Guess? Inc (GES) 2006 Q4 法說會逐字稿

Good day, and welcome to the Guess?

Fourth Quarter Year-End Conference Call.

Today's call, including the question-and-answer portion is being recorded and being made available to the public. [OPERATOR INSTRUCTIONS]

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 operation and projections for the current and the future periods.

Forward-looking statements are only expectations and involve known and unknown risk 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 10-K and other filings with the SEC, include the risk factors discussed therein.

Now for opening remarks and introductions, I would like to turn the call over to Paul Marciano, Chief Executive Officer of the Company.

Please go ahead.

Thank you.

Good afternoon, and thank you for joining us today to discuss Guess? financial results for the fourth quarter and fiscal year 2006.

Also joining me today are my brother, Maurice Marciano, Chairman of the Board, Carlos Alberini, President and Chief Operating Officer and Dennis Secor, Senior Vice President and Chief Financial Officer.

I will begin with a brief overview of the fourth quarter and key financial successes of 2006.

Next, Dennis will discuss the fourth quarter in detail followed by Carlos who will review the outlook for the first quarter and current fiscal year.

I will finish with an update on our gross initiative and long-term goal and then we will go to the Q&A.

We had a terrific fourth quarter performance that closed an outstanding year.

Once again, we reported record revenue and record earnings for the quarter.

We reported earnings per share of $0.99 versus $0.57 last year, an increase of 74%.

All our businesses around the world performed significant well driving top and bottom line.

Revenue growth exceed our expectation in every business division with a total increase for the Company of over 25% in the period.

We managed the business well and grow significant gross margin expansion as we leverage expenses effectively.

As a result, operating margin for the Company increased 480 basis points for the total of 20.5%.

We are extremely pleased with this result.

We close the year with a strong business momentum, the strongest that I can remember and we very confident that we are well positioned for the future of global expansion.

For January '07, we have much better January same-store said performance than expected at 12.7% against 27% of 2006.

Let me recap now some of the outstanding results of 2006.

The revenue reached $1.2 billion, representing an increase of 27% over 2005.

Operating profit increased 90% to $193 million, and operating margin expanded 540 basis points to 16.3%.

Net earning -- net earning reached $123 million, more than double last year net earning of $59 million and this come on the top of earnings are doubled in 2005.

Our diluted earning per share reached $2.68, versus $1.31 for 2005, which represents a 105% increase in diluted EPS for the year.

In January 2006, we had the first global conference in Los Angeles called One World, One Brand, which brought together all of our distributors, licensees, partners, key customers and executives of all divisions to share the Guess? brand vision in a global scale.

We believe that the conference had a huge impact in all the businesses in '06 and give us the best year ever.

We just returned two weeks ago from our second One World, One Brand three-day conference, this time in Singapore.

Where 500 participants represented 67 countries walked away with a clear vision once again of each retail concept, Guess?

Jean, Guess by Marciano, Marciano and Guess Accessory and want to plan on on this concepts.

Our 2006 performance reflected a strong execution of our strategy by a team of more than 9000 dedicated employees and partners worldwide, and we want to thank them for really going above and beyond our expectation.

I will hand the call over to Dennis now.

Dennis?

Thank you, Paul, and good afternoon.

Let me now share some of the outstanding financial highlights of our fourth quarter performance.

Total net revenues for the Company increased 25% to $346.4 million in the fourth quarter, with all of our segments contributing to this growth.

North American retail contributed the largest part of this increase, aided by our strong sales growth for stores opened more than one year, which reached 12.5% in the period.

European sales almost doubled and contributed 29% of the Company's revenue growth, even while the fourth quarter is not typically a strong quarter for Europe.

Total Company gross profit increased 36% this quarter from $117.7 million to $159.5 million with all of our businesses contributed to this growth.

North American retail contributed about half of the gross profit increase, driven by the higher sales volume and improved margin due to more full-priced selling and occupancy leverage.

Every business drove gross margin expansion in the period with Europe and licensing contributing strongly to the improved margin performance.

As a result, the Company's gross margin improved 340 basis points to 46% for the quarter.

In the fourth quarter, our total SG&A expenses were $88.3 million or 25.5% of revenues and our SG&A rate improved by 140 basis points.

Improved leverage over SG&A costs in both our North American retail and wholesale businesses were the key drivers of the overall reduction in the SG&A rate.

These were partially offset by increases in performance and stock-based compensation.

For the quarter, we increased operating profits 64% to $71.1 million and expanded operating margins 480 basis points to 20.5%.

The strong performance across all of our businesses resulted in improved profitability for all segments and contributed to the operating margin expansion.

