Guess? Inc (GES) 2009 Q3 法說會逐字稿

Good day, and welcome to Guess third 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 third quarter of fiscal year 2009.

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

I'm pleased to report another quarter of solid financial performance in a very challenging environment.

We grew our revenue by 13% and our earnings by 10% during the period.

We managed the business with strong discipline controlling inventories well, adjusting our expense structure to adapt swiftly to this unprecedented market condition.

For Q3 of fiscal 2009 our consolidated revenue would reach $528 million, a record third quarter for our company.

Our earnings grew 10% representing our 21st consecutive quarter of earning growth and we increase our EPS by 11% to $0.69 comparing to $0.62 a year ago.

Each of the business segments increased revenues during the quarter.

In our retail segment, retail increased revenue by 12% per square with comp store sales down 0.8%.

The profitability of the North American retail business was negatively affected by decline in customer traffic and highly promotional environment.

We begin the quarter with positive comp growth in August, then constant in September but still remain positive.

The slowing trend continuing in October when we saw comp dropped to negative single digits.

All of this culminated in a third quarter comp of 0.8% negative.

This performance was against a positive of 15.8% comp in the third quarter a year ago.

Regarding store opening during the quarter we opened 15 new stores in North America across all concepts.

We plan to open seven additional store during the fourth quarter for a total of 57 new stores in the US and Canada for this year.

About eCommerce we made this business a top priority with key investment in strong management team and several systems upgrades.

In the third quarter we achieve another strong gross increase of revenue of nearly 30%.

This compares to the second quarter where we increased revenue by almost 60%.

We see the eCommerce business as a vital part of a global (inaudible).

The website give our customers a window to the world of guess brand and their lifestyle.

We know today that the customer performed significant research online before reaching our stores and so how we represent our brand and our side is key to our marketing strategy as a company.

For Europe, overall we were pleased with our results in Europe of again we are backdrop of tumbling economy in UK and Spain.

Our business increased revenues by 17% in the third quarter reaching $186 million for that period.

Our apparel business was the strongest as wholesale revenue increased by more than 50% comparing to the year before.

We opened a total of 34 stores direct or we were partners and ended the quarter with 54 owned stores.

In wholesale segment which includes North America wholesale and Asia operation, we increase our revenue by 2% in the quarter with performance in Asian business more than offset the small decline in our North American wholesale business.

During the quarter we opened eight new stores in China and Korea bringing our free standing stores count in this market to 71 stores.

We plan to open another eight stores in the first quarter supporting a long term strategy to penetrate China and continue to build the brand in Korea.

Our Korean stores fostered positive double-digit comp in the quarter but because of the strengths of the dollar relative to the Korean won is a negative door count.

In the licensing business of our product were once again very strong due to our watch, jewelry, handbag and footwear businesses.

The licensing business grew nearly 25% for the quarter as demand for brand on the global basis continued to be strong.

With that all in we downturn is for what we know the best which is denim.

Denim is our DNA of the company.

So far this year it has represented about 30% of our North American apparel business comparing to 27% during the same period last year.

We believe our product assortment and price point are perfectly positioned for our customers in that category both domestically and international markets especially in a fashion denim.

Last week in a trip to Asia and three weeks ago in Europe, I personally observed a real slowdown in premium denim priced above $180.

I strongly believe that the world of denim has changed dramatically during the last few months.

I think reality is knocking on the door.

The right price for nonpremium denim is between $80 and $120 for brand name and for premium between $120 and $165 and this is exactly where Guess is at.

As for our strategy going forward, we adjusted the CapEx significantly for next year from initial plan and redirected the use of some of our capital for the best return on our expenditure.

We are also addressing our SG&A very aggressively to be in sync with this massive slowdown in the US market.

We believe our growth strategy is the right one now more than ever which is to expand our weaker presentation of a global scale, to develop new markets in Europe where we are underdeveloped like Russia, Germany, UK north of Europe, to grow business in Asia, to extend the online business to Europe and Asia as well, and capitalize on the brand recognition that Guess has developed over the past 27 years.

I would conclude the call after the financial report.

Thank you, Dennis.

Thank you, Paul, and good afternoon.

Total third quarter net revenues increased 13% to $528 million.

Our European and retail segment contributed similarly to the overall growth of our business each delivering more than 40% of the revenue increase.

Our licensing segment contributed about 9% of the growth with a balance coming from our wholesale segment.

Our gross profit increased $23 million to $242 million for the third quarter.

Our gross margin for the quarter was 45.8% versus 46.6% for the same quarter a year ago.

Gross margin in our European business expanded during the quarter most notably from our apparel business.

This improvement was more than offset by lower product margins in our North American business and higher occupancy expenses.

In the quarter our SG&A expenses increased $20 million to $142 million.

The SG&A rate was 27% versus 26.2% in the third quarter a year ago.

