and we were able to leverage our cost structure, reducing our SG&A rate by 110 basis points for the quarter.

We achieved earnings growth in each of our business segments. Our retail business in North America delivered earnings growth of $5.5 million during the period in spite of the Easter shift into the second quarter of this year. Comp sales in North America increased 13.9%, our twelfth consecutive quarter of positive comps.

Our business in Europe achieved revenue and earnings growth of over 30% in the quarter, and licensing worldwide - revenues were up 23%, and earnings grew over 30% for this period.

We are confident that the financial performance we are achieving these past several quarters is a direct result of the execution of key strategic initiatives we have put in place. As a result of these initiatives, our business model has become more balanced and diversified across business segments and geographic regions. This has resulted in a more predictable and consistent earnings performance as we continue to grow around the world.

I would like to now review some of these key strategic initiatives with you. I will start with North America. As you know, we have a very well developed infrastructure in North America. Our retail business in North America represents over 80% of our total sales, with the remainder being wholesale. Our plan is to continue to develop our retail distribution across our multiple store formats. Guess? retail - we currently have 286 stores in North America, and we believe this could become a 500 store opportunity for us. Marciano concept - with 15 stores currently, could be a 100 store chain, and Guess? Accessories - now only 12 stores in the U.S. and Canada, could also be a 100 store opportunity.

Beside that, as we mentioned on our last conference call for outside North America in 2006 our partners plan to open 117 stores, of which 40 will be Guess? Accessories stores, and 77 will be Guess? Jeans or Guess? by Marciano retail stores.

About Europe - we consider Europe to be a key growth opportunity for Guess? For that we are investing in infrastructure to support that growth. This month we will be opening our new headquarters in Florence, Italy, which will be a 100,000 square foot facility.

We have a two prong strategy to penetrate this market. One is, during the last three years we have expanded our wholesale distribution in Europe, and we see significant opportunities to grow in large markets such as UK, France, Spain, Eastern Europe, and others. The second part of the strategy relates to retail expansion. We currently have 19 retail stores that we own, and our franchisees have 52. We have very good partners in many European countries that share the same global vision and confidence in our brand. We intend to open a total of 33 stores in Europe this year, most of which will be opened by our partners.

Asia and India are other growth areas for us. We will continue to invest in infrastructure, as we announced, as well as to support our partners effectively in that region. This month we'll be opening our Hong Kong showroom that will facilitate our growth in the Asian market by providing our distributors and licensees fast and easy access to all our collection, including our lines from Europe and North America. There are currently 189 Guess? stores in Asia, all owned and operated by our partners. We are planning to open an additional 53 stores in 2006 in that region of the world.

Licensing worldwide continues to expand. Our new footwear and fragrance licensees are both delivering very good results, while accessories performed above plan.

Finally, another very important initiative relates to people. Talent and management selection have been our primary focus for Guess? future success. Across our organization we have placed top level talent in key functions from sourcing to merchandising. Our strong team of merchants is working closer than ever with our designers and supply chain executives to improve our execution throughout the product cycle from development to stores. I am convinced that the efforts of everyone in our Company and the change we have made to our model have been the main drivers of our consistent results in earnings growth over the last three years.

Now Carlos will give you some more details on our first quarter results and update you on the outlook for the rest of the year, then I will conclude. Thank you.

Thank you Paul, and good afternoon. This quarter we had a strong financial performance across the board. Because of that we will raise guidance for the remainder of 2006 from what we presented to you this last February. I will discuss this in further detail later.

Now turning to the specifics of our financial performance for the quarter; our business segments delivered strong operating results and we improved in almost all key financial metrics, including revenue growth, gross margin, SG&A rate, operating margin, and most importantly, net profitability and earnings per share.

We operated the business efficiently, delivered solid margins in each of our businesses, and managed expenses effectively. As a result, net earnings for the first quarter ended April 1, 2006 reached $15.4 million, or diluted earnings of $0.34 per share. This represents an increase of 89% in both net earnings and earnings per share, and it compares to net earnings of $8.2 million or diluted earnings of $0.18 per share for last year's first quarter.

Total net revenue increased 20.1% to $259 million from $215.6 million in last year's first quarter. We increased our overall gross margin for the period to 40%, up 190 basis points from a year ago. This margin improvement reflected better retail margins in North America and a bigger percentage of our business represented by our European segment, which carries a much higher margin than our North American business. Our retail margins improved in the quarter due to higher product margins and improved leverage of occupancy costs as a result of increased retail sales.

