Guess? Inc (GES) 2008 Q3 法說會逐字稿

Good day and welcome to Guess?

third quarter fiscal 2008 conference call.

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

The statements included in this conference call which are not historical facts 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 and such statements due to a number of risks 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 third quarter of fiscal year 2008.

Joining me are Maurice Marciano, Chairman of the Board, Carlos Alberini, President and COO, and Dennis Secor, Chief Financial Officer.

The third quarter was another record-setting quarter for our company.

We recorded the highest revenue and earnings for any quarter in the Company history.

All our businesses around the world contributed to the strong, top and bottom line growth.

Our revenue increased 43% and operating income increased 45% in the quarter.

Net earnings reached $58 million increased 32% from last year.

Earnings per share for third quarter reached $0.62, a 29% increase from $0.48 last year.

This marks our 17th consecutive quarter of earnings growth.

We continue to grow our global business ahead of expectation and manage this growth with long-term view and discipline.

We're focusing to invest in key areas to support the rapid growth, (inaudible) strong infrastructure and a great team worldwide.

I will start with Europe.

The third quarter was another great quarter with revenue growth of 79% to $159.4 million and operating profit increased to $46 million.

Revenues were ahead of expectations in every business including (inaudible) handbags, shoes, Guess?

apparel and the Guess by Marciano line we acquired at the end of last year.

The business alone contributed about [70%] of earning growth for European segment this quarter.

We made significant progress in Europe in the last three months.

As we announced last week, Massimo Macchi will join our company as President for Guess Europe [and] Middle East starting next week.

Massimo brings great global experience in retail development, strategy and brand management in the fashion industry.

He has managed and developed some of the world's top fashion brand division including Bulgari, Gucci and most recently, Gianfranco Ferre.

Massimo will be based in our new European headquarters in Lugano, Switzerland.

The Swiss operation now serve as centralized platform for all our businesses in Europe.

About international retail expansion.

Outside North America during the third quarter we opened 66 new stores and creating 20 in Europe, 3 in South America, and 43 in Asia.

This includes 7 new footwear locations in Europe and Asia.

In China and Korea we opened 21 retail stores for the quarter including Macau, Shanghai, Beijing, Hong Kong and Seoul.

In addition, in Southeast Asia we opened 13 new stores this quarter including 5 Guess?

stores, 1 Marciano, 3 accessories, and 4 footwear location Indonesia, Malaysia and Singapore.

The strong growth in international stores position us well above expectation from the beginning of the year.

We now expect to open a total of 197 stores for the year and end of this year we will have 586 stores international.

Wholesale.

Our wholesale segment, which includes Asian operation, had another terrific quarter with a 75% revenue growth.

The North American wholesale business, which includes U.S., Canada and Mexico, performed very well with solid revenue growth, gross margin improvement and expense leverage.

Our business in Asia performed well ahead of plan again and mainly driven by South Korea.

Retail.

During the quarter in North America we opened 19 stores.

Our North American retail business has another quarter of strong financial performance.

We posted a 15.8% comp for the quarter.

I strongly believe that what drove our success was our great diversified assortment and customer acceptance of our product as well as the Guess?

brand integrity.

Our core retail business recorded solid profit growth and approaching margin expansion in that period.

Our latest concept, Marciano and G by Guess, which are at the early stages of development, are significant long-term opportunity for our future.

When constant adjustment of this concept and we challenge ourselves every day to make them right for our customer.

As we continue to build these two division, both concepts should deliver operating margin consistent with other retail brands.

G by Guess.

We are so far open a total of 31 G by Guess stores in the U.S.

Our plan for next fiscal year is to open 10 new G by Guess stores in the United States.

Marciano.

Regarding Marciano we currently have 37 Marciano stores open in North America, and the line is also available in 57 Guess?

stores.

By the end of next year Marciano should have about 52 stores in U.S.

and Canada.

In Europe we have a total of 30 Marciano stores.

We plan to open 10 more stores by the end of fiscal '09.

We will also continue our Marciano expansion into Asia.

By the end of fiscal '09 we will have 12 Marciano stores in Asia bringing our total count to 109 stores worldwide.

Licensing.

Our licensing business also had another very strong quarter with revenue increased by 33% which was driven by excellent sales of handbags, watches, and footwear product worldwide.

Our customers love Guess?

accessories on a global scale.

The quality and fashion represented in these products position us extremely well in the current global market.

We continue to diversify earnings across our business segment around the world, and our third quarter financial results are another validation of the success of the strategy.

For the quarter North America was 43% of total operating profit, and Europe and licensing was 57%.

For the first nine months of this year North America was 44% of operating profit, meanwhile, Europe and licensing was 56% operating profit.

I will address licensing as a key global initiative in my closing remarks.

And now I would like to turn it over to Dennis.

Thank you, Paul, and good afternoon.

As Paul mentioned, we just concluded yet another period of record revenues and earnings in the third quarter.

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

Total third quarter net revenues increased 42.7% to $469.1 million.