The impact of the decisional investments we are making in Europe was the largest contributor to the rate increase as we continue to build out our European headquarters and develop the new businesses we acquired there over the past few years.

We leveraged our expenses in North America including our corporate overhead where expense levels were below the prior year quarter.

For the quarter we increased operating profit by 4% to $99 million including a $1.5 million currency translation benefit.

Our operating margin declined 160 basis points to 18.8%.

During the period the volatility in currencies and in the equity markets had an impact on our nonoperating earnings.

We reported other net expense of $3.7 million in the current quarter.

This includes charges to mark our benefit plan investments to market.

It also includes significant gains from marking to market our hedge contracts which were nearly offset by charges due to the revaluation of our foreign businesses, US dollar denominated balance sheet accounts.

Our effective tax rates for the third quarter was 33.1% compared to 38.8% in the prior year quarter.

During the quarter we reduced the estimate of our full year tax rate to 34.9% which is the same rate we are using to plan the fourth quarter.

The improvement over last year's rates reflects a shift of profitability into lower tax jurisdiction.

In the quarter we increased net income by 10% to a record of $64 million and increased diluted earnings per share by 11% to $0.69, which is also a record for the third quarter.

Now I'd like to quickly review our revenues and earnings by business segment.

In North American retail including the 15 new stores we opened in the third quarter our average square footage increased by 14% over last year.

Retail revenues increased by 12% to $235 million during the quarter.

Our operating profit decreased by $4 million to $27 million operating margin declined 330 basis points to 11.6%.

We responded to the competitive environment with the greater degree of promotions mainly in our Guess and Marciano stores which impacted our gross margin performance for the quarter.

This and increased SG&A spending contributed to the operating margin decline.

Our SG&A rate and the retail segment increased by 40 basis points to 24.3% primarily due to the negative comps.

And our wholesale segment which includes our Asia operations, revenues increased 2% to $79 million.

This revenue growth was driven entirely by our Asia business with the most significant growth coming from our China operation.

Wholesale segment operating profit declined $4 million and operating margin decreased 480 basis points to 17.6% in the third quarter.

This decline was driven by lower North American product margins and a business mix shift towards Asia which generates lower operating margins than North America.

Revenue for the Europe segment increased 17% to $186 million.

Paul says the majority of the growth came from our Guess wholesale apparel business.

Our retail business where we added almost 65% to our owned retail store portfolio compared to a year ago was a strong contributor as well along with our kid's business which operated as a licensed business a year ago.

Also as we planned, we shipped product early in the second quarter this year in our accessories and Guess by Marciano businesses which impacted third quarter shipments were relative to the prior quarter.

European operating earnings increased 8% in the period to $50 million.

Operating margin for Europe declined by 220 basis points to 26.6%.

Our SG&A rate increased due to higher expenses for planned infrastructure spending, investments in new businesses and in retail expansion, and was also affected by the revenue shift I just mentioned.

A higher spending rate more than offset the improvement in our gross margin.

Licensing revenue increased 25% to $28 million and operating margin in the third quarter in this segment reached 86.2%.

Now turning our attention to the balance sheet, we ended the quarter with $237 million in cash up $45 million from last year's $192 million.

Short term borrowings primarily to support our European working capital requirements were $44 million versus $41 million a year ago.

Accounts receivable increased by $3 million to $300 million compared to the prior year which is a 1% increase.

In constant dollars, receivables increased 13%.

Receivables grew primarily in our European business and also in our licensing business supporting the higher revenues in both of those segments.

Receivables in all other segment were down compared to a year ago.

Overall the company's DSOs were flat compared to last third quarter in constant dollars.

We were pleased with how we managed inventories this quarter in light of the market conditions.

We ended the quarter with inventory levels at $253 million, an increase of $30 million or 14% from last year's third quarter.

We are planning cautiously and prudently investing in categories and styles that are resonating with our customers.

In the quarter we invested $17 million in capital expenditures net of tenant allowances primarily to support our own retail expansion including 15 new North American stores and 13 international stores.

For the full year we now expect capital expenditures to reach $102 million net of tenant allowances.

Finally our Board of Directors has approved a quarterly cash dividend of $0.10 per share.

This quarter's dividend will be payable on January 2nd, 2009, to shareholders of record at the close of business on December 17th, 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 fourth quarter on the fiscal year.

First let me address the impact of foreign currency in our business.

Changes in currencies affect our income statement in three ways.

The first impact is translation.

This is the effect of converting foreign currency earnings into US dollars at the prevailing exchange rate.

When exchange rates differ from the comparative period, there is an impact in the US dollar income statement.

For the first three quarters this year the EPS impact was $0.09 favorable because the Euro and the Canadian dollar were stronger in that period.

This is no longer the case.

If the US dollar stays flat to where it is now, we would expect that gain to fully reverse in the fourth quarter and this expectation has been incorporated into our guidance.

The second impact relates to our gross margin due to inventory purchases.

Since we source product in US dollars and sell in local currencies, exchange rates impact our margin.