We were able to improve our SG&A rate, which before option expense was down by 150 basis points for the period. Even after absorbing the impact of option expensing, in accordance with the new accounting rules, our SG&A rate was down by 110 basis points, representing 30% of net revenues. The leverage we experienced in the quarter was the result of cost efficiencies in our North American retail and wholesale businesses and more efficient marketing.

For the quarter we achieved an operating margin of 10%, up from 7% in the period last year, for a 300 basis point improvement. From an operating segment perspective we posted significant earnings growth in retail, Europe and licensing.

Net interest expense for the first quarter of 2006 was $.4 million, which was $.9 million lower than the 2005 first quarter. The reduction in net interest expense resulted primarily from increased interest income on a higher level of invested cash, and higher interest rates earned on that invested cash. Our tax rate was 39.8% in the quarter as compared to 41% in last year's first quarter.

Now I want to take a couple of minutes to break down where our revenues and earnings are being derived from, to help you understand the breadth of our business. In North America, our retail revenues totaled $139 million, up 19.3% from a year ago. This growth was driven by a 13.9% same store sales increase for our company owned stores in North America, and the contribution from our new stores, which represented a net 6.2% increase in average square footage as compared to the same period last year.

In the quarter we opened five new stores - three retail stores, one Marciano store and one Accessories store. We closed seven retail stores during the period, ending with 313 stores as of April 1, 2006. This compares to 289 stores open at the same time last year. The 313 stores are comprised of 286 retail stores, 15 Marciano stores and 12 Guess? Accessories stores. As Paul mentioned, we continue to see potential for significant store growth in the U.S. and Canada.

Earnings from operations in the first quarter for the retail segment increased $5.5 million to a profit of $2.1 million from a loss of $3.4 million in the prior year period. This represented an improvement of 440 basis points in operating margin for the period. Half of the improvement was due to higher gross margins driven by increased full priced sales and better occupancy leverage, and the other half was due to better SG&A expense leverage. Of course our 13.9% same store sales growth was key to this improvement.

In terms of product performance, our young contemporary business was strong during the quarter, particularly in bottoms, while men's saw good performance in fashion denim and long and short sleeved knit tops and tees. Accessories sales in our stores were driven by handbags and watches. We also had strong growth in footwear sales.

Our wholesale revenues in the U.S. and Canada were about flat versus the first quarter a year ago. We were very pleased with that performance, considering that many doors were closed as a result of the Federated May consolidation. This is now a stable and profitable part of our business. Domestically at the end of the quarter we were in about 910 major doors as compared to 940 a year ago. Operating earnings improved to $2.4 million in this year's first quarter compared to $2.1 million in the prior year period, primarily as a result of effective cost control.

In Europe, first quarter revenues grew by $18.6 million or 32.7% to $75.2 million. The majority of the revenue growth in the first quarter was generated by our wholesale business. The continued strong performance of our accessories business, coupled with the integration of our jeans wear business and new retail stores, resulted in revenue increases that clearly exceeded our expectations for the period.

Earnings from operations in our European segment increased by 33.6% to $21.2 million in the first quarter of this year from $15.9 million in the same period last year. The operating margin for this business was remarkably strong for the quarter at 28.2%. Both strong gross margin performance and effective expense control contributed to this business result, which also exceeded our earnings expectations for the period.

Now turning to our worldwide licensing segment, this business continues to perform well, with first quarter net revenues of $14 million, up 23% compared to the prior year, and also ahead of our expectations. During the quarter we increased earnings from operations in the licensing segment by 34.4% to $12.3 million, this compares to $9.1 million in the prior year period. We achieved this earnings increase through revenue growth, coupled with a significant reduction of expenses.

Looking at our balance sheet: cash increased by $62.3 million to $151.5 million at the end of the first quarter, compared to $89.2 million a year ago. Our total debt, including capital lease obligations at the end of the first quarter this year, was $90 million, down $17.8 million from $107.8 million at the end of the 2005 first quarter. All in all, we improved our net cash position, year-over-year, by $80.1 million.

