Guess? Inc (GES) 0 Q0 法說會逐字稿

Good day, and welcome to Guess first quarter fiscal 2009 conference call.

Before we get started, please note that the Company will be making forward-looking statements during this call, including regarding future plans and guidance.

The company's actual results may differ materially from current expectations based on risk factors included in the Company's quarterly and annual reports filed 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.

Thank you.

Good afternoon, and thank you for joining us today to discuss Guess financial results for the first quarter of fiscal year 2009.

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

The Company performance in the first quarter delivered strong financial results even with a challenging domestic environment.

Our ability to deliver these results validates our strategy, and its execution, which was set five years ago, but validates even more our global brand recognition.

This quarter delivered record revenue and earning performance.

Double-digit revenue growth in all of our segment resulted in a consolidated revenue increase of 29% to $489 million.

Operating earnings also increased double digits in all our businesses, resulting in a growth companywide of 31% to $76 million.

We reported net earnings of $48 million, 35% above last year's quarter, and diluted earnings per share of $0.51 cents versus $0.38 cents last year, a 34% increase as well.

We view this result as very significant as they follow last year first quarter when we delivered revenue growth of 42% and net earning increase of 72%.

This is also our 19th consecutive quarter of earning growth.

This period of strong performance started in May 2003, a year when Europe generated only 4% of our revenues, and Asia was less than 1%.

As you know, it has been a key priority as a long-term strategy to expand the brand's presence in these international territories, and we are proceeding well ahead of our plan.

In the current quarter, Europe and Asia accounted for over two-third of our revenue growth.

Europe alone accounted 50% of the net of the revenue increase and 68% of operating earning growth.

Our plan to expand in international continues to be the right strategy more than ever.

For the first quarter, our earnings were divided with North American retail and wholesale 37% of the total, Europe, 42%, and licensing at 21%.

Starting with Europe, revenue in Europe increased by 50% to $179 million in the quarter with each one of our four businesses increasing revenues.

Both apparel and accessories businesses contributed similar amount to these substantial revenue growth.

Sales flow in our denim business was very positive, and customers responded very well to our knit wear assortment.

Accessories business also performed very well in our own stores as well as major department stores in France where Guess watches and handbags are number one performers in their categories.

Even with our current presence in Europe, this region continued to represent a substantial growth opportunity.

With our strong management team, and infrastructure in place now, we are poised for growth across all Europe.

In the quarter, we opened 10 new stores in Europe with eight of these outside of Italy.

France is one of the key markets that we are targeting for expansion this year with Spain and U.K.

We plan to open a total of 86 stores in Europe and the Middle East by the end of fiscal '09.

In the quarter also, we began the integration of our Kids business licensing for Europe, which we just acquired at the end of last year, into existing operation.

Retail.

Regarding our North American retail business, we are extremely pleased with our results, especially considering the state of U.S.

consumer and economic environments.

We generated same-store sales growth of 7% in the quarter, which now represents the 21st -- 21 consecutive quarter of comp increase.

This was up against 13.6% comp a year ago.

Total revenues on retail increased 18% in the period.

We were especially pleased with the progress we made with Marciano stores, which improved its comp store sales performance for the quarter, ending the period on a strong note both in U.S.

and Canada.

We now have 47 Marciano stores in North America, and we plan to open eight more stores in the next 12 months.

A footnote update on G by Guess.

We opened our first G by Guess stores just a year ago.

We currently have 37 stores open in U.S., and we plan to end the year with 45 stores.

For the first quarter, G by Guess nearly achieved profit forecasts.

May was the first month of comp sales, and we achieved a double-digit performance.

You can visit our Web site to find location nearest you.

Our U.S.

retail business continued to benefit from tourists coming to the country with strong currencies.

This is one of the greatest benefit of having a true global brand, where Guess has invested in marketing and advertising around the world for the past 25 years.

A business and tourist destination as New York, Florida, Las Vegas, Texas has been very strong and are well positioned to continue this trend, since 80% of our U.S.

stores are located along the coast and in key tourist cities.

In the quarter, we opened 19 new stores in U.S.

and Canada and have launched our first footwear store at the Americana in Glendale, California.

We will open four more footwear stores in U.S.

by year end.

In total, we expect to open 60 stores in U.S.

and Canada by the end of this year across all our retail concepts, representing 12% in average square footage growth.

Our wholesale segment performed very well during this quarter, growing revenue by 27%.

Most of the growth in this segment was produced in Asia, where Korea continued strong performance from last year.

In the first quarter, Korea nearly doubled its revenues from the first quarter of last year.

In licensing, we had a very good quarter with a 16% increase over last year.

The strong performance once again exceeded our expectation, even with the integration of several licensing categories in the last 18 months.

Globally, our watches were the best performers among our licensed product with a 38% increase in sale over last year.

Now, some update about the initiative we discussed in the last call.

The first one is international retail expansion.

We believe strongly that the best investment in product, in protecting our brand integrity and visibility is in our retail stores.

We are fully committed to the goal of having 1,200 retail stores around the world by the end of this year.

With the help of our excellent partners and executives in each region of the world, in Q1 alone, we opened 34 stores outside U.S.

and Canada.

We are right on track to open 185 international stores this year.

Our plans for Europe this year is to open 26 home stores in strategic cities like France, Spain, U.K.

and Italy, and we plan to open an additional 60 stores throughout European countries, including Russia, Turkey, Poland, Ukraine, Holland, Switzerland and Middle East.

Latin America is a new region of focus for Guess this year, and we continue to build our existing business and increase our retail penetration in Central and South American countries.