With this performance, all of our business segments operated solidly with double-digit margins for the quarter.

Net interest expense for the fourth quarter was $1 million, and included $1.9 million in charges related to the early retirement of our secured notes.

This compares to $800,000 of net interest expense in the year ago quarter.

We also sold nonoperating assets which resulted in a gain of $1.9 million for the period, which is reported in other income net.

Our tax rate for the quarter was 36.3%, compared with 39.5% for the prior year quarter.

The lower quarterly tax rate was the result of our final evaluation of our tax position, which resulted in an annual tax rate of 37.1% for 2006.

For the fourth quarter, net income increased 77% to $45.7 million from $25.8 million and diluted earnings per share increased 74% to $0.99 from $0.57 a year ago.

Next, I would like to review our revenues and earnings by business segment.

Our North American retail revenues increased 16% to $240.2 million in the quarter.

This growth was driven by the 12.5% sales increase for stores opened more than one year and 4.4% average square footage growth.

Better inventory management and a very successful product assortment led to improved sell through and more full priced selling.

Fourth quarter traffic also improved, reversing the trend that we had experienced early in the year.

Retail operating profit increased $14.9 million to $51.3 million, a 41% improvement.

Operating margin improved 380 basis points to 21.4%, primarily driven by the gross margin expansion that resulted from increased full priced selling and occupancy leverage.

Our wholesale business continued to make solid progress and sales growth and improved profitability.

Revenues grew 27% to $42 million.

At the end of 2006, we were in 974 doors in the U.S.

Operating earnings in the quarter tripled to $9.5 million, driven by increased volume, a higher gross margin and a reduction of SG&A expenses.

Operating margin reached 22.6% for the quarter, an improvement of more than 13 percentage points over last year's 9.5%.

Fourth quarter European revenues increased by 87% to $42.8 million and operating profit increased to $5 million from $200,000 in the year ago quarter.

Our European retail stores performed exceptionally well and contributed the majority of the profitability increase in Europe.

Higher sales volume and significant SG&A expense leverage led to an operating margin of 11.6% to compare to less than 1% in last year's fourth quarter.

For our licensing business, our line of accessories continued to perform very well in all regions of the world and the segment was a major driver of earnings growth for the quarter.

Royalty revenues increased 56% to $21.3 million.

Operating earnings for the licensing segment increased 53% to $19.7 million, up from $12.9 million last year.

Now, some highlights from our balance sheet.

We ended the year with a very strong balance sheet.

Cash and cash equivalents increased by $49 million to $220 million compared to a year ago.

This is after the early retirement of $33 million of secured notes and a cash payment of $13 million we made for the acquisition of Focus Europe.

As of the end of December, we were completely debt-free in North America, and our only remaining debt was the capital lease for our Italia headquarters and our short-term revolvers in Europe.

Accounts receivable increased by $52 million to $133 million compared to the prior year.

The growth in receivables was due primarily to the tremendous growth we had in Europe during the second half of the year.

Inventory at the end of 2006, was $166 million compared to $122 million at the end of 2005, an increase of $44 million.

About 40% of the inventory increase relates to the focused acquisition in Europe and the remaining represents inventory needed to support our sales growth in North America and Europe.

Our inventories remain clean and we enter the new year well positioned with a significant portion of spring product, which drove our solid business in January.

We ended the year with a total of 336 stores in North America, which compares to 315 stores a year ago.

I would now like to share some highlights and some financial statistics for our Company.

The fourth quarter of 2006 represented our 14th consecutive quarter of earnings growth.

This performance has contributed significant improvement in our return on equity and our return on invested capital.

Our return on average equity reached 34.3% in 2006, a solid improvement from our 2005 performance when our return on average equity was 23.1%.

Our return on vested capital reached 38.3% in 2006, versus 24.9% in 2005, again a significant improvement.

And we now enjoy the benefit of a very balanced earnings model.

In 2006, our European and licensing businesses, when combined delivered nearly the same operating profit as our North American retail and wholesale businesses also combined.

Our earnings are not overly dependent on any one business segment, product category or territory.

Regarding our capital structure, since the year 2000, we have focused our efforts to delever our balance sheet.

Our earnings growth combined with the strong cash flow generation power of our businesses and effective working capital management has allowed us to pay down our debt, fund all capital requirements and position us well for the future and with that, I will turn the call over to Carlos.

Thank you, Dennis, and good afternoon.

Our performance over the last few years validates that our business is at a reflection point and the Company is poised to continue its accelerate rate of growth.

