Guess? Inc (GES) 2008 Q2 法說會逐字稿

Good day, and welcome to Guess second quarter fiscal 2008 conference call.

Before we get started, I would like to remind you of the Company's Safe Harbor language.

The statements contained in this conference call which are not historical fact including statements regarding future plans and guidance for current and future periods may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results might differ materially from those suggested in such statements due to a number of risk and uncertainties as described in the Company's most recent annual report on Form 10-K and other filings with the SEC.

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.

Good afternoon and thank you for joining us today to discuss Guess' financial results for the second quarter of fiscal year 2008.

Also joining me are Maurice Marciano, Carlos Alberini, and Dennis Secor.

We're extremely pleased with our second quarter financial performance.

We set another record for this period with revenue growth of 48% and earning growth of 82%.

Once again, all our business segment delivered strong top line growth and bottom line earning improvement for the period.

Earning per share reached $0.40, an 82% increase from $0.22 last year.

This is our 16th consecutive quarter of earning growth.

During the period we delivered 250 basis point improvement in operating margin as a result of stronger gross margin across all business units.

We closed the quarter with significant momentum worldwide.

To start with retail.

Our North American business continued to exceed our expectation.

Total revenue increased 21% this quarter.

Same-store selling in our retail stores increased 16.2% in the quarter, This was on top of 13.7 same-store sales increase for last year second quarter.

August also had a double-digit increase.

Each category (inaudible) for the (inaudible) quarters.

We experienced a very positive response to our young contemporary and our Marciano line.

These businesses were driven by strong sales of dress, shorts, woven tops, and denim products.

Our men customers reacted positively to the line.

Key performers included men top, denim, and shorts.

Accessories and footwear continue to be our star performers during the quarter with an exceptional business in handbags, watches, and shoes.

We believe we have today's best product in each of these category for our target customers.

While the retail business was strong across all region, Canada once again had the top performance for this period.

During the quarter, we opened 12 stores in North America.

These include 5 G by Guess stores, our newest retail concepts.

We have now a total of 25 G by Guess, we plan to open another 10 new G by Guess by the end of this year for a total of 35.

At the end of the third quarter we will have six-month business and the back-to-school behind us.

At that point, we will have a better picture of this new concept to present to you.

Marciano.

We consider Marciano division to be key growth opportunity in North America.

During this quarter, we added significant (inaudible) in our team and launched our new Marciano footwear product line.

So far this year we opened seven new Marciano stores in U.S.

and Canada including the [Brandywine] in Caesar Forum in Las Vegas, bringing the total Marciano stores count to 32.

Some key new location we opened during the second half of the year such as Fashion Square in Scottsdale, Arizona, Houston Galleria in Texas, Times Square in Las Vegas, and Royal Hawaiian Shopping Center in Hawaii.

Across all retail concepts we are open 20 stores in North America so far for the first half of the year, which is ahead of the plan.

We expect to open 30 more stores during the second half of the year and to have over 370 stores by the end of this year comparing to 334 for 2006.

Wholesale.

Our wholesale business is also a terrific quarter with 75% sales growth and improved profitability both exceeding our plan.

As you know, the segment includes our new business in Asia, that is South Korea and China, which did very well.

And of course our wholesale segment include our wholesale business in North America which had very strong performance in the period, as well.

Europe.

Our business in Europe was exceptionally strong during the quarter with revenue growth of 121%, or an increase of $59 million to $108 million from $49 million last year.

Contributing about 22% of this growth was a category line (inaudible) Marciano, which had a solid performance during the period.

Our handbag and footwear business had a terrific quarter posting 150% growth.

This was (inaudible) due to early shipment of fall product as a result of a change of business model.

Our retail stores in Europe doubled the business in the quarter.

This was accomplished with new stores and healthy comp sales growth significantly ahead of the plan.

We continue expansion in Europe to push for markets such as Spain, Germany, Benelux, which are barely penetrated by (inaudible) today.

For international retail expansion outside North America, we're continuing to make some great progress in our retail expansion plan with our partners across the world.

During the second quarter we opened 38 new stores including 16 in Europe and 22 in Asia.

For the year we increase our goal of total stores opening from 108 store to 141 store.

During the first half of the year, we open 104 new stores and 37 are planed to open for the second half of the year.

Licensing.

Our licensing business had an exceptional quarter accomplished with growth in organic sales across all key accessories, categories and footwear.