By the end of fiscal year, we will -- we plan to open a minimum of 12 stores in countries such as Mexico, Brazil, Panama, Venezuela and Dominican Republic, bringing our total store count to 48 in that region.

Next initiative relates to Asia.

As I mentioned, Korea has been instrumental in building our business model and brand awareness in Asia.

Guess Korea opened seven free-standing stores, including the first footwear store and ended the quarter with 111 stores in concession in that country.

We plan to open an additional 17 stores by year end.

In China, for the quarter, we opened three new Guess Jean stores outside of major tier cities.

At quarter end, we had 35 stores in concession in China, Hong Kong and Macao.

It was exactly a year ago that we launched the brand in China.

By the end of fiscal year, Guess China will open another 43 stores in concession, bringing our total count to 78.

Finally, eCommerce.

We continue to actively develop Guess.com and Marciano.com and G by Guess.com as a key destination for our current and future customers in conveying the Guess lifestyle today and how diversified we have become compared to when we started with just jeans and T-shirts in 1981.

In the last nine months, we have significantly invested in online advertising as well as including an eCom team, which increased our business by 52% this quarter.

We are absolutely committed to triple this business in the next three years, and we will work relentlessly to make the shopping experience as seamless as possible because, clearly, it is all what online shopping is about.

Now, Dennis will take you through the numbers.

I will close the call before the Q&A.

Thank you.

Thank you, Paul, and good afternoon.

Let me now share with you the key financial highlights that drove our solid performance for the first quarter.

Total first quarter net revenues increased 29.4% to $489.2 million.

Europe drove 54% of the increase.

North America retail accounted for 29% of the increase with our wholesale segment, which includes Asia, and our licensing segment contributing the balance of 17%.

Gross profit increased by 32% to $221.2 million, and the Company's gross margin expanded by 90 points in the period.

Gross margin was favorably impacted by higher European product margins, an increase of Europe as a percentage of the total mix and improved occupancy leverage, partially offset by lower product margins in our retail segment.

In the quarter, SG&A expenses increased 32.5% to $145.3 million.

The majority of the increase supported the higher sales volume with most of the balance relating to new businesses and new European infrastructure.

Our SG&A rate increased 70 basis points to 29.7%, driven mainly by spending for our new European headquarters as well as new businesses in Europe, partially off-set by expense leverage in both our Wholesale segment and in our Corporate overhead.

For the full year, we are expecting to improve our consolidated SG&A rate versus last year.

For the quarter, the Company's operating profit increased by 31.1% to $75.9 million, which includes a $5.9 million favorable currency translation impact.

Operating margin increased 20 basis points to 15.5%.

Among the non-operating components of our income statement, interest income was $200,000 lower, given declining U.S.

interest rates.

We've recorded a net charge of $1.6 million for foreign currency-related revaluations, an amount similar to last year's quarter.

We also recorded $500,000 in minority interest charges this quarter versus a $100,000 benefit last quarter, given the stronger performance of Focus Europe and our Mexican joint venture, both profitable operations this period.

Our effective tax rate for the first quarter was 36% compared to 38.7% in the prior year quarter.

This reflects a shift of profitability into lower tax jurisdictions.

We are continuing to plan the remainder of this year at the 36% rate.

We increased net income by 34.5% to $47.8 million, and increased diluted earnings per share by 34% to $0.51 cents.

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

Our North American retail sales increased 18.1% to $211.9 million, driven by our 7% comp sales increase and an 11.4% increase in average square footage for the period.

For the quarter, operating profit increased to $22.8 million from $19.9 million, and operating margin was 10.8% versus 11.1% in the prior year quarter.

Product margins were lower in the period, and this was partially off-set by an improvement in our store occupancy rate.

We leveraged operating expenses by 20 basis points for the quarter.

In our Wholesale segment, revenues increased 26.9% to $75.1 million with the vast majority of the increase coming from our Asia business.

Operating margin for the segment was 16.7% versus 18.1% last year.

The relative growth of our Asia business, where operating margins are lower than our North American wholesale business, was the main driver of the operating margin change.

Asia leveraged its operating expenses, though our retail expansion investments in China are impacting our occupancy rates negatively during the start-up phase as we originally planned.

The North American wholesale business increased revenues and profits modestly.

Revenue for the Europe segment increased 50.2% to $178.7 million with all of our businesses in that region growing significantly.

Growth in our existing Apparel business was the strongest.

Operating earnings increased 44.2% in the period, and our operating margin decreased by 90 basis points to 22.4%, due to the annualization of infrastructure spending in the period.

Gross margins were stronger in the quarter for Europe, but the SG&A rate increased primarily due to costs incurred in our new European headquarters in Lugano, Switzerland, which began operations during the second quarter last year.

Licensing revenue increased 15.7% to $23.5 million.

This growth was remarkable, especially considering that we no longer receive royalties from our European Kids business since we acquired that business at the end of last fiscal year.

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

We ended the quarter with $260.4 million in cash, up $71 million from last year's $189.4 million.

Accounts receivable increased by $109.2 million to $315.6 million compared to the prior year.

About 80% of the increase supports the growth in Europe, which now includes our new Kids business along with Asia.

The substantial majority of our total receivables relates to our European business, and our European DSOs improved compared to a year ago.

The impact of currency translation mostly related to the strong Euro, but also the Canadian dollar, increased receivables by about $28.4 million over last year's levels.

And $141 million, or 45% of our total accounts receivables, were insured.

Inventory reached $202.8 million, an increase of $38.3 million, or 23.3% from the prior year quarter.

Similar to last quarter, about half of the increase will support new businesses, including Asia, G by Guess and our new Kids business in Europe.