We are very pleased with our financial results and are confident in or Company's future and our board shares our enthusiasm.

With announced today that our board has approved a two-for-one stock split and regular quarterly cash dividends that annualized at $0.48 per share, that is on a prestock split basis.

This actions demonstrate our commitment to creating shareholder value and recognize our solid cash flow generation power and strong balance sheet.

The first quarterly dividend of $0.12 per share and the additional stock split shares will be distributed on March 12, 2007.

The distribution will be made to shareholders of record as of the close of business on February 26, 2007.

Now, I would like to remind you of our board's position to change our fiscal year.

Our 2008 fiscal year began on February 4, 2007, and will end on February 2, 2008.

To help you better understand the impact of the change, today we released recast historical financial information for the first three quarters of last year, comprising the quarters that ended on April 29, July 29, and October 28, 2006.

These recast results are attached to our press release on pages 10 to 14.

Please note that the recast quarter ended February 3, will include the five-week January 2007 transition period.

We are currently in the process of finalizing the January results and plan to file January 2007 as a separate period, together with the first fiscal quarter of 2008 next June.

For now, let me give you some indication of our January business, which was very strong.

We expect that the five-week January period will show at $0.12 to $0.14 earnings per share improvement over the year ago January period.

This increase in earnings was driven primarily by two of our business segments in similar proportions.

First, our European business, including the recently acquired Guess by Marciano Contemporary business had strong shipments in the period.

Second, as Paul just mentioned our retail stores in North America posted a same-store sales increase of 12.7% in the January five-week period.

We are very pleased with this performance which followed an increase of 27% in comparable store sales for the same period last year.

Once we include these expectations in the recapped quarterly period end of February 3, 2007.

We expect diluted earnings per share for that period in the range of $0.95 to $0.97.

We also expect revenues for the same period of approximately $385 million.

For the 12 month period ended February 3, 2007, this guidance would result in expected revenues of slightly more than $1.2 billion.

Operating margin of 16.5%, and diluted earnings per share in the range of $2.80 to $2.82.

We believe that the change in fiscal year will provide for more consistent quarter-to-quarter comparisons.

When you look at the Company's historical profitability by quarter for the recast periods, you will see that about one-third of our annual profit was delivered in the first half of the year and two-thirds in the second half.

The first and second quarters were similar in earnings per share contribution and the same was true for the third and fourth quarters.

We expect that for the fiscal year 2008 that just begun, our performance will show a pattern that's close to the historical earnings cycle.

Our business model is identical and we plan sales growth in all of our businesses fairly consistently throughout all fiscal periods in the current year.

I would now like to update the annual guidance that we provided back in November for the current fiscal year and provide guidance for the first quarter.

This updated guidance includes the impact for the change in our fiscal year.

It also included the impact of our acquisition of Focus Europe and reflects improved expectations for our business overall, given the strong performance that we achieved in the fourth quarter and in January as we reported today.

We look at fiscal 2008 as a year when we invest and build for the future growth of our business.

And during this investment period, we plan to continue strengthening our operating margin performance and delivering substantial earnings growth.

For the 2008 fiscal year, we now expect the Company's consolidated revenues to range between $1.45 billion and $1.5 billion.

We expect to deliver an operating margin of about 17%.

We also expect diluted earnings per share in the range of $3.30 to $3.40.

Our plan for capital expenditures for 2008 is approximately $85 million net of [highly accented] and we expect depreciation and monetization in the $44 million range.

In our retail business, we continue to plan accounts in the low to mid single-digit range for fiscal 2008 and expect the count pattern to be relatively consistent throughout the year.

Total retail revenues are expected to increase in the 8 to 10% range for the year.

We plan to make investments in advertising and infrastructure to support the launch of G by Guess.

As a result, we are planning only a slight operating margin expansion for our North American retail segments compared to the year that we just completed.

In our North American wholesale business, we continue to see limited door expansion as a result of market consolidation.

In fiscal 2008, our Asian business will include our operations in South Korea, which we took over this year, plus our existing Asian wholesale exports.

These businesses are all included in our wholesale segment.

All considered our fiscal year 2008 expectations for our wholesale segment is to increase revenues by approximately 20%, and deliver an operating margin of about 16%.

Regarding Europe, including the revenue impact of the focus acquisition, our expectation is for revenues to grow between 45 and 50% in fiscal 2008.

With the additional focus and given the potential effective of exchange rates which had a profitable impact into last year's operating margin performance, we are planning this business with an operating margin in excess of 20% in fiscal 2008.

We are planning licensing revenue growth in the low single-digit range for the fiscal year.