All of our business segments contributed to this growth with roughly half of the increase coming from Europe.

The wholesale segment, which includes Asia and North American retail, each contributed nearly one-quarter of the growth.

Gross profit increased by 41.4% to $218.5 million and gross margin declined by 40 basis points.

Product margins were lower primarily in Europe.

Gross margin was favorably impacted by the overall mix shift toward our higher margin European business and occupancy leverage in North American retail.

During the quarter we achieved leverage over our SG&A investments.

Total SG&A expenses increased 39% to $122.8 million.

Our SG&A rate improved 70 basis points to 26.2%.

About 51% of the increased SG&A investment related to new businesses and European infrastructure investments.

About 25% of the increase supported the higher sales volumes.

About 9% of the increase supported additional advertising and existing businesses, and 7% of the increase was due to performance-based compensation which includes the impact of stock compensation accounting.

For the quarter the Company's operating profit increased by 44.6% to $95.6 million which includes the favorable impact of currency.

Operating margin increased by 30 basis points to 20.4%.

This quarter includes a minority interest charge of $1.2 million net of taxes and last year's third quarter included $1.7 million in non-operating asset sale gains.

Our effective tax rate for the third quarter was 38.8% compared to 35.2% in the prior year quarter.

We plan to end this fiscal year with the 38.8% tax rate.

We increased net income by 32.5% to $58.3 million and increased diluted earnings per share by 29.2% to $0.62.

The combined impact of last year's lower tax rate as a non-operating asset sales benefited last year's third quarter EPS by about $0.04 per share.

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

Our North American retail sales increased 17.7% to $200.4 million.

I'm sorry, $210.4 million.

We continued our retail expansion which resulted in a net 5.4% increase in average square footage over last year.

For the period the retail segment's operating margin was essentially flat at 14.9%.

This resulted from the leveraging of expenses offset by a decrease in gross margin.

In our wholesale segment revenues increased 75% to $76.9 million with two-thirds of the increase coming from our Asia business.

Our North America wholesale business was especially strong with solid top and bottom line growth.

Operating margin for the segment improved to 22.4% this year driven by higher product margins and improved leveraging of SG&A costs, particularly in North America.

Licensing revenue increased 32.6% to $22.4 million, which is outstanding especially considering that this excludes royalties from Focus Europe at our South Korean operation.

Revenue for the Europe segment increased 78.8% to $159.4 million.

All of our businesses in Europe grew with Focus Europe posting its best performance since our acquisition.

Operating earnings increased 47% in the period, and our operating margin was 28.8% in Europe.

We see this year's operating margin for this business in the 22% range and believe this to be a sustainable level considering our current business mix and investments in infrastructure.

Now I'll turn our attention to the balance sheet.

We ended the quarter with $191.9 million in cash compared to $180.2 million a year ago.

Accounts receivable increased by $122.9 million to $296.6 million compared to the prior year.

About 90% of the increase supported the substantial growth in Europe plus the new Asian operation.

As a result, most of our receivables are now denominated in foreign currencies.

The impact of currency, primarily the strong euro, resulted in an increase of about $27.5 million in receivables.

Overall, day sales outstanding improved slightly.

Historically, the third quarter represents the peak of our receivable cycle and we expect strong collections in the fourth quarter.

Inventory reached $223 million, an increase of $78.4 million, or 54%.

Nearly half of the inventory increase relates to our new businesses.

Almost 20% of the increase relates to our core European business and the remainder relates to the expansion of our North American business.

We sourced a substantial portion of our non-U.S.

products in U.S.

dollars, and therefore have benefited from the stronger euro and Canadian dollar.

This should contribute to improved margins when this inventory is ultimately sold.

Currency translation increased ending inventory by $12.2 million compared to the prior year.

All in all, we now expect our inventory position at the end of this fiscal year to be between 25 and 35% higher than at the end of last fiscal year.

And now I'll turn the call over to Carlos.

Thank you, Dennis, and good afternoon.

I will first address our outlook for the remainder of this fiscal year.

Our business remains strong across all of our segments.

Our retail business in November continued the trends of previous quarters and delivered double-digit comps.

Based on these trends and our conservative forecast for the holiday season, we continue to expect a comp increase of mid single digits for the fourth quarter which should result in a 13% comp for the full fiscal year and a total annual revenue increase of about 16%.

Based on these expectations, we are increasing our consolidated revenue guidance for this fiscal year to a range of $1.680 billion and $1.7 billion.

We remain comfortable with a full-year operating margin guidance of 17.5% that we provided in the last conference call.

As a result, we are raising our EPS guidance to a range of between $1.93 and 1.96 per share this year.

Now let's talk about our outlook for next year.

We are planning next year's consolidated net revenue to be in the range of $1.970 billion and $2.050 billion and expect to increase operating margins slightly to 18%.

We expect diluted earnings per share in the range of $2.35 to $2.45, and we are planning next year with an effective tax rate of 37%.