The balance of our inventory increase supports anticipated growth in North America and in our core European businesses.

Currency -- currency translation increased ending inventory by $8.4 million, or 5.1% compared to the prior year.

Our inventories are clean, and our position aligns well with our sales plans.

We are making inventory investments to support key growth opportunities, such as Korea, China, Mexico, Marciano, denim and G by Guess to deliver an adequate supply and product flow to these businesses to maximize sales growth and market penetration.

In the quarter, we invested $18.3 million in capital expenditures, net of tenant allowances, primarily to support our retail expansion in North America.

Our Board of Directors has approved a quarterly cash dividend of $0.08 per share, payable on July 3, 2008, to shareholders of record at the close of business on June 18, 2008.

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

Thank you, Dennis, and good afternoon.

Today, I will give you an update on our expectations for each of our business segments and our outlook for the second quarter and the full fiscal year.

I will first address our retail business in North America.

In the first quarter, we were pleased with our performance in retail overall, particularly considering the economic environment in the United States.

We generated positive comps in each month during the period, and our comp performance improved during the quarter, with April being the strongest month for most of our retail concepts.

In May, the entire chain posted a mid- to high single-digit comp.

For the second quarter, we are planning this business with a comp in the low single digits, which should contribute to an overall sales increase in the low- to mid-teens for the period.

For the full year, we are now planning retail performance for a sales increase in the low- to mid-teens range, comps in the low single digit range and an operating margin of about 14.5%.

In Europe this year, we are planning that the timing of profits will be different from last year's, given the annualization of infrastructure investments, changes in the flow of shipments, primarily from Guess by Marciano and our accessories business, and a higher mix of retail business in the fourth quarter as a result of the many new store openings that we have this year.

These changes will shift profits from the third quarter into both the second and fourth quarters, resulting in flat operating profit in Europe in the third quarter and increases of about 50% and 75% in operating earnings in the second and fourth quarters, respectively.

These changes, naturally, will have an impact on the consolidated results of the company in the respective quarters.

In the second quarter, we are planning for our European revenues to increase in the range of 30% to 35%, and we continue to plan for full-year revenue growth between 25% and 30%.

We now expect our annual operating margin to reach about 23% for Europe.

In our wholesale segment, Asia will continue to be the main driver for revenue growth.

We are planning for second quarter revenues to grow in the low-teens in this business.

For the full year, we expect revenues to increase in the mid-teens and operating margin to reach about 17%.

In licensing, we are planning second quarter and full-year revenue growth in the low- to mid-single digit range.

We expect this business to yield an operating margin of about 86% this year.

So, in summary, for the second quarter, on a consolidated basis, we are planning for total revenues between $445 million and $465 million, consolidated operating margin of about 15.5% and for diluted EPS in the range of $0.47 to $0.49 per share.

For the full year, we now expect total Company revenues between $2.03 billion, and $2.08 billion.

We also expect to deliver an operating margin of about 17.7% this year, and we have raised our diluted EPS guidance to a range of $2.40 to $2.48 per share.

Lastly, regarding quarterly earnings, with the profit shifts in Europe and other key initiatives, we expect the Company's third quarter operating earnings this year to be similar to last year's.

These expectations continue to assume full year capital expenditures net of tenant allowances about $126 million and do not assume the repurchase of any of our shares.

Now I would like to turn the call back to Paul.

Thank you.

We have said time-after-time and year-after-year that Guess has a complex, but very unique business model, balanced across all regions of the world in different product categories and very diversified among distribution channel.

From four different retail concept and a fifth just starting to a worldwide licensing in all the accessory businesses to wholesale in Europe, in U.S., Canada and Asia, to partnerships with top retail operators in remote areas where U.S.-based company are challenged to operate,f South Africa to Philippine or Indonesia or Middle East as an example, where we have today 80 stores.

Then you step back, and look at the world map and realize how much we -- can be done in each continent, each country, where we have barely started, such as Europe, Latin America, China or India.

The passion, talent and obsession of our team and associates to execute our strategy are what makes Guess unique 27 years after we started our Company right here in Los Angeles.

But we are also aware of our surroundings and always adapt to be more aggressive or cautious when and where needed to be.

We try every day to stay true to ourselves, never forgetting that ultimately we want to be here 10, 20, 30 years from now.

That's our dream every day.

Thank you, again.

Now we're open for the questions.

Ladies and gentlemen, I think we are ready to open the lines up for your questions.

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

Please proceed.

Yes, congratulations, everyone, on another very strong quarter.

Thank you, Jeff.

Thank you, Jeff.

I wanted to focus on your European business and what appears to be a continuation of a very, very strong growth rate and despite the volatility in those markets.

And, number one on Europe, with Marciano, I think, Paul, you commented the Marciano business, you're very pleased with it.

And I wanted, specifically, the integration is going according to plan.

Any highlights you'd call out in terms of where you've been able to take that business since you brought it back in directly?

And then, over time, do you expect, or how should we think about the operating margins of that business once we anniversary, or annualize some of these investments?

Is it a mid-teens op margin or mid-20s op margin again over time, or what directionally should we look for?

Okay.

I want to answer first about the expansion of Marciano, which is Guess by Marciano in Europe.

Today, we have exactly 27 stores.

And, if you look at any country, except Italy, Italy has 11 stores.

[In the]other countries, like France has only three stores.

England, we have not even started.

Russia, we have four.

Tokyo, we have three.

I mean, we have absolutely the whole entire field of Europe wide open, and we are planning to go aggressively now that we bought back the license of Focus Europe two years ago -- a year and a half ago to definitely expand that division on a much faster scale.