Sales (inaudible) penetration in our retail stores in North America continue to increase year after year.

In addition, the (inaudible) acceptance of this plan all over Europe and now Asia contributed to an increase of 51% for the quarter.

As a six-month recap of all of our businesses division, we have exceeded our financial goal for the Company both on top line performance and bottom line contribution, recording revenue growth of 45% and earning growth of 77%.

We are proud of these results and we accomplished it with significant diversification of earning.

In fact, consistent with our long-term strategy, our earning from operations which for the six-month period were 73% were divided (inaudible), 45% North America, 31% Europe, and 24% licensing.

I will now hand the call over to Dennis and Carlos to take you through the numbers for the quarter and our outlook and then I will follow-up with an update of global key initiatives for the year.

Thank you, Paul, and good afternoon.

As Paul mentioned, we enjoyed another record-setting period in the second quarter.

Let me now take you through some of the important financial details for the quarter.

Total net revenues for the second quarter increased 48.2% to $388.3 million from last year's $261.9 million with all of our business segments contributing to this growth.

Our gross profit for the quarter increased 57.1% to $173.4 million from $110.3 million a year ago, translating into a gross margin of 44.6%, a 250 basis point improvement over last year.

The gross margin improvement for the quarter was driven by improved leveraging of occupancy costs and by the relative growth of our higher margin European business.

The SG&A expense rate for the period was about flat compared to the prior year's quarter.

SG&A expenses for the quarter were $114 million compared to $76.7 million last year, an increase of 49%.

About 36% of the increase was related to the addition of new businesses including Focus Europe and our South Korea operation where we now manage full P&Ls, and also our new G by Guess concept.

About one-third of the increase related to volume-driven variable expenses and the rest supported infrastructure investments and performance-based compensation.

For the quarter we increased the Company's operating profit by 76.4% to $59.4 million from $33.6 million last year and expanded operating margin 250 basis points to 15.3%.

We adjusted the estimate of our annual effective tax rate to 38.9% and therefore we are planning the remainder of the year at this rate.

This resulted in an effective tax rate of 39.1% for the quarter as compared to 39.9% in last year's second quarter.

We generated $37.5 million in net income, or $0.40 per diluted share during the second quarter compared to $20.6 million, or $0.22 per diluted share last year, an increase of 82% in net income and in earnings per share.

Next I'd like to quickly review our revenues and earnings by business segments.

Our North American retail sales increased 21.4% to $201.6 million.

During the period we opened 12 new stores and closed one underperforming store resulting in a net 3.9% increase in average square footage over last year.

In the quarter we completed our analysis of unredeemed gift card liabilities and adopted the redemption recognition method of accounting for gift cards.

This resulted in a one-time cumulative increase to revenues of $3 million for the North American retail business.

For the period the retail segment's operating margin increased 120 basis points to 13.8%.

We were able to effectively leverage our occupancy costs as a result of higher sales.

Expenses increased due to additional advertising spending and investments in the G by Guess brand initiative.

In our wholesale segment revenues increased 74.5% to $57.3 million.

Operating margin for the wholesale business improved 140 basis points to 17.8% this year, driven by higher product margin and improved leveraging of SG&A costs, particularly in North America.

Revenue for the Europe segment increased $59.1 million, or 121.2% to $107.9 million in the second quarter, contributing nearly half of the Company's total revenue growth.

All of our businesses in Europe, including retail, performed well and the segment also benefits from the business model change with some shipments historically made in the third quarter being delivered in the second above our plans.

Operating profit for the European segment increased 135.6% to $19.4 million with an operating margin improvement of 110 basis points to 18%.

Licensing revenues grew 51.1% to $21.5 million in the second quarter.

Bear in mind this excludes the royalties from Focus Europe and our South Korea operations this year as we now manage those businesses directly.

Now turning our attention to the balance sheet.

We ended the quarter with $200.5 million in cash and equivalents compared to $196 million a year ago.

Our accounts receivable increased by $77.8 million to $186.9 million compared to the prior year and the growth was proportionate to the significant increase in European sales including Focus Europe.

Inventory at the end of the second quarter reached $226.4 million compared to $132.5 million last year, an increase of $93.9 million, or 71%.

Approximately 50% of the increase will support our new businesses which include South Korea, China, Mexico, Focus Europe, and our new G by Guess concept.

About 25 % of the increase relates to our core European businesses which includes apparel and accessories.