Regarding quarterly earnings, our business model and mix continue to evolve and operating earnings and margin performance are becoming more consistent among quarters.

For next fiscal year we expect the first and second quarters to deliver similar operating margin, and for the third and fourth quarters to deliver similar operating margins between them as well.

This should have the greatest impact on the third quarter, which has historically been the highest margin quarter, as we continue to adjust product flow and shipments among [months] in Europe.

We are pleased with this development which is a direct result of our business diversification efforts and last year's fiscal year-end change.

As you may recall, one of our objectives with the change was to provide for more consistent quarter-to-quarter comparisons.

Next fiscal year we plan to continue to invest in retail expansion in North America and Europe and in our infrastructure.

We expect to close the current fiscal year with capital expenditures of about $94 million net of [tenant] allowances.

For next year we expect our capital expenditures to be approximately $126 million net of [tenant] allowances and depreciation and amortization to be about $57 million.

For fiscal 2009 we plan to expand our retail square footage in North America by more than 10%.

We are planning retail revenues to increase in the mid-teens and for comps to increase in the low single digits.

We are planning operating margin for the retail segment to reach about 15.5% next year which is about a 50 basis point improvement over our current fiscal year's expectations of about 15%.

Our North American wholesale business has performed well in fiscal 2008 with modest top line growth and effective expense management.

We are planning next year for this business to expand door counts slightly and for it to yield a similar operating margin to this year's levels.

The main contributor to the growth in the wholesale segment will continue to be our new Asian business.

Overall, we see revenue growth in the mid to high teens for the wholesale segment in fiscal 2009 and for operating margins to decrease slightly due to the further investments that we plan to make in Asia.

Europe continues to be a critical part of our international expansion strategy.

We plan to continue to invest in the region and infrastructure including the Lugano headquarters and in retail expansion.

We're also acquiring back the license of Guess?

Kids in Europe.

This business should be accretive to next year's earnings.

We are planning next year's Europe revenues to increase in the 25 to 30% range and, as Dennis mentioned, we expect our operating margin to be in the 22% range.

Our licensing business continues to perform above our expectations this year and we plan to increase licensing revenues in the mid single digits next fiscal year and for this business to maintain its current operating margin performance.

Thank you very much, and with that, I will turn the call back to Paul.

Paul?

Thank you, Carlos.

I would like now to update you on the three global initiative that we spoke about this past year.

The first one was footwear.

We continue to invest in this category and the results are very apparent.

For the quarter our North American footwear business increased by nearly 50% comparing to the same period last year.

This year we have opened 5 footwear store Europe and 4 in Asia bringing our current footwear store count to 9 stores.

Next year our goal is to open 7 in North America, 8 in Europe, and 5 in Asia totaling 29 footwear stores by the end of fiscal 2009.

Our second global initiative is GC watches.

Our goal this year was to double the size of our business and we have already reached that goal.

For the quarter our global Guess?

collection watch business has increased by 118% comparing to the same period last year.

So retail pricing range from 200 to 1400 on the Swiss-made watches.

Our third global key initiative related to handbags.

We had the tremendous growth in the third quarter as well.

The business was up 32% in America, and our global handbag category was up 60% year-to-date.

Now for next year.

We have three key goals.

First, we will continue to invest in North America with retail expansion, as Carlos mentioned.

We plan to end this year with 380 stores in U.S., Canada and Mexico.

Our goal is to open 68 stores in fiscal '09 which will include 18 Guess?

stores, 12 Marciano, 10 G by Guess, 15 accessory stores, 7 footwear stores as well as 6 new stores in Mexico.

A second initiative will be Europe.

Europe is about two years ahead of the regional plan.

We believe that we can grow that business between 700 and $800 million in the medium-term.

The key challenge for us is to penetrate north of Europe successfully.

To achieve this, we have secured executive and (inaudible) in key cities such as London, Dusseldorf, Paris, in addition to Barcelona, Milan and Florence showroom.

Our third goal relate to Asia.

We are consistently focusing on the new market.

We have a strong and fresh future and see opportunity for store growth.

We want to continue to invest in key strategic location and build our retail store organization.

We will also continue to focus on energy markets such as India and Russia which remain key territories for Guess?

brand in all categories.

We feel that our business model and the diversification of a product in different parts of the world give us significant advantage in the market to have stable and strong earnings growth going forward.

It is clear from our report today that the globalization of the Guess?

brand has put our company different pace and our open opportunity for many years to come and to execute.

I want to say thank you to our team around the world for all their effort and hard work that went into making this year the best year ever once again.

Thank you, and we're ready for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Gabrielle Kivitz with Deutsche Bank.

Please proceed.

Good afternoon and congratulations on a strong quarter in a very challenging environment.

Thank you, Gabrielle.

How are you?

Great.

My first question is hoping you could talk a little more about the merchandise margin declines in the Europe business and the U.S.

business and just maybe also give us a sense of what we should be expecting in terms of merchandise margins going forward from both of those businesses.