A stronger US dollar increases local currency protocols for our foreign businesses.

While we believe that we benefited from the strong Euro and the Canadian dollar this year, it would be very difficult to quantify the impact for two key reasons.

First we hedge purchases which affects the timing and the accounting of the transactions, and second, we make pricing decisions based on the prevailing currency exchange rate for each season.

Lastly, there is an impact in nonoperating earnings as we mark-to-market our hedge contracts and balance sheet accounts that are US dollar denominated in our foreign businesses.

For the first nine months of this year the EPS impact of this nonoperating items was favorable by $0.01.

If the US dollar remains at current levels, it should result in no significant fourth quarter impact.

Next I will address our North American retail business.

During November we continued to experience lower customer traffic and operated in a highly promotional environment which impacted our gross margin considerably.

We closed November with a comp store sales decline in the mid-single digits range or negative low single digits in constant dollars against a positive 17.2% comp in November a year ago.

If prevailing conditions in this marketplace limit our visibility into the holiday season business, based just on the current trends we are lowering our revenue outlook and reducing our operating margin assumptions.

Our current expectations also assume that the US dollar remains strong for the balance of this year.

Consistent with the November trends we are planning our fourth quarter business assuming a negative comp in the mid to high single digits range.

This follows a 13.1% comp store growth last fourth quarter.

This should result in a mid single digit growth in revenues for the fourth quarter.

For the full year those expectations would result in a flat comps and a full year revenue growth of about 13%.

Overall we are now planning this business with a full year operating margin of about 11%.

In our European business we continue to expect fourth quarter revenues to grow over 20% in Euros.

However, due to the strength of the US dollar we expect this to translate into low single digit growth in US dollars.

This should result in a full year revenue increase of around 30%.

We continue to plan this business with a full year operating margin of about 23%.

Our expectation in the wholesale segment is for fourth quarter revenue growth in the high single digit range.

Similarly to the third quarter trends, we expect our Asian business to contribute all of the growth.

For the full year we now expect wholesale segment revenues to increase in the midteens range and expect operating margin to reach about 16.5% for this segment.

In licensing we expect revenues to decline in the high single digits range in the fourth quarter.

This should result in a revenue increase in the low teens for the full fiscal year.

We continue to expect this business to yield the full year operating margin of about 86%.

Now combining all this businesses we expect total company revenues for the fourth quarter to reach between $500 million and $540 million.

We're ending with an operating margin of around 14% for the quarter and fourth quarter diluted EPS are expected to reach between $0.50 and $0.55 per share.

For the full year on a consolidated basis we now expect total company revenues to reach between $2.03 billion and $2.07 billion.

We now expect operating margin to be around 16% and expect our full year EPS to be between $2.27 and $2.32 per share.

Our outlook assumes no further stock repurchases.

Now regarding next year's guidance, given the importance of the holiday season on our business and the current market conditions, during the next few weeks we expect to gain visibility critical to plan the next fiscal year effectively.

Accordingly we plan to provide next year's guidance to run current with our fourth quarter earnings that we plan to release next March.

In the meantime we want to share with you some important information impacting our business next year.

Regarding store expansion we currently have 17 deals that are committed in North America and three in Europe.

We plan to carefully evaluate any future store opportunities for next year by currently estimate that our store growth will be significantly slower than this year.

Consistent with this we estimate that capital expenditures will be below this year's levels as well.

With respect to capital deployment we'll protect our cash flow generation power and carefully deploy capital based on return opportunities.

We'll remain committed to maintaining a strong capital structure with little or no debt.

Regarding our wholesale business growth, our spring/summer backlog in Europe represents a 15% increase in Euros versus last year.

Translated into US dollars at turn rate, this represents a decrease of 1%.

Our backlog for the US wholesale business for the same period represents a 13% decrease versus last year as overall demand has declined and we are relying more on a larger immediate business.

With respect to inventory our spring purchases are aligned with our wholesale order backlog for both North American and Europe and assume a negative comp for the first quarter for our retail businesses.

Regarding our cost structure, we have already reduced our corporate headcount in North America by about 10% and plan to manage our business next year with no corporate headcount growth.

We are currently looking at all aspects of our business to reduce costs in North America and abroad including opportunities in supply chain to both reduce cost and improve speed.

Our goal is to focus our cost reductions in areas that will not impact customer service and revenue generating activity.

I believe that our diversified global business model will prove resilient through this challenging time and will position our company to emerge even stronger once conditions stabilize.

We have assembled a talented management team that executes well and is completely dedicated to building shareholder value and to developing and reaching the full potential of the Guess brand.

When the financial and market conditions ultimately improve, and they certainly will, we are convinced that companies like ours with great global brands, competitive product, strong management, solid cash flow generation and a very strong capital structure will be among the winners.

Over the years we have navigated through prosperous times and challenging times as well.

In every case our company emerged stronger when we were tested.