About the product itself also now, so we develop that which you have seen in all our stores in America, the Marciano Shoes [goes] on a contemporary line.

That is also going to carried in all of our Marciano stores in Europe.

So, now the box will be a little bit bigger.

And, about the margin, I think Carlos is going to address that.

Yes.

Jeff, when we acquired the license, and I think you were asking about margins for our Focus business, which is the Guess by Marciano business in Europe.

At the time we acquired the business, we had an expectation to reach a margin that I can tell you we have exceeded so far.

So, things are looking very good there.

I don't think that we are in a position to start talking about operating margin in the mid-20% range, but I think that the teens is what we have achieved last year.

And we have expectations that we can improve from there.

As you know, a lot of the sourcing currently happens in Europe and with the Europe - the Euro where it is, that presents significant opportunities to improve initial margins.

But, we are taking one step at a time.

I think that the integration efforts were are very successful.

We are now on a common platform systems-wide, and the team is working very well together.

So, I think that we are going to continue to look into opportunities for synergies and also the sourcing, as I mentioned.

That's great.

And just one other question, if I might, on the profit and sales of the U.S.

wholesale business.

I know that most of the growth was coming from Asia in that.

Any quick comments, given the volatility in the domestic market, how that's tracking for you?

In terms of -- you talk about Guess by Marciano?

I'm sorry.

I'm not sure.

No, the U.S.

wholesale business.

Oh, I'm sorry.

I'm sorry.

I misunderstood.

The U.S.

wholesale business is -- for this quarter was pretty much in line with last year's, which was in line with our plans.

We are being careful.

We have -- we are operating more doors than we did a year ago.

And we are being -- trying to focus on improving the business within the doors that we currently have.

As you know, our major customer is Macy's, and we think that the opportunity there is to increase productivity.

So, we will continue to plan the business conservatively, and the partnership there is very strong with the Macy's team.

And we think that, as we said in our prepared remarks, the big growth for wholesale is going to come primarily from Asia.

Okay, great.

Thank you very much, everyone.

Good luck.

Thank you.

Thank you.

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

Please proceed.

Thank you.

Congratulations on another fabulous quarter, everyone.

Thank you, Christine.

Thank you.

Wondering if you could help clarify for us, you had mentioned that you talked about the European shipments moving out of Q3 into Q2 and into Q4.

Some of that's continued expansion of retail in Europe.

Could you just kind of walk us through why the shipments are changing, and what the dynamics are behind that so that we can better model?

Yes.

We -- as you know, the business there is complex because of the different business models that we have within the European segment.

And, as we continue to add both growth and other businesses, like the Kids business is also impacting the numbers.

The growth of Focus is impacting the numbers.

We are looking at -- and the accessories business has also been changing, or trying to change that model to ship earlier, just to change the business model to make it, one, more productive and working closer with the retailers to improve business overall and improve the frequency of shipments.

So, when you look at the overall picture and then combine that with the retail business, which this year, as Paul mentioned, we are opening many owned property stores.

Those are the ones that impact the retail business.

We have a shift primarily into both second quarter and fourth quarters because of all the -- all these issues combined.

I think the best way to explain the impact on the numbers is the way we did, trying to really give you more -- more visibility on the bottom line.

You have an issue with expenses as well because we started the Lugano operation in Switzerland, starting in the second quarter.

But most of the heavy spending occurred for the first time in the third quarter and fourth, and obviously that is -- is the first time that we are going to annualize the impact of that investment this year as well.

So, all those things together we have some improvement in margins that we saw in the first quarter.

We are anticipating on a conservative basis that margins will continue to improve.

That's why we are forecasting that this year we'll achieve a 22% operating margin for the full year.

Right.

So, the big picture is to really look at it from an annual basis, not to get so focused on the actual quarter, the quarter?

Yes.

That is the -- we have said that before.

I think it's -- especially in Europe because of all the changing parts that take place.

Christine, this is Maurice.

What's happening also in Europe, slowly, slowly, Europe is changing a little bit their habits.

Meaning that, until very recently, all the stores didn't want to receive merchandise until August because July was mostly a sale month --

Right.

-- for everybody.

And, now more and more, they are changing that, and they are receiving the merchandise -- they agree to receive the merchandise earlier, which means in July, which for us is second quarter.

Right, and how much of that is due to strength of demand for your product versus Europe moving maybe more to kind of a four-season versus a two-season business?

No, --

I think it's a general trend in Europe.

Right, but, overall for the year, our expectations are similar to what they were, Christine.

So, it's not that we are changing the overall view of the revenue growth for the year.

Right.

Okay.

Understood.

And then, very exciting to hear G by Guess is doing well.

What do you think are some of the reasons behind that, considering that some of the new stores are actually in B malls, where traffic is actually down for the mall overall?

Well, I think the reason, first of all, once you visit a G by Guess store, go to the Web site, pick one location, wherever you are, and it's a very, very exciting environment.

The prices are very reasonable, and the product is younger.

And it's true that there's less traffic, but the conversion rate in that store is much higher than A malls.

For that, as we explain, that it's a new concept, new idea, completely, completely different concept.

By the way, the concept won the best retail award in America and -

Good price value.

-- And the price value, of course.

And, definitely, that's what I was mentioning -- Maurice is always here to correct me.

I love that.

And -- and also I think that once you have this experience, it's so different of a Guess experience that you get it when you walk in the store.

And it's -- don't forget, it's only one year old.

So, I think it's the - men's has been extremely strong in G by Guess, surprising to us.

We thought it would be women.