So a little bit of color from the recent quarter and how we should think about that going forward?

Thank you.

Sure.

Let me start by talking about the European business.

I would start by saying that our European business has become very complex and any one quarter we're impacted by a lot of moving parts.

There's currency impacts, there's the business mix, Focus has a different margin profiles than the rest of our European businesses.

We have product mix issues.

We told you last time that the change in our business model would move from handbag shipments from the third into second quarter.

Footwear had a higher penetration this third quarter than a year ago, and we've made a lot of investments.

We talked about investments in infrastructure and we had some one-time charges related to that.

So in any one quarter in Europe there's a lot of moving parts that have impact on both gross margin and our operating margins.

So the way that we're looking at this business is not so much on a quarterly basis.

For example, last year's third quarter operating margins expanded by full 12 points, and they were -- that was 10 points over the average for the year.

So we're looking at this business on an annual basis.

I said in my prepared remarks that we're looking at it to deliver operating margin in the 22% range.

That's down about 3 points from our performance last year, and the way I would look at that is about one of those 3 points comes from the impact of the Focus business and 2 of the 3 points comes from the impact of the infrastructure investments that we're making.

Okay.

And on the merchandise margin portion of it specifically, should we not be thinking about that quarter-to-quarter?

I guess I ask it because when I look at your total results and I see gross margin down for the first time, we haven't really seen that in a long time so I'm just trying to get a handle on --

Gabrielle, it's Carlos.

What's justified or explains the difference for the third quarter was the mix of different businesses.

If you look into what drove that small decline was primarily the performance of the European segment which experienced a very different mix for this particular quarter with some of the things that Dennis just mentioned.

So, also, if you look at what happened a year ago in the third quarter in Europe and using the recast third quarter, we were up like 12 points.

That's 1200 basis points.

Obviously, that quarter was somewhat unique, and we are looking at what should be the ongoing expectation for the total business.

With respect to our business in North America, our margins are really, really strong, and if anything, we expect that in the fourth quarter we'll see an increase in margins, so we are not -- we think that this is just related to that change in the mix.

Okay.

And so were the gross margins for the U.S.

business excluding G by Guess and Marciano, were the gross margins up for that domestic business?

Yes.

Once you consider occupancy costs which we show as part of cost of goods sold.

With the occupancy they were up.

So without the occupancy the merchandise margins were down in North America?

Well, you know, if you consider -- if you take all the new businesses meaning Guess?, I thought that's what you asked, the margins were up.

And then if I could just ask a question on the wholesale.

The North America wholesale business was surprisingly stronger than I expected it particularly considering what we're hearing from other wholesalers domestically.

Just wanted to understand, get some color there and see if what we should be expecting from that going forward?

I know it's a small piece, and a lot of (inaudible).

We are very pleased with our wholesale business and we were just very excited about the performance in terms of both top line, bottom line, the margins were very strong and we continue to see very healthy business there.

Now, of course, you know, we are anticipating a very modest growth for next year, but we think that that operating margin is sustainable.

Okay.

Thank you and good luck for the rest of the year.

Thank you.

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

Please proceed.

Thank you.

Congratulations on yet another fabulous quarter.

Thank you, Christine.

Wanted to ask a few questions.

One, I know there's been concerns on some part about the investments that you've made on sweaters and coats and wanted to see how that's been performing both in third quarter and then November so far, and then if you could just expand a little bit about the performance of G by Guess?

Yes, with respect to sweaters and coats, actually, this was one of our big initiatives to drive growth in the business, and we are very pleased with the investment.

Obviously, the fact that the weather didn't get cold until recently had an impact on that business, but our business in November was very, very strong in both categories, so we think that the assortment is right and we feel that we are well positioned for the holiday selling.

With respect to G by Guess, we are, as Paul mentioned, we are in the early stages of development of this brand.

We are excited about the opportunities.

We have seen that the -- what we saw as a big market opportunity is definitely there.

The mix of business is very similar to our existing business except that men's is even more penetrated and shows big lines of opportunity there as well.

We are anticipating that next year this brand is going to be accretive to earnings and we're excited about that as well.

We are not going to expand very aggressively.

As you know, we will open only 10 stores next year and we will continue to refine the concept.

Has performance been consistent across the two different types of conversions as well as the new standalone stores?

I mean, not the standalone but the new stores?

No.

It's on a store by store basis.

You cannot say, okay, this performance is consistent with that.

It's like in every one of our retail formats it depends on the location, and both productivity and profitability depends on that.

Christine, this is Paul.

Hi.

I think we have to be reminded just that the concept is only a few months old, and definitely we start to open the first one in April, but I have to tell that you during the big green Friday we had a great weekend across all G by Guess stores, and that has been only like five, six months after we opened the first one, so we are learning a lot through our customers.

We are listening a lot to our customers, and definitely that learning curve is going to go on for at least maybe a year, a year-and-a-half, but we did open and continue to open that chain of stores.