We believe that this cycle will be no exception.

I now turn the call back to Paul to close.

Thank you, Carlos.

Great news.

There is no doubt that we're facing tremendous uncertainty and volatility.

To reinforce what Carlos said, as a company we are very aware of the surroundings.

We will adapt to be more aggressive or cautious when and where need to be.

Over the long term what may change, however, is the timing of our execution.

Discipline will drive up planning in this current economic condition that will proceed for the next 12 to 18 months in our opinion.

We will continue more than ever to make common sense decisions on a day to day basis and that is our strategy.

We thank you for your attention today, and we now will open the call for the questions.

Operator?

I think we're ready to on the lines up for your questions.

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

If time permits, we'll be happy to take follow-up questions.

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

Please proceed.

Yes.

Thank you.

Congratulations, everyone, on another great quarter.

Also thank you for the detail today as a very helpful with respect to the guidance that you could provide.

Carlos or Dennis, I wanted to start off with just one question on hedging and clarify something.

So just to be clear, the year-to-date translation of revenue and operating expenses back from Europe and Asia resulted in $0.09 gain.

You expect that full $0.09 gain to reverse in Q4.

Is that correct?

That's correct.

Okay.

So on a run rate basis assuming the dollar stays at the current value, how should we look at that as we head into next year, similar sort of rate year over year so that $0.09 drag would continue through the first few quarters of next year?

Well, I mean if you look at where we are right now, the Euro and the Canadian dollar, if they stay flat to where they are now, for the first three quarters of the year we're going to be anniversarying a much stronger Euro and a much stronger Canadian dollar.

So that's not going to turn until the fourth quarter.

No.

I understand that.

So does that mean how can we sort of think about quantifying at current exchange rates the drag, the nonoperating drag of that translation through the first three quarters, that same $0.09 level?

Well, I think the way I would look at it is if you do the math on how the currencies have behaved this year, on average for this year the Euro was probably in the low 1.40 kind of range and in Canada probably in the $1.10 kind of range.

So to the extent that the dollar would hold flat for next year, then that gap would represent the change in the earnings plus or minus any growth or decline that you would want to model in.

Okay.

In terms of the balance of your FX impact, just to be clear, that the hedging that you do on your gross margins resulted -- as a result of that hedging and on your balance sheet adjustments there was only a $0.01 gain through first nine months of this year?

That was correct, but keep in mind that we had significant hedge contracts in place that generated a pretty substantial gain in the third quarter --

Right.

-- which was partially offset by all the other US dollar denominated accounts that were in our foreign businesses that had to be mark-to-market as well.

Okay.

And, Jeff, if I can add something because I think the answer was not clear to me as well about the effects, if you take the same calculation on where we were the first three quarters of this year and you take where we are right now and you translated that to next three quarters assuming we're staying where we are right now, so you take that exactly reverse I think that could translate in $0.09 or more of negative for the next three quarters.

It all depends the currency which nobody knows where we're going.

Right.

So we want to take a very conservative approach and be as transparent as possible on that.

Yes.

No.

It's very helpful.

I just want to make sure that distinction is made because your hedging and your gross margin rates I think is different and creates more stability than other companies.

Absolutely.

You sort of neutralize the effect on gross margins more or less.

It's not really gross margin.

What we're hedging -- this is Maurice.

What we are hedging is not -- I mean you can call it if you want you can call it gross margin, but it's really the cost of our goods is, as we are buying the goods, then in order to protect the cost of goods, then we are hedging accordingly to our needs for the (inaudible) that we're going to need in six months, nine months from now so, that's what we're doing, you get it?

No.

I understand.

Thank you.

That's helpful.

One other question is on Europe.

You said, Carlos, I think you mentioned bookings were up on a constant dollar basis about 15%.

Is that correct or on a Euro basis?

Yes, that, yes, that is correct, yes.

As we stood here last year at that time can you remind us what the bookings were at that time on a constant store basis in Europe?

I really don't remember, Jeff.

We'll search for the number.

If I'm not mistaken, it was around like 25%, something like that.

That's a pure guess, but I think it's close to that.

Okay.

So the way to look at the deterioration in Europe would be that sort of a direction.

You're still comping or you're still up in terms of orders.

Oh, yes.

It's just moderating somewhat.

Yes.

And one last clarification, Dennis, I think you've said before, too you do some insuring against your receivables because I know your receivables is one big area that some people worry about on the balance sheet.

You extend credit on longer terms to your European independents.

Can you just clarify again how much of that is insured?

You're right.

We do insure in Europe and in North America as well and just operating off memory I think it's roughly about half of our European receivables are subject to insurance.

Okay.

But otherwise you've seen no material deterioration in your European receivables?

As we said, our DSOs were very consistent and the Asian profile is very consistent where we were a year ago.

Great.

All right.

Thank you, everyone.

Good luck.