Accessories has been very strong and YC, the young contemporary, has been little bit slow to start, and now it's picking up and catching up with men and accessories.

So, we are very happy because we were not sure that we would break-even the very first year.

As any new concept, as you know, anybody who starts a new concept, it's really takes some time, a year, two years, sometimes three years, sometimes four years.

We don't know.

But we continued to stay focused on what we wanted to be distinguished to, and it seems like the customer is responding to.

And we will have 45 stores at the end of the year.

We are very pleased with that.

Well, congratulations.

I think all the stores look great.

Thank you.

Thank you.

Thank you, Christine.

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

Please proceed.

Good afternoon.

Let me add my congratulations also.

Thank you, Eric.

Thank you, Eric.

One quick housekeeping question.

How many Guess Accessories stores do you have now?

You talked about -- you talked about all the other chains, Marciano, G by Guess, Footwear.

What's the story with the Accessory stores, and where are we in terms of stores?

Where is that going to be for the year?

In North America, is that what you're talking about?

Yes.

We've got 21.

Is that -- where -- and you're going to add another 15, then?

And, the -- just give me one second.

The plan for the year is another -- is 15 in total.

Exactly.

Could you talk -- could you talk a little bit about what the currency effects were in terms of the overall company for EPS and sales?

Yes, the -- as I said in my prepared remarks, the translation benefit was just under $6 million, 5.9.

Most of that is being generated out of -- out of Europe.

In addition to that, we took the charge of $1.6 million, and that's the impact of mostly the marking-to-market the foreign currency contracts that we had in Europe.

So, it was about $6 million favorable on translation and then we took a $1.5 million charge below the line.

Okay.

And the other thing is you -- Lugano's rolling out to attack Northern Europe, as we were -- talked about last conference call.

Kind of could talk about where you are in that process of getting into Northern Europe, and what do you think that can be as you guys go to the next level in Europe?

Well, I think that, if you look at the first quarter, we have seen a pretty nice part of the increase of our European revenue growth came from places other than the traditional ones.

And, we continue to see that kind of trend.

So, I think that the initial experience here with the new team and the new infrastructure is starting to pay off.

So, we are very excited about that.

But we are just at the beginning for Northern Europe.

Right.

Right, final question, what's happening -- is there any news or anything new with Japan?

Nothing for now.

We are so busy somewhere else.

I mean we are so, so busy.

Japan remain, as I think we mentioned many, many times, a definite territory to explore, but it is a tough market to get in.

And unless we have the right pieces and partners on the sense of our own people because we get twice the licensing over 20 years, it never worked for us.

We are not going to walk away.

We are going to do it the right way like we did in Korea or like we did in China.

We didn't grow our licensing.

In China, we are licensing.

We reversed that in the direct operation, and it has been, day one, a success for us.

Because we have our own people, our own structure, own organization, but mainly our own culture from what we believe is right for the brand, adapted with a team of Korean or Chinese [wear].

We need to find the right team in Japan.

Well, great.

Again, congratulations on a great quarter.

Thank you, Eric.

Thanks, Eric.

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

Please proceed.

Hey, guys.

Good afternoon.

Great quarter.

A couple of questions for you.

I think you commented that you should see some improvement in the SG&A rate.

Was that on an annual basis, or was that just as we get into the latter part of the year?

That's for -- that's for the full year.

That's for the full year?

Right.

So, when should we start to begin to see leverage?

Would that be a -- would that be a Q3 occurrence?

Well, the big -- the big hurdle for us in SG&A this year is the first quarter, for two reasons.

One, we're annualizing the Lugano costs.

We had none of those last year.

Plus, the first -- the first quarter is among the lower in terms of revenue.

The high revenue quarters are the third and the fourth quarter.

And there's a significant fixed component to that SG&A structure.

So we've got the first quarter behind us.

So as we move to the rest of the year, we should be able to leverage that fixed component, and we'll also be up against last year's numbers that had Lugano in it.

So for the year, I would -- I would say the SG&A leverage should be modest, maybe 20 to 30 basis points for the year.

That's good to hear.

Second, on the inventory, much more in line with sales growth.

Is that a fair way to think about it going forward, or can you grow inventory, with -- given the investments are behind us, at a rate lower than sales growth?

We continue to go into new markets, Brad.

And I think that when you look at our inventories today, we are very pleased, like we said.

We do not anticipate that is going to change dramatically between now and the end of the year.

So, we are planning to really continue to make investments, rationally, meaning we are going after those opportunities, or merchandise categories that offer superior returns.

And that's what we are going to continue to do, same thing with territories.

Great, and, then last, on the, the retail -- do you have the inventory, the comp store inventories?

Yes, we never talk about comp store inventory.

But I can tell you that North America's inventory was up in the mid-teens, which is pretty much in line with the sales growth that we are anticipating concerning that square footage is up about 12%.

So -- and that is the plan for the remainder of the year.

Great, fantastic, guys.

Good luck.

Thank you, Brad.

Thank you.

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

Please proceed.

Yes, let me add my congratulations.

I'm thrilled to see that North American comp better than your plan.

Could you comment further on what allowed you to do so well in retail thus far this year?

What -- what sectors and geographic areas are driving your business?

I presume it's the tourist areas, like you mentioned, the Coastal markets.

Well, Margaret, this is Paul.

I think what you have seen, in especially the chains who have high concentration of stores in Orlando, Miami, New York, all these areas.

We -- some weeks we have more than 50% of our business made out of foreigners because basically, I mean the product is so attractive to the European.

And the currencies are the lowest in 30 years, I think.

And I think that is a direct effect.

We have a very, very little exposure in Middle America stores.