Inventory increased by $16 million, or 16.7% to $111.6 million at April 1st, 2006, compared to $95.6 million at April 2nd, 2005. Part of the increase is due to the Easter shift from the first quarter last year to the second quarter this year. As a matter of fact, our current inventories, post-Easter business, are running about only 12% over last year's levels. Capital expenditures for the quarter were $9.9 million before tenant allowances of $.9 million and in line with our plans.

Now, I would like to update you on the 2006 outlook for the Company. We offered detailed line-item guidance for 2006, during our fourth quarter 2005 conference call in February. We remain confident that we can achieve our overall financial goals this year and exceed the level of profitability that we expected then. Based on our recent performance, we now believe there is revenue upside in two specific areas, which should also result in increased earnings.

One is retail store comp sales in the second quarter and two, European revenues, primarily in the third quarter. We reported last week that our April same-store sales increased 22.6%. We are very pleased with this performance, which exceeded our expectations, even after considering the benefit from the shift of the Easter holiday.

Because of this, we now expect comp sales growth for the second quarter in the low to mid-teens, up from the +10% forecast that we provided in February, which should contribute to a total retail sales increase in the high teens on a percentage basis for the second quarter, up from the increase in the mid teens forecast that we provided previously.

In Europe, strength in all categories is expected to drive second half revenue increases of nearly 35%. This compares to the low teens growth prospect that we provided in February, with the third quarter accounting for nearly all of this increase.

Finally, SG&A expenses, as a percentage of net revenue, are now expected to be up only 50 basis points in the second quarter and down at least 280 basis points in the third quarter. This represents an improvement from our previous forecast of an increase of 140 basis points in the second quarter and a reduction of 240 basis points for the third quarter.

I would now like to turn the call back to Paul. Thank you. Paul?

Thank you, Carlos. In conclusion, and after listening to our first quarter report, it is clear that the Company is quite different from what Guess? was five years ago and more than 10 years ago. Our business has changed dramatically and we have changed with it. But most importantly, we anticipated it, strategized it, put a foundation to go beyond the borders of North America and execute the worldwide expansion that has unfolded in the last three years.

I cannot emphasize enough the importance of international business. It has become the number one priority across all divisions and in the entire organization of Guess?. The challenge is big, but the risk of execution comes with the reward we hope to have. All that created now a complete new set of excitement inside and outside of Guess?.

We have always invested in the Guess? brand and protected it from day one. For that reason, we have been able to position the brand in foreign countries much faster than our competition. Now we will capitalize on this brand recognition by expanding our businesses. At the same time, we stay extremely vigilant about where the market moves and what our customers need.

Thank you very much for your time today and now we would like to open the call to answer your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Christine Chen, with Pacific Growth Equities. Please proceed.

Thank you, congratulations everybody on another stellar quarter. We'll miss Fred, but I'm sure that we are in good hands with you, Carlos. I'm wondering if you had an update on, you know, his successor?

Well, we are conducting a search and we have been actively engaged, and are going to report at the proper time. In the meantime the good thing is that we do have a very strong team and I have been investing a lot of my time with the team and we don't feel that there are going to be any changes in the way we have been operating. We will report at the proper time.

OK, and then, as far as the second half outlook, Europe, the bulk of that being in fiscal Q3, that's because of seasonality, I assume?

Exactly.

OK, and then the second half of the year, you start anniversarying some pretty big numbers in the U.S. at the retail level. Now, what sort of things are you doing to sort of overcome that hurdle?

We are very confident that the business is very well positioned. We have a very strong team on the merchandising side. I think that is what gives us so much confidence. This team has been in place for a very short period of time. I think that many of their initiatives are starting to show right now. By merchandise categories, I think we have opportunities in every one. In Men's, Marciano, the whole YC business, we are making a major investment in denim. Maybe Maurice wants to comment?

Accessories - this is Paul - in accessories, I feel the same confidence at the moment that, for example, if you take the products of footwear, it is really the first fall, basically, that we are going to anniversary here. And the response of the footwear line has been really way, way exceeding what we have in our plan so far.

And also, you know, really when you consider last year, I think we had a very strong fourth quarter. But looking at the product categories, where we missed business, they are significant. I think our investment in some of these new programs is going to pay off. We have a big program in Active we're just completing new as a category that was very under penetrated for us.

Wovens, we're investing in that part of the business significantly. Corduroy is another category that I think presents big opportunities, even sweaters and outerwear. And so, I think overall, there is plenty of room for us to continue to grow within our own stores.