Jeff, coming back to the -- I don't have the exact numbers on the back log, but just to give you an idea our revenues in Euros for the first and second quarters this year were up 30% and 40% respectively.

So that gives you an idea of where we were looking which is pretty much -- that includes the new businesses.

So I think that's pretty much in line with what Paul was suggesting, the 25% number.

Right.

That would have been higher than what your original bookings were, right?

The original bookings would have been lower than your ultimate revenue?

Exactly.

Thank you, Jeff.

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

Please proceed.

Thank you.

Congratulations on another good quarter.

Thank you.

Thank you, Christine.

Wanted to ask certainly in this environment that's a little bit more promotional you've had to dial that up a little bit, but what seems to be happening at least to me is it seems to be more targeted and linked to your customer loyalty program.

Is that something that you had been planning all along?

Is it in response to the promotional environment?

Can you just talk a little bit about the strategy behind that.

Yes.

A good part of what we are doing has been planned all along.

The results are part that has called for because the environment is much more promotional and it has called for more aggressive action in terms of both pricing and also some additional events or items in the promotion.

So overall I think you are absolutely correct.

We are trying to be much more targeted in both the type of product that we are promoting and also the type of events that we are using to promote.

And then can you just share with us a little bit about what categories are performing well for you and your comfort with inventory levels at the US retail side.

Yes.

We had a lot of categories that really performed well during the quarter and the whole YC area, we had Ts, knit tops, denim did very well, sweaters, even denim skirts and some of the new denim items did very well and we -- and Marciano woven tops performed as well, sweaters, skirts and pants.

We are with respect to your question about inventory levels, we are very pleased with where we are going.

We have a good plan to end the year where we want to be.

Of course this has required some additional levels of promotion as we said before because the plan that we had was higher than what we are experiencing and what we see for the fourth quarter.

So obviously it's important that we make the turn with the right inventory levels.

With respect to accessories where we have invested a lot of our inventory dollars, there are a lot of categories that did very well.

As Paul mentioned before, eyewear, watches, handbags, jewelry, footwear, all those are categories that really did very well during the quarter.

We believe that we have done the right things, also, to slow the purchasing.

We have canceled quite a bit of goods coming in and we feel very good about the first quarter because we are able to catch it in time.

With the improvements we have made in our supply chain, we have been able to really buy later and we have left a lot of open to really fill with immediates which we think is the right approach for this type of economy and market conditions.

And then last question, with respect to sourcing costs, are you seeing that come down a little bit going into '09?

We see a lot of opportunity.

We have people in Asia right now and there's a rumor that there's going to be about 50,000 factories that are going to be closing by Chinese New Year.

So obviously there's a lot of capacity, extra capacity, with the slowing in demand.

We are looking at ways to reduce costs.

Also you have an imbalance with some of the Latin American currencies which we feel should help us, too, against a stronger US dollar.

So we are looking for many ways to reduce sourcing costs and also we are looking for ways to really stretch the time where we make purchasing decisions.

The price of cotton is also down from $0.80 to about $0.50.

So we see opportunities and we are hoping that especially as we go into buying the second half of the year that we'll see a pretty significant reduction in cost.

Great.

Thank you and good luck.

Thank you.

Thank you, Christine.

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

Please proceed.

Good evening.

Congratulations.

Hi.

Thank you, Eric.

Could you tell me -- I want to ask a little more about the denim.

I know you were trying to increase the penetration and raise the average price points.

When you look back how did that work in terms of the premium denim and some of the driving higher price points for that?

This is Paul, hi.

Definitely we did if you look back two years, three years, four years ago where our average price was and where we are right now, definitely you can see that the average is at the Guess store level between $98 and $128 I would say and then on the premium we are up to $120 to $165, some of them are very few at $185, $198, but we have just one.

But definitely the right price is $150 for the premium average and $98 average for the nonpremium and this is where we are.

And we see definitely the consumers looking at the tag constantly now on when we buy apparel jeans, what price it is and what value they perceive on that pair of denim.

If it is a five pocket and we look at something above $120, they don't even touch it, and if it's a special treatment being embellished, being with rhinestones or embroideries or graphic or things like that, there is this special value that justifies them to spend a bit more.

So -- and if you're familiar with the company, we've been doing that for a long time and we believe that this is our time again to continue to capture more market share whether premium made in USA will have some challenges we believe.

Okay.

And could you talk a little bit about some of the secondary concepts about G by Guess, the shoes and other and the Guess accessory chains, what are you looking at in terms of expansion plans for those going forward?

Going forward if you look at G by Guess, definitely the company now, that division is open and functioning for a year and a half, and as of last quarter, Q3, has been very good for us on -- I think Carlos has the numbers, but definitely we improve on G by Guess stronger and stronger.

Yes.

G by Guess for the quarter posted a positive comp in low single digits, but what's even more encouraging is that going into November which was a very challenging month overall we had a double-digit comp growth for that division and we are very excited.

Obviously we did see some impact on the promotional business as well.