This increase is net of impact of the acquisition of Focus and the assumption of our South Korean business.

We expect to maintain the high operating margins that we have achieved historically in the licensing business.

We are planning all fiscal 2008 with a 38% effective tax rate.

And now let me spend a couple of minutes on our outlook for the first quarter of 2008, which will end on May 5, 2007.

Starting with North American retail, we continue to be very pleased with our business with solid performance across the board.

We continue to see strength in key product categories including our Marciano line which had a great performance in January and continued to show strength in the February business.

Based on this trend we expect first quarter comps to increase in the low to mid single-digit range.

This compares to a 12.6% comp increase in the newly recast first quarter numbers for last year.

We expect total retail sales to increase between 6 and 8% for the quarter.

We plan the first quarter to be an investment period in retail as we are planning to launch a substantial portion of our remodels including conversions to G by Guess.

This program will have a slightly negative impact on profitability for our retail business in the quarter.

Next we expect wholesale sales to increase approximately 35% in the first quarter period.

In Europe, we expect first quarter revenues to increase in the range of 55 to 60% and we plan licensing revenues to grow in the range of 6 to 8%.

These expectations should translate into first quarter consolidated revenues ranging between $325 million and $335 million.

Operating margin in the low teens and diluted earnings per share in the range of $0.52 to $0.55.

So with that, I will turn the call back to Paul.

Paul?

Thank you.

I hope someone can remember all of these numbers.

I would like to discuss our gross initiative as fast as I can.

Let's start with North America.

As discussed in the last conference call in the next two months we will open the very first G by Guess store concept which will have not only men and women apparel but also accessories such as handbags, watches, footwear but is especially dedicated to this brand new division.

By the end of July '07, we will have at least 25 G by Guess stores.

We are all very excited about this concept and we will give you informed on the next conference call of the very first customer reaction.

Our Marciano division, which started in late 2004 is well positioned for the current fiscal year.

We currently have 25 stores in U.S. and Canada and we plan to open another 10 Marciano stores bringing you a total of 35 stores by the end of this year.

In U.S. and Canada we continue to see significant opportunities for retail expansion both in mall and key street locations.

We plan to open 48 new stores for 2007 and we will continue to [highly accented] have expansion for all different concepts.

Were confident that we can more than double our source presents in this territories over time.

Europe.

In Europe, we are looking to at least double the [inaudible] region for the next three to five years to add [highly accented] $600 to $800 million in our business.

Guess by Marciano, [highly accented] we have a very diversified business business when planning Europe that offers beautiful growth opportunities.

I think with our pro brand, company-owned retail stores and licensed stores and a very strong accessory and footwear business.

Now about Asia.

Korea.

We officially started a direct operations six weeks ago only.

We are very pleased with our presence in South Korea.

We already have 34 shops in large department stores and 11 free standing stores, and we see a big opportunity to maximize our brand strength in this country that to love fashion and love Guess? for the last 15 years.

I was in Korea for the official launching in three weeks.

In China, we are focused on forming a [highly accented] retail project into 2007.

The first of which will be opening up 5,000 square feet flagship store in Shanghai plaza.

A brand new mall in a great location.

In April, I will also be in Shanghai personally to introduce Guess? to China.

We will be opening all the flagship stores in Beijing, Hong Kong, [MOSCOW] later this year.

Southeast Asia.

In in addition to our direct operation plan in China, we plan to open 24 stores this year in all concepts through Indonesia, Malaysia and Singapore with our partner AG Benjamin.

Together with our international licenses and distributor, we increase international stores in 2006 by 98 stores or 31%.

We ended the year with 413 stores, comparing to 315 stores a year ago.

We plan to open about 108 new stores in 2007, outside of North America.

That would bring the total to more than 520 stores.

We have three key global initiatives of this current year.

Number one, footwear retail.

This is the next Big Wave for the coming four to six years.

And with the priorities for each region to establish this new store concept.

In a joint venture with Mark Fisher, formerly with Nine West for 23 years we plan to open six footwear stores in the U.S. and Canada.

[highly accented] former president of Nine West retail division will be leading this venture.

This will allow us immediately to analyze the strength and the weaknesses of this project and to expand around the world.

Guess? footwear in all categories has the potential to reach between 3 to 400 million [highly accented] in the next five years.

We will also introduce our upscale Marciano footwear, this fall in U.S. and Canada and Europe, which will be done also by Mark Fisher.

Focus Europe, which is our Guess by Marciano contemporary line was acquired by Guess Europe as of January 1, 2007 and we are committed to bring that business along between $180 to $230 million in the next four to five year if we execute the strategy well.