And then just one last question, the wholesale doors was down, I assume, because of the merger between Federated and May Company. I guess, going forward, is the idea to be more productive in the doors that you have? Or, are there any plans to try and get more doors?

Yes, as a matter of fact, we think that the productivity has been increasing. Our business in wholesale is very healthy and we are doing more business with less inventory right now, as we speak. So, we are very excited about that. We don't see a significant expansion in doors right now, but that could come with time.

Great, congratulations once again.

Your next question comes from the line of Jeff Klinefelter, with Piper Jaffray. Please proceed.

Hi, Jeff?

Again, your next question comes from the line of Jeff Klinefelter, with Piper Jaffray. Please proceed.

We might have lost him.

Maybe you can move to the next one?

OK, your next question comes from the line of Erin Maloney, with Merriman Curran Ford and Company. Please proceed.

Hi, good afternoon. I have a couple of questions. Just first, if you could talk at all about your store opening plans for the rest of the year, for the North American retail business, kind of in total and by concept.

Yes, let us look into the numbers. You know, as you know, we came into the year with a plan to open approximately 38 stores. I'm sure we can give you the specifics later on. We did do that when we talked about the fourth quarter conference call.

OK, so those plans haven't changed from that conference call?

We are still on plan and, you know, our capital expenditures number, what, $60 million before our tenant allowance of $7 million. We are sticking to that plan. We're trying to be very, very careful with the selection of real estate, of course.

OK, and then, just my other question was on your licensing business, on kind of the outlook for the rest of the year. You did mention it as an area for possible upside, but I recall you were only looking for kind of high single-digit growth and obviously came in quite a bit above that in the first quarter. I mean, is there opportunity to see greater growth out of that business?

Yes, this is Paul. I think so too, but because of the fact that, for example, you have new licensees of sizable potential, like fragrance, and footwear, being the first year, it's really that we go by how they are moving into the market and how the customers react rather than to say that we are so confident that it's a slam-dunk thing that we're going to double or triple the business. We don't know, so we go by how the customer reacts and how we evolve in the market, because of it being only the first year.

But obviously, quarter-over-quarter so far, we've been happy about this first year, with these two big licensees. And of course, you have the largest one, which is watches and handbags. We are experiencing some very important growth international. In view, of course, of the merger of Federated and May Company, they have lost quite a few doors, especially in accessories. But obviously, because of international exposure, that has not really affected their business on a total picture, which is, again, the strength of the brand we chose here.

So, we see a continued growth in licensing and we hope to maintain the same potential in the remainder of the year.

OK, great. Thank you very much.

That being said, just in terms of the specific numbers, you are right. We are staying with that high single digits forecast and, hopefully, that is conservative, for every quarter.

Thanks, great. Thank you.

Your next question comes from the line of Jeff Klinefelter, with Piper Jaffray. Please proceed.

Yes, sorry about that technical difficulty there, guys. Fantastic job in the first quarter, congratulations.

Thank you, Jeff.

I have a couple of questions. I guess, as we're starting to focus on Europe and on licensing, could you just put in perspective, or help explain again, how those two revenue streams work in some of your international markets? I know that in some cases you supply wholesale and also license the rights to the name of the store itself. In other cases, it's an outright franchise. Is there a fairly quick, simple way to just recap again how we can be thinking about those two revenue streams in the next few quarters?

It's not simple. We're going to try our best to explain that. We do have, for example, products, let's say, handbags and footwear, which are licensed products. But because the [restrictions] of organization that Guess? U.S. has put in place in Europe, we did not grant the right to distribute to anybody but ourselves. So, we do ourselves the distribution of these products. And that becomes like a wholesale business for us.

And that creates basically a double stream of revenues. One is the wholesale business in handbags and footwear. But two, the more we sell and the more we get revenues in licensing at the end. That's one part.

Then, you have the denim business, or jeans wear business, which we both like to license and it's a direct wholesale business. And then, you have our own stores that we operate in Europe, which is 19 currently, all over Europe. And, if you can call them franchisees, which are not really franchisees, we will call distributors, exclusive distributors, who operate Guess? stores. So that combination gives us, we think, in the next three to five years, a very large room to grow the exposure of the business of Guess?.