So margins were slightly down, but much better than the rest of our family.

One big issue here is that we too have a much better inventory position than we did a year ago where we were understocked for G by Guess.

So we feel good about the division.

As we said before, we will not talk about growth plans for the coming year until we have an opportunity to really address the whole holiday season.

So we'll have to wait a little bit for the retail store expansion.

Okay.

Again congratulations on a great quarter.

Thank you.

Thank you.

Your next question comes from the line of Todd Slater with Lazard Capital.

Please proceed.

Thanks, everybody, and good job managing through some of this stuff.

Thank you, Todd.

Thank you, Todd.

I was wondering in terms of the fourth quarter guidance for a 14% operating margin, do I have that right?

Yes.

It's down about -- I don't know -- almost 500 basis points or so from LY.

How much of that year's year's change do you estimate is coming from lower sales higher markdowns, in other words, from the operating environment, how much from FX and other nonoperating issues?

Yes.

You are right.

A big part of the change is related to our retail business in North America and that has two pieces.

One, the deceleration in the demand.

We are looking at a comp in the mid to high single digit negatives for the fourth quarter.

So obviously that's having a pretty significant weight in both margin overall and also in our ability to leverage both occupancy costs and SG&A.

In addition to that -- and that is a pretty significant part of the decline.

Also we see a force here with the promotion environment that is going to push us to continue to promote more aggressively again both in pricing and number of events throughout the fourth quarter to be able to make that turn with the desired level of inventories and quality of inventory.

So those two pieces are -- represent a pretty significant part of the shortfall maybe in the 400 or maybe 450 basis point change.

This is for the total company.

Yes.

Carlos, if I can add on that, if you look at backups, any comp numbers that you go at a company, you look back five and a half years straight positive comp.

This is our first negative comp in five and a half years and it arrived so quickly, so fast that we wanted to take a conservative approach about what is ahead of us, because we don't see a lot of great news coming in the newspapers, on TV and the Internet anywhere.

Right.

So we want to be conservative to say, if that turn out so fast so quick, we want to take a conservative approach and not thinking, oh, just let's think positive, things will get better.

No, we don't.

We believe that this is a massive, massive slowdown like we have never seen in our career and we act thinking that this is where we're going on that direction and getting worse possibly.

If it's better, we're ready, but we prefer to be prepared for the worst and that's why the reason we give some conservative approach on that.

Right.

So how fast, in that vein, how fast can you ratchet the inventories down to where you feel more comfortable and also you said you're going to keep headcount, you caught headcount but you've obviously got a lot of work you can do on the expense line especially internationally?

Yes, yes, yes.

No, no.

Actually the good thing about this whole thing is that we were able to really jump on it pretty quickly and we feel that we're going to close the year with the right inventory levels.

As I mentioned during my prepared comments, we have bought spring in line with our backlog, current backlog for both the North American business and also Europe, and also we are assuming a level of same store sales decline for the first quarter we think is appropriate based on what we are seeing.

So once we make the turn, we feel that we are going to be pretty much where we want to be in terms of inventories.

So we don't think -- everything that you're seeing in term of the cost to really be able to normalize our inventory situation is already embedded into our guidance for the fourth quarter.

Okay.

Just a quick international follow-up.

If you could talk a little bit about the international business in terms of big buckets, little buckets, where you're coming out this year.

Where does it look like the numbers next year will most likely have to decline where you have a much more mature larger base, and where does it look like you'll still see some significant or any revenue growth opportunities?

Well, I think again what I was saying in opening remarks was what do we control?

We control our retail operation, and our retail operation in Europe is barely starting the last two and a half year, or three years.

We don't have that many stores.

The stores we own is only 54 stores.

You look at 10 countries and we have plenty of opportunities to open in key cities in Europe, even like Germany where we don't even start one store, but they are also in a beginning of a recession there, but also you have to look at that this is a time that maybe we can lock in some very great real estate at a very low price.

We saw a [disarration] of land in the UK in the last 60 days like I've never seen before.

That land would come and drop prices 5%, 10%, 15%, 20% because we just don't want to keep an empty space, and we don't rush to make that decision because we think the correction is still going on and we don't want to lock in on the long-term leases unless we are sure and certain that we are in for a gross period.

So right now Italy has been very strong for us.

France has been very strong for us.

Spain has been slowing down, but what we perform well is where we are partners, where we don't control the real estate, which is like Hungary, Romania or Ukraine, Russia, Turkey.

We have been doing very good there and we don't have any exposure of CapEx there, and Middle East besides Dubai who stopped to shore some slowdown, the whole Middle East has not been affected yet.

So we are in touch basically on a weekly basis and we have a clear picture for our booking for next year with them and we have much more opportunities right now and you ask where we see that.

All the cards are not out yet about what is going to unravel in the next 60 days, 90 days, on the news that we watch every day including today.

Can you paint the same kind of little picture for us in Asia where you have the opportunities where you are now?