Currently we have 23 Guess by Marciano free standing stores.

We plan to open 20 new stores by the end of '07. [highly accented] The GC Watch Guess? collection it's an upscale line of Watch developed seven years ago, and this is our first measurable initiative. [inaudible] wanted to make it a brand on his own as a Sweet Swiss Watch company, a completely separate division with Guess?

Watch, we will double in '07 to these [highly accented] and that is our goal.

Our continued expansion by retail division in U.S. and Canada and Europe.

A strong comparable store sale has made a huge impact in accessory growth across the world.

We will reinforce that momentum with greater marketing and advertising products campaigning handbags, footwear and watches in all major clothing magazines.

We have an exceptional year in 2006 and that success was due to our focus and our vision of the brand, a consistency in our product and image, but also our focus towards the business in every part of the world without compromising the brand and the integrity of Guess?

Having said that, we, of course, worry about the change of trend, a change of such a strong economy and of the new competition at any time, any day.

On the other hand, in many aspects of the business, we feel that we are just starting in certain regions of the world in some categories, like footwear or Guess by Marciano are just beginning to expand.

These gives us confidence that we have yet so much to accomplish in so many areas.

We feel our growth will be similar if we keep our discipline and our focus.

Thank you very much and with that I think we need to open the line up for questions.

[OPERATOR INSTRUCTIONS] And gentlemen, your first question comes from the line of Jeff Klinefelter with Piper Jaffray.

Please proceed.

Yes, thank you.

Congratulations to everyone on a fantastic year.

Thank you.

Thank you, Jeff.

Thank you all for all the great detail.

You provided a lot today on the call, but just a couple of quick follow-ups.

One on your international growth, your retail doors.

I understand 108 is your current target.

One question is, do you see that deviating much?

As you get further into the year could you increase that or accelerate that given opportunities, meaning what is your lead time and then any sense by country or concepts specifically, how that will break down?

Jeff, this is Paul?

The number we give you just now will be something that we are very confident about that because they are already committed and -- but I don't have the breakdown by concept or category or size.

We know these 108 stores are due to open.

There will most likely be an increase of numbers but it will be likely some airport shopping corners which we don't really count as a free standing store.

Okay.

Give you an example, last year we have been saying that we would open 117 stores.

We ended up opening 125, Jeff.

So that gives you an idea of how were are playing these numbers.

Okay.

In terms the country penetration or the success you are having and any particular focus in '07, in terms of where you are getting new retail partner relationships that should increase your market share?

Yes, it will be pretty balanced between western Europe then also a big push in Asia by Korea and China.

And Middle East has a big expansion.

And you just heard that just MGB which has been a partner for 15 years in Southeast Asia will open 24 stores in one year.

Okay.

So that gives you the region basically where there's a big push.

Okay.

Very good.

And then in terms of licensing, I understand that it will be up low single-digits after backing--- after adjusting for the focus acquisition.

Can you give us some sense of what an apples-to-apples growth would have been?

Apple-to-apple, I think it's between 6 to 8%?

Yes.

What we are losing is about 10% of last year's royalties between South Korea and the focus business.

So, you know, we are planning to replace that and add to that on the growth, on the organic growth of the licenses that we do have.

Okay.

And just one last quick question, we noticed in your stores recently, we are seeing some product that Guess?

Italia product, a little bit more of a premium line mixed in with the balance of your product.

I don't know if you commented on this earlier when I was off the call.

Could you comment at all on that and what the initiative means?

Well, it confirm what Maurice explain on the las call, is that more and more the two line will interwind one way or another and it's happening now.

It means if you go to Europe, you will start to see the products from the Guess? line and if you come in the U.S., you will see the product from Italia.

So sooner than later, you are going to see the percentage of mixture growing over the next few season, to have really a call line and then a region cap line.

Okay.

Very good.

Thank you very much.

Thank you, Jeff.

Your next question comes from the line of Eric Beder with Brean Murray.

Please proceed.

Good afternoon, guys.

Congratulations on a great quarter.

Thank you.

Thank you, Eric.

Could you help me out a little bit here.

You were going to open 48 stores in retail in the U.S. in terms of retail, where are those going to be?

And I guess the other question is what stores are being taken away from the core Guess? stores for the G by Guess.

All 25 to 30 of those stores going to disappear from the Guess---

I can't answer you that.

On the 30 stores -- I mean, 25 to 30 stores G by Guess, there will be 10 new stores G by Guess, 10 factory store conversion, and 10 retail stores conversion on G by Guess.

So that gives you 30 of the G by Guess.

