Guess? Inc (GES) 2010 Q1 法說會逐字稿

Good day.

Welcome to Guess first quarter fiscal 2010 conference call.

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

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 2010.

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

Dennis will go in to details about the financial by business segments and then tell us our outlook going forward.

Our financial results for the first quarter exceeded our expectations.

These results reflect the solid execution of the entire team in a very challenging environment worldwide to say the least.

During the period we earned $0.35 per share.

Operating cash flow reached $43 million and our cash position increased $52 million from last year.

At the very first sign of slowing consumer demand and global financial crisis, we acted quickly to align our inventory position and our cost structure with the new business environment.

These efforts were very successful.

We also reduced new store development and focused on the overall efficient use of our Company's assets.

Our commitment has been to protect our strong capital structure and cash flows.

Today's results demonstrate that strategy is very productive.

We ended the first quarter as we planned with very clean inventories which were flat to last year.

We delivered better SG&A rates than a year ago despite the lower revenues in that period.

For the quarter, we achieved our revenue expectations and exceeded our earnings goals and did so in an environment where consumers continued to stay away from the malls and where currencies continued to impact our profitability negatively.

We do not believe that the economic crisis is over, but we are beginning to experience a more stable and predictable environment.

Customers are shopping mainly around events, coming to the malls when there is a reason to shop.

The competitive landscape is more balanced, with less promotional activity and leaner inventory in the sector.

And, the adverse currency environment we faced is improving.

We are regaining confidence in our ability to deliver better results relative to our previous expectations.

The earnings guidance we are providing today reflects that confidence.

Short-term actions in crisis time always matter.

But, most important, we believe that our brands, our product and our global diversified business model provide us with a competitive advantage to perform well and gain market share in the challenging environment.

I'm confident that our Company is positioned to emerge among the strong global companies in our sector when the economies ultimately improve.

Denim is at the core of our Company's product line.

We have developed a denim assortment that positions our offering to capitalize on today's consumer demand, which expects branded product, great fashion, high quality and great washes at a compelling value.

Our accessories line offers a unique range of products including unique handbags, watch, eyewear and shoes that support the active lifestyle of our Guess customer.

And with our accessory store concept, we will continue to penetrate new markets globally.

Today we have 200 Accessory stores around the world.

In Europe, there are many markets in which our business is greatly under-penetrated and we are addressing it.

In Asia, we see significant market opportunities as well, especially in China, as we continue to refine our business model and improve our product diversification in that market.

And with our global licensee partners, we continue to open new stores as Guess becomes a major global player.

For the remaining of this fiscal year, we plan to open 81 stores outside North America, in addition to the 30 stores opened year-to-date.

In the mean time, we will continue to do what we do always, to focus on the things that we can control and manage our business in an effective and disciplined way.

Day by day and with a long-term goal to protect the Guess brand in every country.

These results could not be possible without the strong execution of our strategy by our team of more than 9,000 dedicated associates and partners worldwide.

I want to thank them all for their commitment, amazing attitude and trust in the Guess brand, especially during this time of massive global economic crisis.

Thank you and, Dennis, please go ahead.

Thank you, Paul.

Good afternoon.

Total first quarter net revenues declined 10% to $441 million.

Most of the decline was due to the stronger US dollar.

In constant dollars, first quarter revenues were roughly flat.

All of our operating segments posted lower revenues than a year ago.

The revenue decrease was most significant in Europe which was impacted by currency translation and by a sales shift into last year's fourth quarter.

Total company gross profit decreased 20% to $178 million for the first quarter.

Gross margin declined 500 basis points to 40.2%.

The main driver for the overall margin decline came from our European business, which was negatively impacted by the strong US dollar, lower apparel product margins, and by higher mark downs and occupancy costs in our retail business there.

In North America, deleveraging of occupancy due to the negative comps and slightly lower product margin also contributed to the decline.

Our SG&A expenses were $130 million, down 11% from last year's first quarter, with each one of our operating segments and our corporate group reducing spending levels from last year's first quarter.

This strong cost management resulted in a 40 basis point improvement to our SG&A rate to 29.3%.

This is a significant accomplishment considering the decline in our revenues.

We focused our marketing, staffing and promotional events during peak periods, when we anticipated that customers would be out and motivated to buy.

And, we maintained tight controls over our overhead expenses and concentrated our efforts in those areas that are not critical to our long-term strategy.

For the quarter, the Company's operating profit decreased by 37% to $48 million, which includes a negative $7 million currency translation effect.

Operating margin declined 460 basis points to 10.9%.

During the period, we reported net other income of $1.4 million.

This was driven primarily by mark to market adjustments of several non-operating assets, given the improvements in the US equity markets.

Our effective tax rate for the first quarter was 33% compared to 36% for the prior year first quarter and we are planning the remainder of fiscal 2010 with this rate.

Overall, net income attributable to common stockholders with $32.5 million, which declined 32% from last year's first quarter and diluted earnings per share with $0.35 compared to $0.50 in the first quarter of last year.

This includes a negative $0.01 impact for both periods, due to a new accounting treatment for certain participating shares.

This should affect all quarters both this year and last year in a similar amount.

Now I would like to quickly review our revenue and earnings by business segment.

In North American Retail, during the quarter, our comp store sales decreased by 6% in constant dollars.

In US dollars, the decrease was 10% with G by Guess continuing to be the best performing concept.