So -- so we don't suffer that really that dramatic slowdown in shopping centers because 80% of our stores are all in -- cross lines or in very high tourist areas like Las Vegas and Hawaii, of course.

And that , so, basically, I think we have a better range, and, of course, the product, we have excellent product.

We have excellent accessories.

The prices are right, and the consumer coming from foreign countries respond tremendously to that to do multiple buy rather than to have a simple outfit.

And we see that repeatedly month after month after month by the district manager, manager, regional manager, telling us that the flow of tourist is

And what products are working, the men's, the women's?

What -- can you highlight some key areas that are performing well for you?

Yes, all, all in double-digit increase as far as sales, men shoes, needless to say, because we just started two years ago.

And watches, we just give you a number.

Watches in our own stores, forget about now globally, own stores, the watch business after 26 years is up 27% this quarter.

27% in the last --

Wow.

So, when you know how developed that business is in our stores, obviously, there's a demand or has to be justified by something else than just the regular customer who shop in our store.

So, we see that.

Again, if you take a watch from here at the $125, the same watch would be in Europe at 200 Euro, which translates to $300, because we have a distributor there, and it's in Euro.

So, that right there, it's an incredible deal.

So, the tickets are driving the business, not the number of transactions.

Yes.

Okay.

And, what about Kids, any thought of bringing that to North America?

You mean the one from Europe?

Yes.

We have a licensee in America who is doing very well.

You can go to any Bloomingdales or Macy's.

We have a shop-in-shop, and -- but we don't have stores yet.

Okay.

We are looking into it if it's worth it to start a whole chain of that or not.

But we have so much to do already between footwear stores and accessory stores to expand in North America.

Okay, thanks.

And good luck in the fourth quarter.

Thank you, Margaret.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Holly Guthrie with Janney Montgomery.

Please proceed.

Thank you, and good afternoon.

Congratulations.

Good afternoon, Holly.

Hi, Holly.

Thank you.

Question on the Switzer and the expense in Switzerland.

And I guess the question has to do more so with the expansion, not just into Switzerland, but in the other parts of the country -- the others countries in Europe, excuse me,.

As you move into those -- as you move into and/or continue to grow in those other countries, do you see or foresee SG&A expenses similar to what you're talking about experiencing in Q3 and Q4 in Switzerland?

Do you see those additional ramp-ups in those other countries, or are those investments already spent?

No, no, no.

We - really, the last year is, starting in the second half and this year are the big investment years in terms of those -- founding the infrastructure in those areas, including showrooms.

This is the first year where we are going to have a full year of expenses to support those showrooms that were opened in several of those fashion cities.

In addition to that, like we said, Lugano is completely new spend, and we have really increased our organizational capabilities there with a lot of different people, different -- new roles.

We do not anticipate that the spending is going to increase dramatically from this level, but, of course, we will continue to invest, especially in those areas where we see a need, like retail, for example.

Retail, as we grow that network of stores, we will continue to invest in that team.

But, overall, I think at that -- what you saw in terms of the spending levels related to revenues is probably as -- as significant as it's going to be.

Thank you.

Thank you, Holly.

Thank you.

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

Please proceed.

Thank you.

Good afternoon, everyone.

Hi.

Hi, Betty.

Hi.

I was wondering, I mean you certainly gave a lot of color on G by Guess, and it sounds like (the concept -- and the stores look great, by the way.

But, I was wondering if you could also provide some color about the Guess Retail concept and Marciano and then, obviously, the -- the accessory store.

I saw the brand-new opening at the Americana, and it looks fabulous.

Could you give us any color on what apparel categories are trending well and any regional variances at all?

Thank you.

Yes.

I think, as Paul mentioned, really across the board, we have had good success with all the categories, but, overall, the ones that are driving the business and the sales growth.

Denim was very strong this past quarter, and we continue to see that going into the latter part of the year, where denim as a category also is very strong.

Jackets, we had good success.

Sweaters, outerwear, woven tops, even dresses after we had a tremendous year last year, the dress business continues to be healthy.

I think, as Paul mentioned, Marciano, which has been also very healthy, and -- and in Marciano, especially, footwear was probably the top category.

Then when you get into the accessories business, Paul mentioned watches, which was a top performer, but also footwear was right aligned with that type of performance, delivering a pretty significant growth over last year.

The men's business continues to be very healthy and driven by, again, denim, also woven tops and jackets and outerwear.

So, overall, we are very pleased.

Handbags had a good quarter.

Many of the other areas and accessories also performed very well.

With respect to Marciano, I think that the Marciano business is continues to improve.

There were a lot of changes to the assortment and by the team, and I think that we expect that that business will continue to trend.

As you know, we had a management change about a year and a half ago.

So, this was a period where things were just in -- as part of the change.

Now we have a very favorable situation there, and we're very pleased with that.

A quick housekeeping, if I could.

Were there any buy-back activities during the quarter?

No, there weren't.

Thank you.

Good luck.

Thank you.

Thank you.

Thank you, Betty.

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

Please proceed.

Good afternoon, and congratulations.

Thank you.

Thanks.

It's a beautiful quarter.

I was wondering -- I just want to clarify a couple things.

Dennis, did you say in the second quarter you expect North American comps to be at four -- at operating margins at 14.5%?

Or was that for the year?

Because, for the other segments, Dennis, you gave us, I believe for the year, but I thought I wrote it down for the second quarter for America -- for the Americas.

No, no, no.

Are you talking about the retail business?

Yes.

Yes, that's for the year, and I was the one who said that.

Oh, I'm sorry.

Sorry, Carlos.

That's okay.

Okay.