We have a clear goal to be like a 10, 15 years business like we started on every one that we did.

So already to see the adjustment we made in the line, we are very pleased with the results we have, and I think that you will see the numbers speaking for itself the next year.

Okay.

Great.

Thank you.

And then if I missed it, can you quantify the impact of the 53rd week on the U.S.

retail business last year?

I think it's about $13 million in revenue.

Okay.

And that is included in our overall revenue guidance that we gave.

In fact, that week is not there.

Okay.

Great.

I think the stores look great.

Congratulations and good luck for the holidays.

Thank you.

Thank you, Christine.

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

Please proceed.

Good afternoon.

Congratulations on a great quarter.

Thank you, Eric.

I'm interested, you had some interesting expansion plans for the U.S.

We haven't seen in a while in terms of Marciano and the accessories stores, and those have not been expanded this much.

Could you talk about what you found the space now that Marciano that you're comfortable to expand in now by 12 stores?

What changes have you done to the accessory stores to restart growth in those in North America?

Well, about Marciano, now we have, don't forget, we have just added a big category which is Guess footwear and if go to any Marciano stores you're going to see a major presence in center stage of that store.

And before it was only apparel, so now the next wave will happen in Marciano stores will be to add handbags.

Of course you know the track record we have in handbags and footwear in our current Guess?

store, so definitely we feel much more comfortable now to accelerate the base of opening Marciano stores knowing that the product is there.

You will also notice now if you go in Marciano stores that where Marciano watches.

We started a year ago.

But now that we have the shoes in place and the bags coming in the next six months and the watches in place today, now we have a full complete product that we can offer in any store opening.

And the best example if you want to go will be in Las Vegas, the new one that we're opening in Las Vegas.

Accessories, we have, let's say, focused on the international more than domestic, and now the domestic, when I say domestic, you think Canada and Mexico, which is North America for us, we have definitely made a priority to accelerate the accessories stores, again, because the products support completely that concept.

The box is pretty small, between 800 to 1100 square feet, and we don't have the need of space like you have for footwear, when we're going to put footwear we need a bigger box because of the size of the boxes.

So definitely now we see three years that we have opened the first accessory store.

We have close to 140 I think around the world, and we feel completely confident that North America is a priority for us to open now at the same pace.

Great.

Congratulations on a fantastic quarter and some great guidance.

Thank you.

Thank you.

Footwear will be the next big thing, Eric.

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

Please proceed.

Hey, guys, great quarter.

So wondering if you could touch a little bit.

I know you've a new prototype store out there that you're testing a little bit.

I think it's the Beverly Center.

It's a bit of a hybrid between the U.S.

and Europe.

I know there's just a few and it's early, but wondering if you could just talk a little bit about that?

Yes.

This is Maurice.

Very simply our goal is to combine the two concepts, and that's why you see a real closing up, you know, of the two concepts.

The goal will be to have the same store all over the world, so we are working toward that direction and it's doing great.

We just opened one in 8,000 square feet in Viareggio in Italy, okay?

It's a resort city, and I must say that this is the most beautiful store that we have open as of today.

It's one of our franchisees has opened that store, and it's gorgeous.

So we continue to fine-tune it into that direction, and the clear goal to have all our stores all over the world to have exactly the same feel and the same experience for the customer.

So the newer stores that you're opening like next year, will those all be under this prototype or will they go into select centers and select places?

Because it's more of an upscale type store, so I'm just wondering what the new stores will look like?

They're going to be most like basically like this one.

Okay.

The one that you've seen in Beverly Center they're going to be like that.

Okay.

They're going to be like that.

And then it wouldn't be a Guess?

call if you didn't go through a few product categories.

Obviously with the type of comp that you did in the quarter everything was really good.

I can't imagine you had anything that didn't perform well.

But just wondering if you could talk about some of the bigger categories?

You touched on sweaters and outerwear already, but maybe denim bottoms and some of the tops and maybe Marciano versus young contemporary and men's and just what you're seeing in some of the different categories?

Thanks.

The trends that we have seen are pretty much in line with what we saw before and what we invested our inventory dollars, so then it was very strong, outerwear, or sweaters we talked about, dresses we have had a phenomenal business in dresses, woven tops, even knit tops, I mean, YCN and men's also have success.

And then all the accessories, watches, and Paul referred to this, watches, handbags, footwear, (inaudible) business.

So all, you know, the great thing is that the business has been very strong across the board and that's how we have been able to really capitalize on such a strong trend in comps.

Great.

One quick follow-up.

In the past when the mall got very, very promotional in December and in the holidays, often times you were kind of forced to get promotional just to compete.

I mean your inventory controls are so much different today.

Can you just comment on the promotional environment and what your kind of strategy or outlook is if the mall continues to get very, very promotional leading up into the holidays?

I think probably the best example was the day after Thanksgiving.

We did have some early birds, as you know, for specials and we had great business, and we think we were less promotional than most and less promotional than the year before.