The remaining inventory growth relates to our North American business where we are experiencing a substantial AUR increase and have positioned our ownership strategically with early receipts of fall product including coats, sweaters, and denim.

Finally, we announced today that our board of directors has improved an increase to our quarterly cash dividend to $0.08 per share, up 33% from the previous dividend of $0.06, which will be paid to shareholders on October 5th.

This increase in dividend demonstrates our company's commitment to the continued creation of shareholder value and confidence in our future prospects.

And now I will turn the call over to Carlos.

Thank you, Dennis.

As we announced in our earnings release today, based on the strength of our second quarter performance, we have increased our consolidated revenue guidance for the full fiscal year to a range of between $1.560 billion to $1.600 billion.

We expect that our segments will deliver operating margins for the full-year consistent with the levels that we provided on our last conference call with our retail segment delivering an operating margin of about 15%, our wholesale segment at about 16%, and our Europe segment in excess of 20%.

As a result, we continue to plan for an operating margin for the total company for the full fiscal year of about 17.5%.

We are also raising our full-year EPS guidance to a range of between $1.79 and $1.84 per share.

Now let me provide you with an update to our segment revenue goals for the balance of this fiscal year.

Retail.

Beginning with North American retail, we continue to be very pleased with the performance of this business, which delivered a very strong comp sales increase in the second quarter and a 15% comp gain year-to-date.

As mentioned, our recent sales trend have been very good in August which speaks well for our back-to-school assortment and prospects.

Accordingly, we assume that our plans will continue to capitalize on this trend and we are raising our second half comp guidance to the mid single-digit range.

For the full-year, we are now planning for overall retail revenue to increase about 13%.

We are confident in our inventory position and product assortment, however, we remain committed to grow our business in a controlled manner and don't want to be overconfident in our current position.

We will continue to focus on leveraging our expenses and managing our inventory levels effectively.

We are well positioned on both fronts.

Regarding expenses, we have achieved leverage in our existing businesses as our revenues continue to grow.

Regarding inventories, we are well positioned to capitalize on key business opportunities that we have identified for the second half and expect solid margin performance for the period.

For the Company as a whole, we are planning that our year-end inventory will be between 20 and 30% higher than at the end of last year.

In the wholesale segment, we continue to expect a significant portion of our growth to come from our Asian businesses as it has in the first half of the year.

For the second half of the year, we're expecting revenues to increase by about 30% and are now expecting full-year revenues to grow between 45 and 50%.

In Europe for the second half of the year we are planning for our revenues to grow by about 30%.

This, of course, takes into account the shift of third quarter revenues into the second quarter, which was mentioned earlier.

For the full-year we are reiterating our guidance for revenues to grow in the range of 50 to 55%.

In our licensing business for the second half of the year, we are raising our revenue guidance to an increase in the low single-digit range, which will result in a full-year increase of about 20%.

We now expect capital expenditures for the full-year to reach $89 million net of tenant allowances and depreciation and amortization to be about $48 million.

Thank you very much.

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

Thank you, Carlos.

Now, I would like to update you on three global changes that we spoke about on our last two conference calls.

Footwear.

Footwear is our first global key initiative.

We continue to invest in this major long-term project and the results have been very positive.

In North America, we have devoted additional space additional space to the footwear business in our stores and invested in footwear specialists in all our top doors.

(Inaudible) retail stores.

In the next 12 months, we plan to (inaudible) locations such American (inaudible) in Glendale, California, (inaudible) in Las Vegas, and (inaudible) in Miami, Florida as location to launch this exciting new concept.

I believe if the concept is right, it could easily be 160 store chain around the world in the next three to four years as we already opened 130 accessories stores in the last two-and-a-half years.

Our footwear concept could be a repeat of the success of our accessories stores.

As a footnote, we've already opened two footwear stores in Paris, one in Milan, one in Jakarta, Indonesia, and a new one in Singapore.

I just did a full tour of our stores in Southeast Asia last week, visiting our very first footwear stores in that region and was very happy with the presentation.

In the next few months we'll be opening more footwear stores location in Rome in Italy, Valencia in Spain and two more in Kuala Lumpur, Malaysia.

The second initiative as GC watches is another one global one where we have made excellent progress to (inaudible) double the size of the business in 2007.

In the second quarter sales of GC watch in North America increased by 120%.

I repeat again that all the GC watches are Swiss-made and range in retail price from $250 to $1,000 a piece.

Our third global initiative is handbag and its continued expansion on the business of handbags.