I apologize.

No problem.

Okay.

And so, then, can you just talk about your outlook for the promotional activity in that segment?

Do you continue to think that product margins will be challenged, given what's going on in the U.S., or what's your outlook there?

We are trying to be very cautious in the way we are looking at the business.

Really, what has helped us tremendously has been the type of conversion that we have experienced.

But, clearly, traffic is down and has been down.

We are not anticipating that that trend is going to change overnight, and, as a result of that, we are also expecting a lower same-store sales growth than what we have seen.

And, because of the lower same-store sales growth, the leveraging on occupancy costs is -- is not as strong as it was in the first quarter.

So --

But -- but, the May trends are better.

Are you up against more challenging comparisons in June and July, or does that just reflect conservatism, the fact that the May comps are better, but--

Yes.

As you know, Janet, we tend to be conservative, and we want to continue to really deliver on what we say.

Yes.

Yes, I mean, definitely, this guidance is conservative, as it always is.

No, and appropriately -- appropriately so.

It's very tough out there in America right now.

Right.

On the U.S.

wholesale business, did you say that the business was roughly flat in the quarter with your existing accounts?

Yes.

And, can you talk about the go-forward outlook there?

Similar.

It's similar, and it is already included in the wholesale guidance that we provided you with today.

Right, and is that in the same number of doors?

Yes.

Well, we have more doors than a year ago, and we anticipate to continue to operate in about the same number of stores that we are operating in now, which is more than a year ago.

And it looks like the Asian business -- the growth in the Asian business can more than offset the flat -- the flat trend in that business in the United States.

Is that a fair statement?

Well, yes, that's why -- but, again, that is already included in the guidance we provided you with.

I know.

Carlos, there's always a lot of chatter that your business in the wholesale in the United States is weak.

So, I'm just trying to clear that up for all the skeptics.

So, I just wanted you to talk a little bit about it.

Yes.

No, we are pleased with our business.

Our margins have been very healthy, and --

Right.

But let me just make sure that you understand, the business is performing in line with our plans.

Right.

Okay.

So, we don't--

I think the question would be more -- if I'm not mistaken, Janet, is U.S.

wholesale is flat.

The growth is coming from Asia, and we continue to grow.

We just started to really expand in China and Korea.

Right.

And that is what we are looking for.

Right.

We give you a number of stores we are going to open in China and Korea for the end of the year, and we will continue to have growth in wholesale, but mainly the majority will be driven by the Asian portion of that.

At one point or another, we will split on a conference that discussion of North America and Asia.

Once it becomes substantial, I think we will have to split that on the discussion.

Okay.

Yes, that would be great.

And then--

Because it's very confusing.

Thank you.

And -- and, Dennis, just for the second quarter, not for the year, do you expect the SG&A rate to be a lot -- growth in SG&A spending to be in line with sales growth, or do you expect some leverage in the -- in that second quarter?

We expect--

I know what you said for the year.

I was asking -- I'm asking about the second quarter.

Yes, we expect leverage in the second quarter.

You do, okay.

Terrific.

And congratulations.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up from the line of Jeff Klinefelter with Piper Jaffray.

Please proceed.

Yes, thank you.

I just wanted to circle back and ask Maurice and/or Paul, however you want answer it.

But just stepping back from the current business trends, looking at some of the trends or fashion cycles that you see emerging globally and how those may be playing through the U.S.

European and Asian markets.

Maurice, in the past, you've had some very interesting and helpful comments on this.

And, given that we're in sort of a discretionary recession right now, wondering what might -- what might be able to bring us out in the next six to 12 months.

I -- first of all, I must say that in terms of trend, the trends are very, very similar in Europe and in U.S.

and for the rest of the world.

We don't see different trends in Europe versus here.

And what we are seeing right now, I mentioned the last time that -- if you remember, that the -- the color denim was going to come back, and it is coming back.

And I think it's just beginning of the cycle.

I think that all the -- for women, the dress business continues to be strong, and I expect that to continue for the rest of the year at least.

And this is -- this everywhere.

And in the Marciano business -- in the contemporary business, we are seeing the suitings finally coming back and getting stronger and stronger.

It's not -- it's not very, very strong right now, but it's definitely gaining strength.

So, we are -- we are looking into that, not only looking.

We have it -- we have it on the floor, and we are giving more and more exposure to that.

And, like Paul was saying before, all the accessories, mostly the shoes and handbags, watches, of course, but mostly shoes and handbags are contributing more and more into our sales.

Okay.

That's very helpful.

Thank you.

So, in terms of your core sportswear business, the color denim today, would you say that that is incremental to your core denim business over the last year or two?

Definitely, definitely.

Okay, definitely.

Because, until now, for the past few years, as you very well know, because you know this business as much as I do, is -- everything was driven, especially for woven bottoms.

Everything was about denim, denim, denim, in all kinds of shades of denim.

And, now finally for both -- and I must say both men and women, the color denim is really picking up very strongly.

So, I'm very happy about that.

Okay.

So, you continue to see denim as a, clearly, the core fabrication over the -- in the foreseeable future.

You don't see anything happening in non-denim yet?

No, Jeff-- That's, that's -- I consider the color denim.

I consider it as a non-denim.

Jeff, if I can, this is Paul.

If I can give you just one or two numbers, is year-to-date, our total denim business in our stores across America is up almost 30%, three-zero.

That's a big number.

Yes, that's impressive.

And you're going to see a campaign breaking in magazine in five weeks, will be all about denim.

All about denim.

Okay.

So, we definitely believe that we are -- we are really believing that denim is, again, a key, key, key component for our Company.