We don't think that the tone of business will change dramatically from what we saw.

But, of course, like you said, we will continue to watch inventories very carefully.

Great.

Thanks a lot, guys.

Keep it up.

Thank you.

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

Please proceed.

Thank you and congratulations.

Just looking at the investments in the different global parts of the business, could you sort of just run through a little bit more longer-term looking at Europe, whether you think next year will be your big investment hurdle and then things will sort of fall off and then things will pick up more in Asia, if you could just go through that thought process?

Yes, like we said, Holly, we do anticipate that operating margin to be sustainable, but keep in mind that the new headquarters in Switzerland is definitely going to require some additional investing, at least the annualization of what we started investing in.

That is already considered in that guidance that we're giving about the 22% operating margin.

And Paul also mentioned the new showrooms.

We have three major centers that we think is critical for the growth of the region.

That is also included in that type of guidance.

Now, of course if we continue to capitalize on growth, over time we can see leverage of those costs because with this we're pretty much at the end in terms of the big investment initiatives.

And then we should be able to leverage from there, but we are taking one year at a time here.

Great.

Thank you.

Good luck.

Thank you.

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

Please proceed.

Good afternoon, everyone, and congrats on a great quarter.

Thank you.

Now, obviously it sounds like Asia continues to be an area of tremendous opportunity for you and I recognize it was probably awfully small base, but given how well Europe has been trending for you, can you maybe talk to us a little bit about maybe comparing the two regions as Asia is in a much earlier stage of growth, how are the two divisions, you know, progressing?

Is Asia growing similar to what you saw in Europe in terms of top line and margin characteristics?

And longer-term can you help us quantify what you think may be an opportunity for the Asian market?

Thank you.

I'm going to try to address -- this is Paul.

I'm going to address the needs of the strategy of the store expansion and Carlos will address, I think, the margin.

Basically, if you look at Asia we -- I would say on one hand we just barely started.

On the other we have partnered in Southeast Asia for over 16 years now in Indonesia, Malaysia, Taiwan, Thailand.

But really is a core now is China for us, Korea, and which we're running directly, and we just barely started.

We are (inaudible) stores, for example, in Philippines for almost 70 stores, but that also for 15 years, and it's a partner there.

So we are just in a process a really developing Asia is just beginning.

Japan we had a licensee for twelve years and we ended the license to at one point or another do what we did in Korea and China and operate directly.

And Japan is a very, very challenging market, maybe the toughest market in the world, in my opinion.

So we have a lot of work ahead of us and to compare Europe with Asia it's very difficult.

I mean, Europe we're very familiar.

We know basically every country there and we are well established on many part of Europe.

Asia we want to act cautiously and we've also strong partner at the [restep] except, of course, Korea and China.

So the investment will be substantial, but we're looking from between now and the next five years what we plan to do, and at one point or another we want to have a business the size of what we have in Europe to have that in Asia on a direct basis.

Carlos, (inaudible) gross margin.

And to get there, you know, we are looking at the business with a 20% range growth on top line.

We think that the operating margin for this business in the medium-term should reach the mid-teens.

Fortunately, our businesses in Korea is demonstrating that that is entirely possible for the region, and we think that once the business gains some size we could also capitalize on the infrastructure investments that we are making.

Great.

Thank you and good luck.

Thank you, Betty.

Your next question comes from the line of Margaret Whitfield with Sterne, Agee.

Please proceed.

Good afternoon.

Congratulations.

Hi, Margaret.

Hello.

Your opportunities in northern Europe, I wondered what is needed?

I know you feel you might need a different product, and I wondered how you're doing on the collaboration between the European and the merchandisers here in the North American market to deliver a more unified product offering?

And finally, if you have color on what we might expect in terms of new fashion for next year, I'd appreciate it.

Thank you.

Thank you.

Let me address North Europe.

North Europe, as you know, if you're familiar, it's two different worlds between south and north.

We are now have management in for the north for Germany, for England, for Holland, which we didn't have any really business there yet.

The line definitely, the products line assortment has to be addressed because it was really very sudden Europe line oriented, and we are just at that point hiring a head of merchant for all Europe we'll be able to coordinate all that which is a turning point for us.

Second, also we plan to invest in some key locations and creating Dusseldorf and creating Amsterdam and creating also new stores in England and establish the brand as well as we did in France, Spain or Italy.

So it's, again, a matter of investment, a matter of people, a matter of time, but as you just mentioned before, the line has to be appropriate for north Europe.

Whatever you sell in south of Spain or south of Italy you're not going to sell in Sweden, so definitely we have addressed that.

We prepared that, and fiscal '09 should have a great increase of business in that region.

We are well prepared for that.

And in combining the fashion in Europe as well as North America, where are you regarding that?

A commonality of design.

What we're going to do -- this is Maurice -- what we're going to is we're going to increase the penetration of the American product into the correction for northern Europe because we really believe that the American product is much more in line with the tastes and the fit for northern Europe rather than the products from Italy, so that's what we're doing.