I just came back last week from -- I was in South Korea and [Makau], Hong Kong and you see some slowdown in Hong Kong on the malls, but Korea we are performing very, very well, one of the number two brand in the country and we see an opportunity to continue to grow there.

We are starting directly operation for Taiwan.

It was a licensee like in Korea.

We will start directly as January 1st and we are planting again the seeds for future growth on this region.

Japan we keep delaying because we keep not having any visibility of Japan which is one of the toughest countries to develop.

If you want to talk about Indonesia, Malaysia and Singapore, believe it or not the one will be more sectored than the others has been Singapore more than Indonesia, Malaysia, because again you deal with a major financial center which Indonesia and Malaysia don't have.

And it's the same as London or New York or you see that all these financial institutions have been laying off left and right everywhere and that affects the buying power of the such a tiny country like Singapore.

So this is what we're seeing right now, and, of course, needless to tell you that we weathering very, very well in India until last week, and last week it came to an out for five, six days and we are waiting to see when it's going to pick up, but we have like 28 stores in India and we are waiting to have more news about if the consumers going to go back in the mall and shop.

We will know that in the next week.

What are you seeing in China?

China we see a slowdown of the consumer because you can see that right after the Olympics there was a contraction, a contraction of consumer and export and the whole economy there.

So that again because we just started we have so much room and territory to cover, we will not reach the door we are planning, to but we want to take position at the cheap cost of capital expenditure there with partners and directly in certain cities that we get the best position in the best mall for the time being and hold.

But definitely the numbers are a little bit different than we were at the beginning of the year with the anticipation of the Olympics.

Well, all the best.

Yes.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Betty Chen with Wedbush Morgan.

Please proceed.

Thank you.

Good afternoon, everyone, and congratulations.

Thank you, Betty.

Thank you.

To follow up on that earlier question, in regards to the Asian business, and at least, I guess, we're really referring to China, South Korea and possibly Japan down the road, do we still believe that it could be a midteens operating margin target longer term?

And is it possible to put a timing around that?

And then possibly even just looking at the revenue opportunity for that region, I think at one point we were talking about a near term market opportunity and a longer term opportunity.

Could you just remind us of those opportunities?

That would be very helpful.

Yes.

Let me start with the operating margin, Betty.

We did have operating margin expectations of double digits and ultimately in the teens and we haven't changed that from where we are, and really I have to say that we have been controlling expenses very effectively there and our operating margins have been slightly better than what we had originally anticipated when we entered especially China.

So the overall market has done very well especially with Korea at the front of that territory.

So I don't think that we are changing our expectations for now.

In terms of the size of the business I think it's such a massive territory I think that we need more time to really understand how big and how fast we can be there.

And second, Betty, on that is for example, you see the nine currencies specifically Korea and Japan and within three months the Korean won lost basically 50% -- against the [door] and that is huge.

Against the yen in four months it was 100%.

It was 800 Korean won and became 1,600 as of weeks ago.

That creates a lot of turmoil in importing goods in Korea, being watches, being handbag, being anything.

So we are dealing with that and we trying to plan a business properly because we operate that directly there, but still with that we continue to perform better than anybody in department stores there except one brand.

Okay.

That's very helpful.

And then also in regard to Europe, I believe that we had discussed going into maybe places like Germany, UK was also a wholesale distribution model and last time you had talked about the House of [Fraser] account.

Could you give us an update on the effort how is distribution working with House of Fraser and maybe some of the efforts in Germany in addition to I know you mentioned earlier the retail expansion for company-owned stores.

Yes.

For example, if you are with the House of Fraser is owned by big group, a group from Iceland.

I'm sure you've read and heard about and the same company who owns also a chain of jewelry watches across UK and we are starting a program to open 35 accessory stores with them.

They open already three in the last four weeks and have been performing well comparing to what we are seeing in the market.

The question we have right now is to know what I just mentioned to Todd before is we have a lot of proposal on the table by a lot of shopping haves, by a lot of landlords on the streets, but because of what's happening in UK every single day on the rates changing and economy, we want to make sure we're not going to rush to sign some deals that we will be sorry a year from now to say why did we sign such leases.

So we are waiting to grab the right opportunity.

As far as performance about the products, specifically accessories in House of Fraser and handbags, footwear, jewelry are doing very, very well in UK, very well and we're very happy, but I don't have the numbers to give you right now, but I know for a fact they're doing very well there.

Maybe Carlos has the numbers.

Well, just we have been very pleased with some of the improvement and progress that we are making in some of these countries.

I talked a little bit about the backlog growth that we saw for the first quarter spring/summer in the case of Europe, and many of the territories that we had targeted are showing a much better growth rate that we are seeing in the more mature territories.

So just to give you some examples, [England] the order backlog is up 21% for the period.

France is up 23%.

Germany is up 23%.

The whole Spain area that Paul mentioned which is slowing down a little bit is negative in the low single digits range.