Especially for us.

Especially for Guess Jeans Company.

Yes, that's helpful.

Thank you very much.

Thank you, Jeff.

Thank you.

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

Please proceed.

Thank you.

Just a follow-up to Jeff's comment on the -- on the European versus U.S.

merchandising, but just a slight different take on it.

Could you talk about your mix of product that's being developed and -- and designed in Europe?

I know you were aiming -- I think you were aiming for a 50/50 split across the world of U.S.

designed and developed and then European designed and developed.

Where do you stand on that, and what do you see as far as the benefits to your current business model from where you stand and the opportunities going forward?

Well, let me try to answer you that.

For example, I've just mentioned to Jeff, you are going to see in North America Magazine across the board denim campaign absolutely dominant in Guess ads.

It's exactly what we will be also as well in magazine in France, Spain, Italy, Hong Kong, everywhere.

And it's a global effort and focus that we're putting there.

And the line that you have today available in New York or Los Angeles will be right in the same showroom that we just opened in the last six months in Dusseldorf, London, Barcelona, Paris, Milan and Florence and, of course, Lugano in six months when the showroom is ready.

But there will be six showrooms -- and Hong Kong.

This six, seven showrooms will have the entire line that you have available to any wholesaler or retailer in America, will be in every single key showroom in these cities.

So, we have an absolutely complete line available of cross-over that -- what the Guess brand is about.

If you look at the watches, it will be the same.

If you look at the handbags, it will be the same and shoes will be the same, except that the fit of the shoes has a different fit in Europe, Asia and America.

So, we benefit completely of the design of America, all over Europe and all over Asia and Middle East.

Our partners and consumers are completely free to pick the best of the best.

Thank you.

Thank you.

Your next question is a follow-up from the line of Betty Chen with Wedbush Morgan Securities.

Please proceed.

Thank you.

Sounds like the eCommerce business is trending very nicely.

I was wondering if you could speak a little bit more about the business.

Any -- if you're willing to quantify how much that's generating, and whether the various concepts Web sites, like Guess.com or Marciano.com, is progressing differently?

We don't disclose the volume.

But, we can tell you, as you saw already the result for the quarter, for the quarter we were up like 52%, and we think that we -- we have a goal to reach $100 million business.

And, we have a clear target on that.

Accessories business in eCommerce is very strong, especially when things are not ready to be tried like handbags or watches, nobody try a handbag or watch.

It's not an issue of fit.

But, even footwear is extremely strong because the desire of a customer who wants Guess footwear, who doesn't have a store around goes to the Web site and we think we have a pretty good, efficient Web site today.

But, this is just barely, barely the beginning.

On the variation, if I can tell you, on the first quarter I think, in Guess was an increase of 68%.

Marciano was 53%, and G by Guess is brand new, so we cannot compare.

But, it's up to plan.

And, it's up to plan for sure.

But, the accessory plays a big role, and, again, we're going to put the big emphasis in denim choice availability in a Web site.

That's very, very helpful.

And, then another, I know you gave all the numbers, but it was a lot to jot down.

Could you just go through the current number of stores by concept and then also the openings by concept for 2008 here in North America?

For -- for the quarter or for the year coming?

For, well -- Q1 and store count by concept and then the end of the year I guess openings in 20 -- fiscal 2009.

Okay.

So, let me start with the end of the quarter.

In retail, we ended with 187 stores.

Factory was 98.

Marciano, 47.

Accessories were 21.

G by Guess was seven.

And, we also had the one footwear store, so we ended the quarter with 391.

And, Europe?

The openings --

And, hang on, let me just -- give me one second to get to the openings.

Okay, no problem, Dennis.

Thank you.

Okay, I got it.

For the openings, a total of 60 -- 11 retail, seven factory, 12 Marciano, 15 accessories, a total of 10 G and five footwear stores.

Thank you so much.

That was very helpful and have -- have a great second quarter, you guys.

The stores look --

Thank you very much.

Thank you.

Thank you.

And, your last question is a follow-up from the line of Christine Chen with Needham & Company.

Please proceed.

Just to continue the conversation on Europe versus American product overlap.

In some of your stores, you have Guess by Marciano, the European product for men's and occasionally for women's.

Is there going to be more rollout of that in the U.S.?

No.

I like the product.

This is -- this is Maurice.

The difference between the Guess by Marciano in Europe and the Marciano stores here is that you're absolutely right.

In Europe, we have -- we have both men and women the line, and, in U.S., we wanted that line, the Marciano line to be strictly women and completely just retail.

We don't -- we don't have it in wholesale and the line, as you know, in both countries, okay, in both continent, I should say, the line is -- will be -- it's more -- it's dressier, more sophisticated than the Guess line.

It's not a Jeanswear line.

We are a little bit of denim in it, but it's really an accent to the line.

And, but, the product is extremely, is extremely similar.

It's addressing the same woman, the 25 to 35-year-old woman.

And, same thing for the men.

But, Christine, you're right, we did bring some product, men's product.

I think at so far those have been kind of like a different, isolated projects.

There isn't a plan to bring a lot of men's product for that.

Yes, but when we bring the men's product, it's only within the Guess stores because the Marciano stores carry only woman.

So, when we bring it, it's in some of the Guess stores here in America.

Okay, great.

Thank you.

I was going to add something to tell you.

We have a complex business Okay.

Okay, thank you, everybody.

Thank you for all your interest and enthusiasm in the questions.

We are very happy and continue to just be careful, again But, we will talk to you in September for the results of the second quarter.

Thank you, again, and have a good evening.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the presentation.

You may now all disconnect.

Enjoy your day.