About the 48, that is also Canada and that include Marciano.

That includes Guess --

All the concepts.

Marciano, there are 20 of those and the rest are going to be your Guess? stores?

No, it's 10.

It's 10 Marciano.

[inaudible] By then there are also 10 Marciano stores and the remaining are between full price Guess? retail stores, some factory stores not many, actually, and -- and then several stores in Canada for all concepts.

A few accessory stores are planned too.

Okay.

So the amount of Guess? stores is pretty much going to stay flat?

You get the G by Guess stores?

Yes, that is correct.

And we also -- we are also closing a couple of underperforming Guess? stores.

I know it's early but what are you seeing for spring?

Well, the weather is good.

No, I mean what do we see for spring?

We have a very strong January and now -- but our quarter stopped in February.

So basically we are positioned with the product we have. [highly accented] We feel good about the response of the customers and the licensees are feeling good the early shipping that we have.

We are very excited about what we see, Marciano.

I'm sure you heard, we had a terrific January and the trend continues very strong into February.

We feel that that business is turning around in a pretty big way and very, very fast.

And the trends are similar to what we discussed in the past about what is drawing the business.

The basic denim continues to do very well.

Tops has done very well.

And all the accessories categories have done very well.

The same things driving our business continues to be strong.

Okay.

And the last question.

Could you talk about what you are doing in Latin and Central and South America?

Not that much.

I'm very honest.

Not that much.

The emerging market for us right now is really Russia.

We are opening aggressively Turkey, India we are opening aggressively.

Asia were opening aggressively, South America, it's really up and down too much for us.

We will continue Mexico, of course.

We consider that North America.

It's not Latin America for us.

It's part of our territory and there we are going to be aggressive.

Okay.

Great quarter and good work.

Thank you.

Thank you.

Your next question comes from the line of Holly Guthrie with Janney Montgomery Scott.

Please proceed.

Thank you, and please let me add my congratulations.

Thank you.

Three questions.

First, on the retail side, domestically, if you could talk about where you think your -- your merchandising opportunities, where you basically missed last year where there were some opportunities and where you think you can have some opportunities going forward.

And then also as you grow internationally, you have invested a lot in people and infrastructure, but where -- where else do you see as places that your going to invest to insure the consistency that you have seen so far?

And then last, what are the plans for -- are there any plans for the European debt reduction?

European, -- I'm sorry.

The -- debt reduction.

[inaudible] You heard Dennis mention that the two pieces of debt that we have are the Italian headquarters mortgage, and the revolvers, the revolvers are a way of doing business to support our receivables growth.

So we don't see a need to work on delivering that balance sheet at all.

We think that is well capture structured.

With respect to missing opportunities I think as you know, we had a very good 2006.

That being said, there's always significant opportunities to continue to grow.

We have said in the past that we see denim as a big opportunity to increase penetration, and we have been very successful with that plan and we have plans to continue to grow this year the denim business.

We have also opportunities in dresses and I think I mentioned woven tops which was another area.

Outerwear.

Outerwear, where we had very successful fourth quarter.

But we can do much more.

Exactly.

And I agree about the -- I agree about the dresses.

That's going to be -- that's going to be a big contributor next year.

And I mentioned the denim before because now we are going very much into fashion denim.

Fashion denim means fashion silhouettes.

So it's not only about the -- the pants or the shorts.

Now it's denim dresses, denim jump suits, denim overalls.

A lot of -- a lot of fashions, which we are really going to have the business there.

Great.

International investments in people and infrastructure.

You have done a great job--- Could you talk about that.

In fact, Maurice and I will leave next Monday to Europe and continue to meet senior management and more candidates to build the potential future we have looking one, two, three, five years from now, how this division will be run.

It's -- it's a major, major focus for Maurice and myself to build that infrastructure on people because the business is going to have to drive [highly accented] -- the acceptance of the brand, the demand of the brand is -- is --

More than what we expect.

And the challenge we have is to learn how to say no because we don't want to lose control of the products starting to go too many places.

Great.

So definitely we are addressing what you are saying.

Yes, thank you.

Thank you, holly.

Thank you, holly.

Your next question comes from the line of Erin Moloney with Merriman Curhan Ford.

Hi, good afternoon.

Hi, how are you Erin?

I'm doing fine, thank you.

I had a couple of questions.

First on the footwear stores, I just wanted to clarify those are going to be licensed stores; is that correct?

Not exactly.

It will be a joint venture between the licensee Mark Fisher and Guess.

And I'm talking about North America.