Italy which is one of the most mature markets for us is up 19%.

This is the total backlog that includes all the different categories denim, handbags, footwear, Guess by Marciano and now kid's.

So we feel that like Paul said before we are going through with our strategy, maybe what this may do is change a little bit the timing of the execution, but we're sticking to the road map that we had set before.

Thank you, Carlos.

Those numbers are really helpful.

I was also wondering if you can talk a little bit about the domestic business here in North America retail.

I know early in the year we had experienced pretty strong trends, especially in the cities with higher tourism traffic.

Could you talk a little bit about any updates in the third quarter?

What have you seen that may have changed?

And also are you seeing any regional differences just in northwest, Pacific northwest or in the New York region?

Yes.

Obviously the third quarter still had some benefit from that tourism that you are referring to for two reasons.

One was the summer, part of the summer, and the second thing was that the Euro was still pretty strong relative to the US dollar for a good part of that period.

Now when things change dramatically and the summer was over, things changed for this business as well.

So we are not seeing that impact in our business currently.

Now with that being said, we see some regional differences are up pretty significant right now.

The west coast is underperforming in a pretty significant way.

That happened for the third quarter and it continued in -- during the month of November.

The southeast did very well above average comps for the period.

The northeast also had a very, very good third quarter.

The southwest was also weak with Arizona being the main driver of that weakness.

The mid-Atlantic was also weak, and Canada was very strong relatively speaking in local currency, but then when we converted into US dollars, it became negative and that has been a pretty significant drag for our comps.

If you look at in the third quarter was not that big, but if you just looked at the month of October alone, that it represented four point swing just because of the Canadian exchange rate relative to the US dollar.

That four point swing was also true in the month of November.

So big differences between the different regions where we do business.

Okay.

And then last question, if I could, Carlos.

Certainly a lot of retailers had talked about the fiscal month of November and somewhat impacted because of the calendar shift and losing almost a week's worth of business, and I know you mentioned earlier your November trends.

And do we feel that perhaps we can recoup some of that business lost during November in the month of December?

And will you be maybe tweaking your promotions or events to try to capture some of that?

For sure we're going to plan -- we have planned the rest of the holiday season with the intelligence over the calendar, for sure.

Now with respect to that extra four days or three days hopefully we'll get some of that benefit.

Frankly in the guidance that we provided today we did not assume any significant benefits from that.

So like we said, we plan and we expect the fourth quarter to behave pretty much in line with what we saw in November and that was a decline in comps and a more promotional environment, and that's the way we have extrapolated those numbers into the rest of the fourth quarter.

Okay.

Thank you so much, and best of luck for the holidays.

Thank you, Betty.

Thank you.

And your last question comes from the line of Chi Lee with Morgan Stanley.

Please proceed.

Hi.

Good evening, guys.

Congratulations.

Thank you.

Thank you.

Could you just extend the discussion you were talking about in terms of real estate costs in Europe?

What are you seeing domestically as you look to lease renewals next year?

Well, what we are looking at right now is definitely a contraction on many, many areas that if we were simply looking at certain properties and new malls, we are taking a stand by attitude right now.

If we are committed, then, of course, we're going to go forward, but definitely with the traffic slowing down at the pace we have been seeing the last eight weeks, we need to have more visibility, more understanding of the consumer behavior, which, of course, no one controls, and see where is the opportunity to invest and spend on CapEx rather than to do that.

Maybe we are better to be off in cities like in New York or in France and open more stores in Milan, where we know that we are performing consistently every single month, month after month after month.

So we need to reduce our occupancy costs compared to where the rent went the last five years and see that on a dramatic way.

We're not looking to see if we can get 5% or 6% change of cost of France.

We look at the same pace that things are changing and it's big.

If we don't see a big change of rent and occupancy, we wouldn't commit.

As simple as that.

Okay.

But in terms of the existing locations and the renewals that are coming up, have you seen any greater willingness to --

Definitely, yes.

Okay.

Great.

And then did you actually quantify what the dollar benefit would be on an annualized basis of that 10% headcount reduction?

Yes.

That was -- there are two pieces to that.

In the 10% reduction, we are talking about $7 million or -- but then we also said that we would hold that headcount growth or we are planning the business with no headcount growth at the corporate level.

When you put it all together, that represents about $20 million.

$20 million annualized.

Fully loaded with everything, and this is relative to where we were planning the business initially for the next fiscal year.

Got it.

Okay.

Thank you very much.

Thank you.

Thank you.

And at that time there are no further questions in the queue.

Thank you.

Thank you very much and we will talk again in March, and now we're waiting to see how we're going to close the year, and we want to reinforce again that we will be vigilant and aware about how the last four weeks of this year and the next weeks of -- the next months of the fiscal year will end.

So thank you very much, and we'll talk to you next year, and happy holidays, of course, to everybody and good health.

Thank you.

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

All parties may now disconnect.

Enjoy your day.