Big business once again outperform our expectation.

In fact, the months of July represented the best sales months ever for our handbag [licensee] which is already 14 years old.

This business was up 40% of North America for the quarter with significant improvement in sales penetration in our stores.

In addition, our global handbag business was up 45% during the quarter comparing to the same period last year.

Our strategy is clear and (inaudible) with the execution and the timing of our plan.

We have a complex but very unique business model, well balanced across the world in product category and highly diversified among distribution channel.

In conclusion, I'm convinced that the performance and our financial result are testimony of the talent, [fashion], and hard work of our team and partners around the world and I want to thank them once again for outstanding results.

I think we're ready now to open the line for you question.

We request that everyone limits themselves to just one question so that we can accommodate as many people as possible.

If time permits, we will happy to take follow-up questions.

Thank you.

Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jeff Klinefelter with Piper Jaffray.

Please proceed.

Yes, congratulations, everyone, on another fantastic quarter.

Thank you.

Thank you, Jeff.

Hard to limit it to one.

How about one and a half questions?

In terms of licensing coming out of Q1 you had just a terrific first quarter and then guided conservatively, now you've come out with another fantastic quarter in licensing.

Can you give us a sense for why a more conservative second half again?

Is it just sticking to your prior guidance or is there something going on out there?

How do you get a better visibility for how your licensing is coming in?

And then both for international and U.S.

on that basis.

And then my other question would be more broadly and maybe Paul you want to take a shot at it or Carlos, as well.

From a global consumer demand perspective, there's a lot of concern right now obviously on the U.S.

consumer.

You guys touched so many different markets and not just your product, which is tracking well, but what are you hearing from some of these other markets around the globe, Europe and Asia, in terms of consumer demand trends?

Thank you.

Yes, this is Paul.

To answer your question about licensing the outlook that you have right now for the third quarter is basically we are in a new fiscal year.

We have changed calendar of shipping dates so that is -- we try to anticipate as much as we can.

But also we, at the same time, have an acceleration of store opening, have an acceleration on new (inaudible) stores opening, a broad stores opening, and also a very, very successful product build up season after season by licensees.

We don't [conduct] the business, we don't drive the business there and we go with the flow about how we expand.

We try to be as much possible visibility, but we can't anticipate what we don't know so we go with what the consumers goes and the acceptance of the [product].

So that, I think, answer your question about licensing is now so large and we are on every continent of the world.

And let's say maybe the acceptance of a product on new market is bigger than what we expected.

We have brand new markets for us and we did not expect to say wow, we know we're going to win here.

We don't.

So we just go -- in Europe we have some visibility now because we've been there for many years but Asia is totally new for us.

And we go by, I mean, month by month but the consumer around the world, I just came back last week.

I visited three countries, Singapore and Indonesia and Japan and frankly, we have seen very strong numbers everywhere, including our distributors who are some of them public company who just reported last week.

And very, very strong numbers on comp against strong numbers of last year, especially in Southeast Asia.

As you know the economy is very strong on that region, but we are very influenced about what's happening in America, as well.

So again, we have reading on a daily basis about what's happened on each region.

And we feel that we are well positioned to continue to grow.

Great.

Thank you.

I'll follow-up with you after the call with more questions.

Thank you.

Thank you.

Thank you.

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

Please proceed.

Hi, guys.

Hi, Eric.

I'm going to ask you two quickies here.

The first is could you kind of quantify how much the shift moved from Q3 to Q2?

And you guys did a tremendous business last year in outerwear and could you kind of talk about that opportunity for the second half of the year?

Yes, we have not quantified that specifically but if you look at the business cycle, that number could be in the 10 to $13 million in terms of revenue, the shift between third and second quarter.

With respect to outerwear, we do have a great position right now.

In fact, a lot of we decided to bring some of the outerwear early.

And we feel that there are many areas, especially those climates that turn into cold weather earlier can capitalize from this initiative so we are very excited.

We also think that our product is phenomenal for the second half and we have invested not only for our retail business in U.S.

and Canada, also we have an initiative that pursues wholesale growth, as well.

Yes, I agree with you.

It does look great.

Congratulations, guys.

Thank you.

Thank you, Eric.

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

Please proceed.

Hey, guys, excellent quarter.

A couple of questions.

My first question really kind of gets to the accessories penetration and maybe your own retail stores is the best way to kind of ask this question.

Accessories have been growing very quickly and I'm kind of wondering maybe roughly what percentage of sales they make up in your own stores and where you maybe see them going to.