And any thoughts on the fashion direction for next year, Marty?

Yes.

For the fashion direction for next year, we really believe that we're going to see a resurrection of the non-denim bottoms very strongly, but for men and women, which will have a big impact on the business because this has slowed down tremendously in the last three years, and we think that this is going to have a big impact.

Besides that we see the knitwear fashion for women, the knitwear fashion business really taking a bigger part of the business versus the woven tops.

Okay.

And, Dennis, what was the currency benefit to the bottom line in the quarter?

For the quarter it was $4.8 million.

Okay.

And in terms of November comp trends, were they consistent throughout the month, Carlos?

Yes.

Because you have a much lower forecast for the quarter overall.

Very consistent with third quarter.

Yes, as we said, Margaret, we're remaining very conservative with that forecast for the remaining of the holiday season.

Was your comp in Q3 driven by ticket traffic or what drove the comp?

We have the similar type of trends that we have experienced all the year in terms of good traffic, good conversion rates, and average unit retail was also up slightly.

And that's nine questions you had.

Thank you.

Good luck in Q4.

Thank you.

Your next question comes from the line of Sean Naughton with Piper Jaffray.

Please proceed.

Yes, actually it's Jeff Klinefelter calling in.

So congratulations, everyone, on another fantastic quarter.

Hi, Jeff.

We hope it's not too late for you.

No, no, not too late yet.

We're okay.

In terms of U.S.

retail comps, I guess a quick follow-up to that last question.

In terms of the impact that the accessories categories have had on U.S.

retail comps, and maybe to frame that up you can remind us again how many doors you have, in your U.S.

retail stores, how many doors you have footwear, handbags and watches in and how those have contributed to those comp trends?

I don't know if I have the exact numbers about how many doors we have footwear, I think we're close to 110 doors in retail, and all the doors in factories, but I think the total comp, if I'm not missing for the quarter, should be in the high 20s.

So footwear has trended, and that's exactly what Paul is alluding to, has trended ahead of the total store if that's helps, so obviously, has contributed greatly to the comp growth.

Yes.

Same thing for watches and handbags.

Watches I can tell you for the quarter we will (inaudible) up, if I'm not again mistaken, around something like 30% against 40% same quarter last year.

So it was a huge jump, but mainly because we push this GC watches which the ticket price is like almost three times a Guess?

watch, the regular Guess?

watch.

So that's what helped a lot.

So I would imagine this is driving up the UPTs in terms of it being a comp catalyst?

On accessories, yes, yes.

Okay.

And then just two other quick ones.

In terms of your China growth next year, what's your plan or what's implied in that growth in terms of new stores that you plan to open in mainland China?

Again, in fact, I'm on my way to China this week.

I'm leaving after tomorrow.

We are planning to continue to cover the key cities ourselves like Shanghai, Beijing, Macau, Hong Kong, we're opening directly all these locations.

Once we remove ourself from the center of these key region of main China of mainland, we want to find the right partner to operate together because it's very, very spread out, and we plan to have a very cautious organization structure [there] to open these stores because we want to keep control with partners who are in retail business and not us to run a (inaudible) of doors in China.

We know what we can do and know what we cannot do, and all the key cities will be opened and controlled by us.

And all the remaining cities that are secondary cities and when you talk about secondary cities there, a small city would be 6 million people.

This is where we will find some partners to work with.

So the clear number of doors I don't have it but definitely we will have a better picture in the next 60 to 90 days where we go for '09 as of firm numbers to doors open in mainland.

Okay.

And then just one last quick question.

Your G by Guess it's very early, obviously, that you have [that] concept, but any sense in terms of what size you have to get for total stores to breakeven in the concept?

We believe that, I think, at the end of next year we should be breakeven for sure.

That's the goal.

Positive (inaudible).

Let's put it that way, Jeff, end of next year, '09, we have to be breakeven.

That's for sure.

Okay.

Very good.

Good luck with the holidays, everyone.

Congratulations.

Thank you very much.

Your next question comes from the line of Diana Katz with Morgan Keegan.

Please proceed.

Hi.

Congratulations.

Thank you.

While it's inclusive in guidance, can you just talk a little bit about how large and profitable the Guess?

Kids license is that you're acquiring?

It is not that large.

We are anticipating that next year that could contribute about 4 to 5% of the growth in Europe.

And then--

And it is profitable.

And then are there any other licenses that you're looking to reacquire in the European business?

Not at the moment, no.

I think we capture basically all categories, and, again, I think you have heard us saying that time and time over, we know what we can do and we know what we cannot do and, clearly, accessory world we have the best partners and we intend to keep that way.

When it comes to apparel, we believe that we have been reacquiring and become partners with the licensees we have and basically no apparel license left in the world except Philippines and South Africa which are very small remote countries for custom and, which is reason we will not be able to achieve that to be direct, but that's basically that.

But for example, the key element that you have seen happening this year has been Korea.