If we look at what comparable companies who came from the U.S. are developed in Europe, particularly one or two of them. So, we have plenty of room to grow expansion in Europe.

OK, that's very helpful. Thank you Paul. And then, maybe just also on Europe, talking more about the jeans wear license and the sportswear sector, how is that business tracking across the major markets, relative to the accessories, footwear, handbags? And, are there opportunities that you see, given the first quarter results for the back half, in terms of either opening new accounts or fine tuning your assortments in the European market?

In fact, we just finished to do the booking for the remainder of the year. As you know we have two markets, so we just finished the market for fall, and the booking has been at the rate of increase of 40%.

That's great.

We're very happy with that.

That's terrific. On the U.S. retail side, could you give us an update, either Paul or Carlos, given your op margin in the first quarter, how does that track with your annual objective for that business? I know we've talked in the past about it being able to get into the low double digits and potentially higher as a vertical organization. How is that tracking, given Q1 results?

We were very pleased with Q1; we picked up 440 basis points over last year's operating margin for the quarter, which was the first time since I've been with the company we saw that kind of performance by retail, and that was in spite of Easter shifting to the second quarter. If we can continue that kind of pace, and of course comps is a great driver of that kind of improvement, I feel very confident that our inventories are in great shape, so product margins should continue to perform well. I also feel very confident that the cost structure is being monitored very, very tightly. If we continue to deliver the top line I think we should do very well. All the new stores have performed well, and with increased productivity our, if you take a look at the latest 12 months through March, sales per square foot for the total chain is at about $415 per square foot. So we are on our way to reach that $450 a square foot that we were looking for as a goal. If we do that, profitability should follow.

Well thank you very much, congratulations and good luck to everybody.

Thank you Jeff.

Your next question comes from the line of John Rouleau with Wachovia Securities, please proceed.

Hey guys, fantastic quarter. Carlos, I didn't think it was possible for you to work any more.

We're trying to prioritize, that's all.

I hear you; you're making my job look easy. A couple of questions here, regarding the opening of the new Florence facility, I mean in know you're operating out of two different facilities there. Can you just talk about how that is going to help this business and how it's going to help productivity, efficiency, or just what you expect by consolidating those two units and being in one building?

This is Maurice, and I'm answering because I'm the one most involved in that. As you have seen when you came to Florence, we were not in two, but in three, there's one other facility that you didn't see. So we were in three different facilities there, now we have everybody together and that's helping tremendously for the efficiency for the communications and everything, and for the morale of everybody, to have everybody together, and with enough space, and with a great space to work in and with windows, which they didn't have before. But all that is really contributing to the efficiency of the place there. So all the design and all the sales, and all the product development, everybody is together now.

Great, well it sounds like we'll have to take another trip over there to see it.

Oh yes, and one more thing, in the new place we have the new showrooms, which are great showrooms, and we have the new store concept on the premises. So all of our visual, everything is there. So that I think is going to be a great booster there. We are already doing great and I think this is only going to contribute to doing things better.

OK. Next question, regarding the accessories category, you've been extremely successful I know with some of the product launches there. That continues to grow as a percentage of sales. Are you looking to further expand the shoe line, further expand the fragrance line, further expand maybe the handbag line and get deeper on a unit or a sku count in some of these categories? How should we be looking at accessories and maybe, how big do you think it could be as a percentage of sales in the full price stores in the U.S.?

Well let me, to tell you that the product existing today in Europe, Asia or in the U.S. or North America in footwear, it has been only for women's footwear so far. We are developing now the men's line, we have not even touched it, and as you know it's a Mark Fisher group. Then we are developing also a line for children, which is a natural with the kids and baby business we have in the free continent. Then you'll have the line also of casual, it means not what I would call athletic, because we don't intend to do any athletic, we intend to do fashion casual footwear for men and women. So basically the category is really opening now, and that gives us a lot of room to grow on each and every one of them.

For fragrance we have introduced a man's in March, and we have really some really good response already. We're introducing as a second line for women of fragrance I believe in July, July 30, which would be the Guess? Gold and that has been I think the potential we have now. And we have not finished with the international yet on the fragrance business, we are just starting in the last three months. So there is definitely a large territory to cover in these two categories.

So as these categories continue to expand and take up a little bit more space in the stores, are you shrinking other categories a little bit? Are you having to build bigger stores? Are you merchandising differently? How is the assortment changing?