Just try to get a handle on how much additional growth is left on the accessories side given the huge tremendous growth that we've seen over the past couple of years.

How do you think about the accessories business and maybe a percentage of the mix in your stores?

John, as you know, accessories and now footwear have exceeded the comp growth that we have seen in the rest of the store for several years now.

Yep.

So the penetration has increased consistently year after year after year.

I don't think we know how high this can be because really we continue to be very, very pleased with the penetration and we continue to invest in all these categories.

Last year, for example, we put a lot of big effort in giving accessories a prominent place in the stores and we have remodeled many of the stores and created this shops within the stores.

I'm sure you have seen them.

Yep.

And that's one of the reasons why our business has been growing so fast, too.

In addition to that, now we have footwear as a new category and our business there has been growing, again, at a faster rate than the rest of the store, but we think that there is much more potential to go for.

So it's a great position that we have.

I think it's very unique.

Paul has said it many times, this positions us in this market in a very unique way and one way that it's very difficult for any of our competitors to replicate.

So it doesn't sound like you're thinking that that could level off any time soon.

Actually, we don't plan the business that way.

Many of the initiatives that we are investing for the second half include many of the accessories lines, including handbags, including footwear, including watches, which are the areas that trended so highly as Paul mentioned in his part of his remarks.

Okay.

But, and this, of course, has a direct impact on licensing, which goes back to the question from Jeff.

We remember that we had a lot of growth starting last year because of these investments that we made that are going to impact royalties, as well.

Meaning the rate of growth that we experience is not something we are counting on on top of what we experienced last year for now.

Now, of course, every time that we have these kind of initiatives, if we get surprised with [upside], of course, we're going to welcome that.

The other thing that is also impacting royalties is the fact that the shift from third quarter to second quarter that we just discussed for Europe also has an impact on royalties, as well.

Got it.

So keep that in mind.

Okay.

And then wondering if you could just touch quickly on AUR.

I know that, again, in the last couple of years that has come up nicely.

I think there was a point in time where you kind of stagnated, if you will, on the AUR side and weren't really pushing the envelope a whole lot further.

But it sounds like from your commentary based on inventory that maybe you are taking AUR up, but maybe that's category specific in outerwear and some other areas.

Just wondering if you could just add a little color and touch on AUR?

Yes, exactly.

AURs are, if you look at our inventory ownership today, AUR in North America is up very nicely but some of that is mix related.

I just mentioned that we bought a lot of coats.

Right.

Those are high ticket items so obviously that's pushing AUR up.

Some of the initiatives and accessories, again, Paul mentioned the GC watch initiative.

That carries a higher AUR, as well, item for item.

So many of those are mix related.

But the great thing is that we were talking about the state of the consumer.

We haven't seen any slowdown in our business.

The last four months we have seen increased traffic, we have seen increased conversion, and AURs have been favorably impacted.

So we are in a very special position and we're trying to run the business efficiently.

Yes, you're one of just a few in that area that hasn't seen a slowdown so keep it up.

Thanks.

Great job.

Thank you.

Thank you.

Your next question comes from the line of Gabrielle Kivitz with Deutsche Bank.

Please proceed.

Good afternoon and I'll add congratulations, as well, on a very strong quarter.

Thank you.

My question is on the wholesale business.

Here you're talking about the investments that you're making to support Asia and those investments obviously pressure the margin to some extent but you achieved some pretty strong margin improvement in the first half.

I know the first quarter was incrementally helped by some of the North America stuff, but even in the second quarter you achieved some nice margin expansion, and when I look at your guidance for the margins for that wholesale segment for the second half, looks like you're expecting a fairly big drop off.

I'm just wondering if you could maybe walk us through that to understand why we should expect the margins to be under incremental pressure in the second half versus the first half?

Sure, Gabrielle, let me try to address that.

Last year, we had a great year in wholesale in the North American wholesale, which was the majority, or almost the entirety of that business but that great performance really started in the second half.

We had a great performance in terms of margin growth in the second half.

That performance continued into the first half of this year and it contributed nicely to the quarter that we are now announcing today.

So the North American business continues to be very healthy, but we do not expect to see that kind of acceleration into the second half because we already got it last year in a way.

What is putting some pressure in the second half for the margin is the new businesses, as you mentioned, the South Korean and Chinese business.

And we said from the beginning, that we expected this business to be dilutive in terms of what we could see for the overall wholesale business.