If we open stores, for example -- we plan to open stores in Paris in the next two to three months, a footwear store and one in Italy, and Tuscany, exactly, it will be both of them French licensed stores.

Yes.

Okay.

And then the six stores that you are planning to open, those are for '07?

Definitely.

Okay.

In North America.

In North America.

Okay.

Yes.

And then the new Marciano footwear line, where can we expect to see that?

Will that be the Guess? stores, in your Marciano stores, will it be wholesale at all?

Yes.

It will be in the Marciano stores North America.

And Marciano stores in Europe and then some wholesale very selective customers because it will be much more expensive than the Guess? footwear store.

Okay.

Great.

And then just another question, just -- I was wondering if you could talk a little bit about the performance of your accessory stores.

It seems like performance has been up and down.

I was wondering how it did during the fourth quarter?

Which one?

The accessory only stores.

Okay.

So we have two categories of accessory stores, the one in North America and the one outside of North America.

I one outside North America I would say they perform between 800 to 1200 [highly accented] which is extremely good.

The one in North America has been performing well, but not to expectation we have, which is an average between 450 and 500, I think.

And I think that this is where we have some improvement on the sense that we think the mix of product is not what it should be, but we are only five stores right now.

That's why we did not expand yet at a big pace the Guess accessory stores in North America until we have the right formula being on the trip little location,which some of them went up and bring was the right size, the right adjustment in it.

So you are absolutely right about that.

Okay.

Great.

And then just my last question was on the North American wholesale business.

That obviously has seen tremendous growth over the last couple of years both on the sales and operating margin basis.

What has really been driving that business even though obviously doors have been relatively flat?

Yes, it has been the strength of the product, Erin.

You know, we have had just tremendous success with the product.

I think the great thing also was that we have right sized the cost structure of that business in 2006 in anticipation of the door closures that we were going to experience because of the Macy's merger.

And that paid off in a big way, because we were able to really benefit in a significant way with the increase in the business and margin expansion.

So we are very pleased with that business.

Erin, I'm sorry, I got the number exactly for the accessory stories in North America.

I was mistaken, it's 500 to 600, not 4 to 500.

It's 500 to 600 but it's still not what we expected.

Its good but it could be much better.

Okay.

Great.

Thank you guys very much.

Thank you, Erin.

Thank you.

Your next question comes from the line of Christine Chen with Needham & Company.

Hi, everyone.

Congrats on the fabulous year.

Thank you.

I just wanted to ask a little bit about operating margins.

The 17% guidance for the year, that's already -- that's already very good and has exceeded I think previous guidance of long-term goals.

Long term, where do you think the margins can go?

Well, as you know, we are looking at this year just to be at that 17%, approximately 17%.

Obviously we continue to see big opportunities in the North American business, especially in retail.

When we compare our performance to some of the best in class, we see a significant gap, and it is just, you know, something that we have been focusing on and we still see big opportunity to continue to expand there.

And as our business grows at a faster rate outside North America, like the European growth that we are experiencing and that carrying a much higher operating margin, we should expect to see growth in the overall operating margin of the Company.

So we think that we have big opportunities supply change.

We have a lot of initiatives in place and really we haven't seen the big bottom line impact of those initiatives yet because we have been building and spending in infrastructure our sourcing office in the Asia area is just broke even for the first time.

So we are excited about that, but, there's big opportunity and life ahead as we grow the volume there.

And there are many other initiatives.

Systems initiatives.

We just put PLM product margin, [inaudible] we think that will contribute to improved efficiency in that area.

So overall, we have not talked about a long-term goal for operating margins now in light of what the -- the year that we just closed, but I think we should definitely see improvements, in the high teens in the next few years.

And then can you comment a little about how January was on a regional basis?

Yes.

January was -- was pretty consistent, on a week-by-week basis which was very -- really benefit -- beneficial, and then with respect to the regions, the West Coast had a very good January.

Canada, again, had a very strong January.

The Northeast was -- was slightly below the total company average.

The Southeast was very strong.

Florida was driving most of the growth in that area.

And -- and then the Midwest was well under.

The Midwest was a tough period.

I think the weather played a role.

Well thank you.

Good luck.

Thank you.

Your next question comes from the line of Laura T Lakner with CIBC world markets.

Please go ahead.

Thanks.

Let me add my congratulations to the pile.

Thank you, Laura T.

I just wanted to ask a couple of questions one going back to store openings.

You also talked, I think about remodels earlier and I just wondered though the remodeling plans that you might have for this current year.

Secondly, just tagging on to Christine's -- or Carlos' answer to the question talking about systems initiatives and wondered if you could just give us an update on PLM and whether you are on track to get that all implemented by the end of next year and then lastly, also just the scheduling on mark down optimization and where you are in that process.