Well for example, if you talk about Europe, it's not an issue because the majority of the business is multibrand stores who buy the product, as well as handbags. Handbags in total Europe, including Eastern Europe, and Turkey and Greece and all that, we have close to 2400 points of sales, but we only have 55 Guess? stores. So that gives you the scale where the product is sold. Then the same thing about footwear, we just started footwear in Europe, same thing. So we don't see any issue for that.

John if we talk about our stores here, what's happening, don't forget, there are two things happening here. As we are opening more and more Marciano stores, then the Marciano line is coming out of the Guess? stores, and that creates a huge opportunity and we've seen it time after time, wherever we did it, in Las Vegas at the fashion show, in Ventura, I could name 15 stores like that. And all the business, all this business vacuum by Marciano has been picked up and grown even bigger by the accessories. That's basically the plan, as we're opening more Marciano stores, then we have all the business picked up mainly by the accessories and then some also by the jeans business.

I can give you a specific example right now in Florida Mall; Florida Mall we have been there for many, many years. An opportunity came for those now center court stores. We opened a 3,000 square foot accessory store and large footwear presence. The store opened and now the Guess? store which is all the lines, men's, women's, Marciano, continued to operate basically with no accessories and all accessories went to that accessory store and the Guess? store has not trended down one single dollar on that store, and both stores do identical business almost. So basically we doubled the business in that mall, if you see what I'm saying.

So the newer accessory stores are carrying the full range of accessories and not just the handbags, some of the watches and - .

Only Florida Mall which has been a test for us, because the box is big, its 3,000 square feet, which is an unusual size for an accessory store. But that gives us an idea of the potential of that format.

OK. At one point you had indicated that you thought the accessories concept could be several hundred stores potential, now you're kind of saying 100. Is it safe to assume that you're kind of looking at that a little differently now that you've got so many other categories on the accessory side, and maybe you're going to reformulate your thinking on that store and then come back to us at some point?

Let me correct that again. If you hear correctly what I said just now, potentially North America is 100 stores, but the potential of accessory stores remains several hundreds for the simple reason that we have opened already 57 stores in '05 and in '06 we're going to open another 55, that's 110 around the world, with another 60 for 2007 which are already committed. But now you're talking on a global scale, what I was saying 100 was between North America, meaning U.S., Canada and potentially Mexico.

Great, OK thank you.

Your next question comes from the line of Holly Guthrie with Morgan Keegan, please proceed.

Thank you and congratulations.

Thank you Holly.

I just needed some clarification, I heard that you were opening 33 stores between you and your franchise in Europe, and that's on plan. But could you just go back and quickly review the Asia and India openings? I think at the end of the fiscal year you said you were going to open 60, is that still between you - I guess mostly franchise, but could you just review that?

Yes, I think it was for Asia and India not 60, but it was 53, 53 stores in 2006 in that region only. A big part of that will be India, we've put already eight stores and the partner we have there is planning to open maybe between 15 and 20 stores because of the early success of all the Guess? concepts that he has opened there.

Great, that's exciting. Then I wanted to get my arms around the SG&A number. Looking back at the last year and a half as you've launched and spent money with Marciano and accessories, SG&A has been a little bit higher, advertising and many other things. With the three or four people that you brought on last quarter, some changes at Marciano, is this about the rate that we should think that SG&A should stay at going forward? Basically do you think that you're at that point in the development of these brands where you can just kind of ride with what you have and just have the ongoing store operating expense increases?

I think in a way it goes back to the revenue issue that I was mentioning Holly, I think that we have been investing in a lot of projects that have very long term potential, as you know, including the new brands, including our investments in Europe and some other parts of the world. The great thing is that we are seeing significant growth in revenue. So we do not think that in terms of the SG&A rate that we will suffer in the next few months and years as a result of that investment. Because we are having significant success with the revenue and I think we should be able to leverage. In fact if you look at some of the guidance that we gave today, you are going to see that operating margins should pick up maybe 150 basis points or even more from last year's performance. And that is a combination of both margin improvement but also SG&A improvement.

OK great, and then one clarification on your guidance. I just looked back at my notes from the end of the fiscal year, and for Europe you had indicated mid to high teens for the year, Q1 up I guess $7.6 million or at $7.6 million, but Q2 up 40% and an increase in the low teens in the second half of the year. I guess I just wanted to clarify, because I think you said up 35%.