We [are] the licensee for 19 years, and because the rules and (inaudible) have changed in South Korea, we're being able to operate directly and these turn out to be an excellent, excellent investment we made to go direct in Korea.

On that note, in Europe would you be able to break out the size difference between apparel and accessories and how that mix shift has been impacting margins?

No, we do not break those numbers down, Diana.

With respect to the margins, I mean if there is a lot that has to do with a mix of shipments by month, and that business, like Dennis said earlier, has become very complex because of all the different types of business that we have currently there.

Okay.

And then in terms of the U.S.

retail stores, would you be able to give us figures on sales per square foot for the U.S., accessory stores?

Do they perform in line where the licensed accessory stores are?

And then also for Marciano, where do you see with these new categories coming in, where do you see -- do you have any sort of target metric for sales per square foot?

We have said that the Marciano stores are performing over $600 a square foot and that has been the case for the whole population of Marciano stores.

The [special] accessories stores, one of the -- this is one of the main reasons why we are so excited about opening some more stores in that category, like Paul said before, because several of our stores are doing very, very well in terms of productivity and obviously profitability.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Janet Kloppenburg with JJK Research.

Please proceed.

Good afternoon and congratulations.

Hi, Janet.

Hi.

Just a couple of follow-on questions.

First, I'm a little confused.

I thought, Carlos, you had said that G by Guess would be accretive to earnings next year, and then I heard maybe Paul say breakeven, so maybe you could clarify that.

I think Paul just said that at least we would breakeven, so obviously we are -- our internal plans are to be accretive for earnings and that's what we're guiding to.

And just a question on that, Carlos, is you're only opening 10 next year, if there is a strategic reason behind that given how many you opened this year and the fact that you do feel good about the progress of the brand?

Yes, this is in our plan.

We have a initial need to open a certain number of doors to have a product adequate for the stores, and now as you heard the plan of how many stores we plan to open next year which I think is North America 68 stores.

Right.

Part of that number will be 10 G by Guess stores, 15 will be accessories, 7 will be footwear, 18 will be Guess?

stores, 12 will be Marciano, so there's that much of Cap Ex we can allocate to each division, and that allocation we have for G by Guess.

Okay.

Good.

And then on the U.S.

comp trend, obviously, it was very strong in November.

I think you said you're looking for it to be up mid single digits in the fourth quarter.

Is that just general conservatism or is there a big bump from last year's December comp that maybe will cause the number to naturally come in?

No, no, it is conservatism.

Of course, when we do that, we're looking at everything and that includes looking at our performance last year.

But if you look at how we comped against November, which was a very strong comp, we were able to continue to comp very high numbers.

Great.

And on the U.S.

retail gross margin, Dennis, I just want to make sure I understand it correct.

Is the reason that the margin was down was because of the mix of the accessory businesses that are growing as a percentage of the sale of the business?

I'm not sure I understand.

Well, wasn't the gross margin down in the U.S.

retail stores in the third quarter?

No, no, no.

The main issue was the contribution and the dilution in margin because of the new concepts.

Oh that was it.

So the product margin was actually improved?

Right, yes.

Okay.

I apologize.

And, Carlos, can you just go through a little bit about what you talked about next year's third quarter that the margin there will be closer to the fourth quarter or how do you want us to think about that?

Right.

You know, basically what we would like for you to consider is that we do anticipate that the first and second quarters in terms of operating margin performance, we expect them to be very close to each other.

Which they were this year.

Exactly.

Yes.

Okay.

We expect the same type of phenomenon to occur with the third and fourth quarters, and that is not the case this year.

No, the third quarter's higher.

Right.

So the question is, do you expect the third quarter to come in next year?

Right.

Or do you expect the fourth quarter to go up?

Right.

We expect the third quarter, well, it should be a combination, but because at the end of the day we are giving you the overall guidance for the year and an 18% operating margin.

So, obviously, what we do anticipate is that there's going to be some flattening of the third quarter and taking it from the fourth quarter.

And in other words, the fourth quarter's anticipated to rise?

Exactly.

Okay.

That's because of how the business is evolving.

Okay.

And could you help me with that a little bit, understanding that evolution and the effect on the influence it has on the operating margin in the fourth, third and fourth quarter?

Well, the major factor here is the -- in significance of the retail business as part of the total mix.

Uh-huh.

And also what we are trying to do to move some of the shipments to either earlier in the cycle for Europe, which is taking some of that margin away from the third quarter.

Okay.

So you just want it to be clear, then, that we should look for operating margins to be down in the third quarter of '08 versus '07 and then for some sort of offset in the fourth quarter of --

Exactly.

Exactly.

Okay.

Okay.

Great.

I understand that.

All right.

I think those are all my questions for now.

I'll speak to you later.

Thanks.

Thanks, Janet.

At this time there are no further questions.

Ladies and gentlemen, this ends the Q&A portion for today's conference.

You may now all disconnect.

Have a great day.

Thank you.