And of course, as that business grows in the second half, it will become a larger part of the total business for wholesale.

So that's what we are expecting.

Again, we hope that this guidance will be conservative.

Okay.

Great.

That's very helpful.

Thanks very much and good luck for the second half.

Thank you.

Thank you, Gabrielle.

Your next question comes from the line of Brad Stephens with Morgan Keegan.

Please proceed.

Hey, guys, good afternoon, and congrats on a great quarter.

On your guidance here, you're (inaudible) the high end of your range by $0.07 and you're raising it by 4.

So is that $0.03 differential here, does that relate to the 10 to $13 million in early shipments for Europe?

Exactly.

Exactly.

Okay.

And then my second question would be, then, if I look at the $3 million you said from the gift card breakage, does that -- is that 100% margin?

Yes, it is.

Okay.

So if I was looking at retail then, I would back that out of my revenues and back that out of my operating profit and if I do that, it seems like despite the fantastic comp that profitability was basically flat in the quarter.

Is that a fair assumption then?

For the retail business?

Yes.

Yes, that would be correct.

And I guess can you just kind of walk me through, do the moving parts given the 16 comp of why it was flat.

Well, we have made significant investments in new initiatives.

One of them being G by Guess.

We have a full team there that is supporting this initiative and all that is part of the expense numbers that you're looking at.

In addition to that, we have remodeled a lot of stores.

We opened a lot of stores, we incurred some preopening costs that are included in the expense base, as well.

But when we look at the overall variable expenses for those businesses that are core, we did experience some leverage.

It's mild, modest, but it was leverage about 60 basis points, I think it was.

So gross margins ex the $3 million would have been up for retail still?

Yes, because of the impact of leveraging occupancy costs which was pretty significant.

All right.

Great.

And last question, then.

Can you talk about the flow between the third and fourth quarter?

I'm sorry if I missed that.

The flow in terms -- we didn't talk about flow.

The only thing that I would say is that we did bring some early receipts because we saw a lot of opportunity and to be able to capture some early business in fall with some of those items.

The three big areas where we invested money in addition to accessories we discussed before are coats, sweaters, and denim.

Okay.

Thanks, guys.

Good luck.

Thank you.

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

Please proceed.

Thank you.

Congratulations.

Thank you.

Question on retail, the retail business in the back half of the year, particularly in Q3.

Historically Q3's always been a bigger contributor to the overall sales even with the recast numbers, and looking at the easier comparison that you have in the Q3, the fact that the G by Guess stores a good portion of them are already open, the higher AUR, can you just talk about all those contributing factors and how you're thinking about the sales for the third quarter?

Yes, Holly, the third quarter is always very strong for us because of back-to-school but it was never at the level of the fourth quarter where we benefit from holiday.

Why it is more productive quarter than either one of the first or second, it's always less productive than the fourth.

But that being said, we are guiding today to a mid single-digit comp increase.

We had a very strong period last year in the third quarter.

We think that we are well positioned to comp against those numbers and that's what we're guiding to.

Margins should continue to be solid but we also had a great third quarter last year.

So overall, I think our guidance is pretty much in line with what we have said in the past.

Of course, we are aware of the fact that there are some issues about the consumer and so forth.

Fortunately it hasn't affected us like we said and we're going to keep our business running in that way.

Great.

Thank you.

Have a good fall.

Thank you.

Thank you, Holly.

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

Please proceed

Thank you.

Congratulations on another amazing quarter, everyone.

Thank you.

I wanted to ask if you could possibly help us in our modeling by quantifying how much did the extra week last year on the retail side benefit Q4 of last year and how are you thinking about it for Q4 of this year?

And then if you could just expand a little bit about G by Guess, are you seeing certain categories performing better than others and what about the performance of the standalone versus factory versus full-price conversion stores?

Thank you.

The extra week is about $10 million in revenues.

Of course, you're talking about a week that is not necessarily the most profitable one, but, and this is about retail by the way.

Related to the retail business.

Right.

But we were profitable for that particular week.

And it's not a significant number, but it's a meaningful number.

With respect to G by Guest, Christine, I think that you probably heard Paul's remark.

We think that is very important that we have a full idea of a whole season running because of the impact of introducing a new brand with completely new product, no promotional product initially, and on some of the conversions that we went through.

So we think that it would be important to really wait until we have that whole season under our belt to be able to give you a full picture and a comprehensive picture of how the business is performing relative to our expectations.