Yes, you heard correctly. We were looking at high teens in the first quarter, and if you remember we had some pre-shipments that had taken place back in December, so we expected that the first quarter was going to be, that the growth was going to be somewhat offset by that pre-shipment that had taken place. In spite of all that we came in with a growth of 32.7%, and we are seeing that the line is performing very well, as Paul mentioned, with pretty significant increases in the jeans wear side as well. So we are comfortable now with telling you that instead of low teens in the second half of the year, we should see an increase of about 35%.

Great, thanks for clarifying that. And then looking at total sales versus comp sales for the first quarter, total sales increasing 19%, comps increasing 13.9%, it looks like square footage growth somewhere around 4.5%, just down about 200 basis points.

No, no, I think -.

And that's what I wanted to try and understand, why it looks like it's slowing a little bit.

No, as a matter of fact, I think our square footage was up about 6.2%.

OK.

But, you know, the other thing you have to keep in mind is that we did close a bunch of stores in the first quarter, about seven stores, most unprofitable stores. So, you know, you're going to see a different dynamic going forward, as we continue to open some of those 38 stores that we mentioned.

Perfect; that answers that question. And then -.

Productivity has been up.

Yes, that would drive that, drive the profitability. OK, and then operating cash flow, negative in the first quarter. Could you talk a little bit about why operating profit was so negative? I know it's been negative in the first quarter in the past. But it was a pretty significant pickup.

Well, you know, part of the issue here is inventories. You now, inventories go one way, actually, you know, we have a source of cash with inventories. We ended the year with $122 million and now we are at $111 million. So, if you take that out, receivables is the biggest driver of the use of cash flow.

Our accounts receivable between the end of the year and the end of the first quarter was about $41 million and that represents big change from the year-end.

OK. I'm gong to take a wild stab at this but that receivable is because Europe tends to order a lot in the first and third quarters? Is that a correct assumption?

Right.

OK, great. Thanks so much and have a great year.

Your next question comes from the line of Jody Kirkamin, with CIBC World Markets. Please proceed.

Hi, I'm calling in for Dorothy Lakner.

Oh yes, hi. How are you?

Dorothy's on [a piece], on call, so we apologize. She couldn't be on both calls at the same call.

Regarding the bottoms business, obviously it continues to be a strong bottoms environment. Last year it was really so much denim and now we have cargos and skirts and other bottoms that have continued to pick up. Could you just address for us what's going on a little bit more on the bottom side, how comps might be running in denim and what you're seeing there?

This is Maurice Marciano. The bottom business remains very strong for us, mainly in the pants. The denim remains very strong, both in our basic and in the premium. And I said that already before.

And now, what's great is that we have the non-denim kicking in and we are selling more and more, you know, non-denim, which last year, the non-denim was very weak. It was all about denim, denim, denim. Now, we see a diversification of that category. So, that's great.

And then the Capri has been very strong and it will be very strong again now for the second quarter. Not only Capri but even shorts, different lengths of shorts. You know, shorts all the way to above the knee. So all this is contributing to really make the bottom business very good. The denim skirts and non-denim skirts are doing very well also. The last thing would be, not in bottoms but more what we are seeing a big pickup in also is in dresses.

So, all that is contributing in making the business stronger.

That's great and marketing spend, in the back half of the year, you didn't really chat about it in this call, as you did as much in the fourth quarter call. But are plans for marketing still the same? And, do you have any different marketing initiatives, maybe to support the new fragrance model that you were just talking about, or anything upcoming that we should be aware of?

Not specifically, marketing remains the same. The strategy has been the same for many years. Nothing is really changing. Outdoor advertising, billboards, magazines, same thing. It's a very stable, consistent strategy that we have not really changed and we don't plan to change.

If you talk about maybe any radio advertising, the answer is no. TV is no. And, because it's not in our strategy, so it remains the same and stabilized.

Thank you very much and good luck.

[OPERATOR INSTRUCTIONS].

At this time, there are no more questions. I would now like to turn the call over to Paul Marciano for closing remarks.

Thank you, again. Thank you for your interest in Guess? and we look forward to keeping you updated on our progress in the future, with the report for Q2. Thank you very much and have a great day, a great evening. Thank you.

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.