Yes.

You know, we have -- first of all, with respect to the remodels, we have a pretty ambitious plan.

We have 21 major remodels planned the convergence of two G by Guess.

The 21major remodels includes some big projects and we are pretty excited about that because every time we do a major remodel, we see a significant improvement in the stores.

And a lot of the $85 million that we are spending are going to revenue generating growth initiatives.

With respect to systems very exciting news there we just implemented PLM last week actually.

In one of the divisions.

Right.

The men's division.

And the results have been pretty impressive.

People are very -- very much loving the system and we think that this is going to be big.

So we are absolutely on target with a plan that we shared with you earlier.

We a whole plan of rollout.

We are going to Asia next and then we have the women's business that comes on to PLM.

We are planning to put this in Marciano as well and then finish with Europe.

So ambitious but still very, very much on target.

With respect to market optimization, we are still interpreting results.

We did conduct tests during the latter part of last year, and the results are also positive.

We are looking at how to implement as opposed to whether we will.

So definitely, it's going to be rolled out.

The issue is, how do we define the primers for the system and how we are going to implement it.

We want to make sure that we are always aware and careful with the integrity of the brand and pricing and so forth in the different territories.

You will make a decision on that by the end of the first quarter.

Exactly.

Were talking the next few weeks.

Okay.

Great.

Thank you.

Thank you.

Thank you, Dorothy.

Your next question comes from the line of Melissa Otto with WR Hambrecht.

Please proceed.

Hi.

Congratulations on a great quarter.

Thank you, Melissa.

Hi.

I just have a question on Asia.

You gave us some great numbers around Europe and the size that business could potentially come.

How big do you think Asia could become?

Well, you know, we just started Korea just a few weeks ago.

If you take Asia as a whole, if you include Taiwan and Thailand, Indonesia, Malaysia, Singapore, I mean, depending if you think of it as a complete, complete region, we think that over time we will definitely mature up.

It's a matter of time, three years, four years, five years but definitely the potential is to position ourselves in Asia, how will we be perceived how will we have the presence in the key locations and more.

And from there, we will have a better view I would say mid '08, we will have a better view what is the real potential, how far and how high is high.

Okay great.

That's understood.

And then a question around the international store openings.

Just to get some more color around the 108 store openings.

How should we think about that in terms of modeling.

What percentage of that is licensed?

What percentage will come through retail?

Well, I -- I mean, it depends on how you want to look at it.

For example, Guess by Marciano, we have 20 coming in.

They are all franchised.

All of that in Europe, and eastern Europe and Middle East and Asia.

Okay.

If you take the footwear, there will be only one footwear store owned by us and all the rest outside U.S. will be franchised.

So our business model is very complex, and it is hard to pinpoint them every single product or category in with one box.

Melissa, if you are asking about the business model when we franchise the stores to third parties, basically the way Guess? benefits is when those franchise buy product from our whole sale separations in Europe or North America.

So at that point, when that purchase takes place we experience the margin benefit from the sale.

And then at the same time, those franchisees are also required to buy all the line of accessories product from our licensees and every time that happens, we also collect the royalty stream.

And if you just remember what just Carlos said on going forward, for Europe, for example, he give guidance of a growth of 45 to 50% in Europe.

The majority of that will come from this franchisee stores or license stores not from the stores we open in Europe.

You follow me?

I follow you, yes.

And then these stores will carry accessories.

So what their going to buy is accessories, handbags.

Well the one to sell handbags, footwear, well sell footwear in Europe and then at watches its licensee there with a distributor.

So it's a complex format we have, but it benefits every single portion of the business when the store open, rather than to have a merchant brand store who carries a little bit of that.

That's great.

Thank you very much and once again congratulations into thank you.

Thank you.

Thanks.

As a reminder to place a question, please press star one on your touch-tone phone.

Thank you.

So I think we don't have any further question.

I wanted it say thank you again to be here and we know that it was a long presentation today because it was a quarter and the year.

And, again, I want to apologize if sometimes it's a little bit complex to follow how many direction we go, but that's the nature of the business we have today.

It's a very, very different company today, Guess? than it was five years ago.

And we move with where the trends take us and where we believe the future is on the long-term.

And I think the best is when you travel, any country you go, ask for a Guess? store, you will find a Guess? store anywhere.

So thank you very much and we will talk to you on the next conference call, which I think will be around June.

Thank you again.

Thank you for attending today's conference.

This concludes the presentation.

You may now disconnect.

Good day.