Okay.

Thank you.

Good luck.

Thank you.

Thank you, Christine.

Your next question comes from the line of Dorothy Lakner with CIBC World Markets.

Please proceed.

Thanks and I'll add my congratulations to the pile.

Just wanted to get a little bit more color on merchandise performance in the quarter and hoping maybe you could compare and contrast retail versus wholesale.

And then if you could give us a little bit of color related to that on the merchandise performance you're seeing in the G by Guess business realizing it's early on that one, but just a little bit of comparison would be great and particularly interested in the denim side of the business.

Thanks.

With respect to what drove the business, we had invested in dresses and dresses had a terrific quarter, denim pants was very strong.

We also had great success with shorts.

This is all the women's business.

We drove a lot of business with knit tops, woven tops also had a positive quarter.

And overall, and even non-denim jackets had a very positive quarter, as well.

The great thing is that we all feel that the product assortment was really great and that that also carried into our wholesale business, as well.

So all the items that did very well in retail did very well at wholesale, as well.

And as a result of that, wholesale had a pretty significant increase even over what we had anticipated and better profitability.

With respect to G by Guess, the items that drove the business are similar in terms of key content, talking about denim, talking about dresses, talking about some of those tops.

And did you see any -- are you expecting the denim part of the business to be a bigger portion of G by Guess or relatively the same?

Relatively the same, the mix is very similar.

Okay.

Great.

And then one housekeeping question if I could add just the number of wholesale doors at the end of the quarter.

We ended with 954, that's versus 862 last year.

Okay.

Great.

Thank you.

Thank you, Dorothy.

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

Please proceed.

Hi.

Good afternoon.

Hi, Erin.

Just -- actually I was just curious on the back-to-school business that you're seeing so far.

Just what products are driving that business, similar trends to you're seeing to Q2.

And then just second part of that question.

I believe you mentioned you were seeing double-digit comps in August.

I was just curious if there was anything artificial driving that such as maybe the shift in the back-to-school shopping holidays in Texas and Florida or if there's any, just reason precluding that from you guys being able to continue that trend for the rest of the quarter?

Absolutely.

It is true.

We run double digits in August and yes, there were some changes in the (inaudible) that impacted August favorably and July negatively.

That being said, we also ran double digits in July and the performance has been pretty much consistent across the board.

We, even in Florida there was a shift in back-to-school starts and also tax-free events we were able to comp those numbers with flying colors.

Texas was a little bit more challenging but still running in double digits.

And then the product performance so far for back to-school merchandise?

Yes, very similar to what we saw before.

We are seeing some early checks on the outerwear where we have it out like Canada and it's very encouraging.

But overall the same categories that drove the business in the second quarter continue to drive the business in the month of August and that is also true for Marciano, which had a great second quarter, as well.

Okay.

Great.

Thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Betty Chen with Wedbush Morgan.

Please proceed.

Thank you, and again, congratulations, everyone for a (inaudible) quarter.

Thank you.

I was wondering if you can give us an update on maybe on some of the infrastructure investments that you spoke of in the past?

For example, I think you spoke of the global core product now that you have Focus under your control as well as maybe any benefits from the markdown optimization system or the CRM program that I think you were looking at maybe for the Marciano concept.

Any update would be appreciated.

Yes, we have been investing in systems initiatives as you mentioned.

I think that a lot of the margin improvements that we are seeing are related to the implementation of markdown optimization.

We're very happy with that.

We continue to tweak the model.

But we think that there is a lot to be said about what it has contributing to us.

We have been able to run the business with a very clean inventories and continue to do so.

With respect to the loyalty program, CRM is something that is work-in-progress.

We have not launched it, but we are about to.

And you're right, it's in the Marciano business and we have expectations that this could be a great positive factor because that business depends on clientele in a big way.

That's why we decided to implement there first and our plan will be to roll it out into the other businesses.

And I think that maybe you were also referring to PLM.

We continue to work on that project.

We think that there is a long-term future on that to be able to rollout worldwide and then at some point, we should capitalize on that for the core line development, meaning to really globalize the whole brand.

Thank you and good luck.

Thank you.

Thank you.

Your next question is a follow-up from the line of Holly Guthrie with Janney Montgomery Scott.

Please proceed.

Thanks.

My question's been answered.

Thank you.

Thank you, Holly.

Next?

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Janet Kloppenburg with JJK Research.

Please proceed.

Hi, everyone, congratulations.

Hi, how are you, Janet?

Very good, thank you.

Just a couple of follow-up questions.

Is the gift card breakage policy going to continue?

In other words, should we see some benefit from that for the next three quarters until we anniversary it?

And also in terms of the retail profitability, I'm wondering if we should expect more leverage in the back half or if the G by Guess investment will continue to constrain margin growth there?

And then I have a follow-up on inventory.

Thank you.

So with respect to the gift card, the $3 million that we recorded in this quarter, I would view as a one-time event.

Going forward, there will be an aspect of income, or an increase in revenues associated with that, but it's going to be minor.

Okay.

Thank you, Dennis.

And then on the retail margin?

With respect to retail margin, I think that there is opportunity in the second half if that's what you're asking.

Yes.

Especially in the fourth quarter we do see opportunities to get some leverage.

And to your point about G by Guess, because the sales productivity of both third and fourth quarters are much higher and the expenses are reasonably fixed in terms of that investment in supporting the brand, we think that there is a better opportunity to leverage those expenses as well in the second half overall.

Great.

And then the inventory reduction that you're planning between the first half and the second half I guess you're projecting only up 20 to 30% by year-end and I'm thinking that the investments in the new businesses are still going to be pretty significant.

I was wondering if I'm missing something.

No, no, you're not.

We're pretty confident with our forecasting here.

And one of the big reasons for that is that, the main reason why inventories were higher about 50%, I think Dennis mentioned this, but 50% of the growth was to support new business.

Well, those business for the most part get anniversaried by the end of the year.

Okay.

In the month of January.

So then at that point, we are just funding the core growth.

And as a result of that, the increase that you see is significantly lower because new business are part of the base.

And then lastly, Carlos, we're hearing a lot about apparel price increases coming (inaudible) out of China and I'm wondering what your exposure is there and what you're seeing?

Thank you.

In terms of product sourcing?

Yes.

We're hearing price increasing in China is pretty significant right now.

Well, we are always looking into better ways to source and I think we have a very strong team there.

We are looking into alternative sources, but we always do and we haven't experienced any significant increases in our own sourcing but it's because we look for alternative sources, as well.

So we are in pretty good shape right now.

Great and congratulations again.

Best of luck.

Thank you.

Thank you.

Your next question is a follow-up from the line of Gabrielle Kivitz with Deutsche Bank.

Please proceed.

Hi.

Just a follow-up question on the comp store sales trend.

I thought that you said at the beginning of the call that in August comps continue to be double digits.

I know you have a somewhat easier comparison for the full Q3 but I just am wondering if you would possibly just give us some color on what the comparisons look like for September and October just so we could understand how the rest of the quarter plays out that'd be helpful.

Thanks.

Gabrielle, as a matter of fact, the third quarter may look lower in terms of the how the bar is set but in reality, it was the month of August where we were lower.

So we were up against a 4% comp last year and that is what brought the comp for the quarter to a lower number.

But the comps for September and October last year were pretty healthy.

Actually we reported a 11.3% comp in September and then 11.8% in October which brought the comp for the quarter to 8.9 because of the 4% for August.

So that's why we are being cautious.

It's not the fact that August was very strong for us is something we take it and we move forward.

Margins were very healthy and we think that we can continue to run the business that way.

Okay.

Great.

That helps explain the conservativism.

Thanks.

Thank you.

Your next question is a follow-up from the line of Dorothy Lakner with CIBC World Markets.

Please proceed.

Thanks.

Just a couple of quick ones.

Most of the store openings that you now have left for the second half of the year, should we assume those take place in the third quarter or if not, if you could give us a little bit of color on that?

And then I just wanted to make sure that I have the store count by concepts for North America correct for the full-priced outlets, accessories, et cetera.

Let me start with the second part first, the store count.

At the end of the quarter the retail was 180, factory was 94, Marciano 32.

Right.

Retail accessory stores 7, factory accessory stores 9, and G by Guess is 25.

That's a total of 347.

Right.

Okay.

And the answer to your second, to your first question, rather, is it's absolutely correct we are opening most of the stores prior to beginning of the fourth quarter.

Okay.

Great.

Thank you.

Thank you.

And at this time, gentlemen, there are no further questions in the queue.

Okay.

Thank you very much for your comments today and we will talk to you in December for the report of Q3 same place, same time.

Thank you very much.

Thank you.

Thank you.

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

All parties may now disconnect.

Have a great day.