Total retail revenues for the quarter were $208 million, representing a 2% constant dollar increase and a 2% US dollar decrease.

Gross margin declined by 270 basis points, mostly due to the deleveraging of occupancy costs.

Strong inventory management enabled us to deliver product margins that were slightly lower than last year's first quarter levels.

Retail segment operating expenses declined compared to the prior period and the SG&A rate improved by 60 basis points.

Overall, operating profit decreased to $18 million and operating margin declined 210 basis points to 8.7%.

During the quarter, we opened 6 new stores and closed 2, ending the period with 429 stores in the US and Canada.

Average square footage increased by 9.7% over the prior year's first quarter.

In our wholesale segment, first quarter revenues increased 2% in constant dollars.

In US dollars, revenues reached $66 million and declined 12%.

Revenues increased in both China and Korea, though the impact of the stronger US dollar against the Korean Won more than offset the local currency growth in that market.

Sales in our North America wholesale business declined as we had expected, as department stores in the US continue to anticipate lower consumer demand and managed their inventory levels tightly.

Wholesale segment operating profit declined to $7 million and operating margin decreased 540 basis points to 11.3% in the first quarter.

This decline was driven by lower IMU in our North America business and by higher occupancy costs in Asia.

For the quarter, European revenues totaled $146 million.

In constant dollars, the decrease was 5% and in US dollars the decrease was 18%.

Sales were impacted by the stronger US dollar and by $14 million sales shift that benefited last year's fourth quarter.

Our accessories business was the strongest and our owned-retail business grew, as a result of new store openings, partially offset by negative comps.

European gross margins declined 750 basis points.

This resulted from the currency impact on product purchases, lower product margins in our apparel and retail businesses and higher occupancy costs.

Our SG&A expense management continued to be very strong, as we achieved leverage over our spending base in Europe.

Operating earnings declined to $23 million and operating margin decreased 650 basis points to 15.9%.

Licensing revenue decreased by 6% to [$22 million] (corrected by company after the call) in the quarter.

Now turning our attention to the balance sheet.

We ended the quarter with cash reserves of $313 million, $52 million higher than a year ago.

Over that same period of time, our debt position was reduced by $21 million.

As a result, we have grown our net cash position by $73 million.

Operating cash flow for the quarter was $43 million versus $3 million in the first quarter of last year.

Accounts receivable decreased by $38 million to $277 million compared to the prior year, a 12% decrease.

In constant dollars, receivables were essentially flat.

About 75% of our receivables support our Europe business.

Overall, DSO's were roughly flat compared to the same period a year ago.

During the period we managed overall business risks, including credit, in a very careful and prudent manner.

We are once again very pleased with our inventory management.

We ended the quarter with $203 million in inventory, which was essentially flat to our inventory levels a year ago.

Maintaining clean inventories to protect our brand integrity and our margins continues to be a top priority for our team.

During the quarter, we invested $19 million in capital expenditures, net of tenant allowances, primarily to support our retail expansion in the US and Europe and investments in our infrastructure in North America.

Our Board of Directors has approved a quarterly cash dividend of $0.10 per share, payable on July 2, 2009 to shareholders of record at the close of business on June 17, 2009.

During the quarter, we purchased approximately 400,000 shares under our share repurchase program at an average price of $13, investing $5 million.

We ended the quarter with a remaining repurchase authorization of $134 million.

With that, I will turn the call over to Carlos.

Thank you, Dennis, and good afternoon.

Now I will give you an overview of our outlook.

As Paul said, we are regaining confidence in our ability to deliver better results relative to our expectations.

Today, we are providing revenue, operating margin and EPS guidance for the second quarter that reflects that confidence.

Regarding the full year, however, the current economic conditions continue to limit our visibility, especially as it relates to the second half.

Given that, and consistent with our previous call, we will not be providing guidance for the full fiscal year 2010.

We will provide an update how our business has been trending and other factors that affect our financial results.

In our retail business, since the post-holiday season when the promotion frenzy in the malls began to subside, each of our concepts has performed in line with our expectations.

We have managed the business with less inventory and our focus has been on protecting our margin structure and the integrity of our brand.

This certainly affected our sales, especially due to our lower clearance ownership.

But it enabled us to remain flexible during uncertain times, maximize gross margin performance and identify trending product categories to invest in going forward.

As we continue to regain confidence and enhance our inventory position, we believe we may have opportunities for improved performance in the second half of the year.

In the meantime, we expect that our performance in the second quarter will be consistent with our first quarter results.

We just closed the month of May with a same store sales decline in constant currency in the high single digits range, low teens in US dollars.

We are planning the second quarter assuming that this situation persists and expect a decrease in total retail revenues in the mid to high single digits.

This includes the impact of the stronger US dollar versus last year.

In Europe, we continue to improve our business model, spreading deliveries more evenly throughout the year.

We are currently working on our apparel lines, offering a pre-collection for the Fall/Winter season.

We expect that the pre-collection will result in a shift of deliveries out of the third quarter and into the second.

The impact of this shift could amount to $14 million in revenues and an EPS benefit in Q2 of $0.03 to $0.04 per share, at the expense of the third quarter.

Considering that our backlog is up about 8% in Euros,, which includes the pre-collection shift, we expect second quarter revenues in Euros to increase in the low teens.

At current rates, this would translate into flat revenues in US dollars.

Let me now address our wholesale segment.

We expect our North American wholesale business to continue to contract in the second quarter, given than our US backlog is down almost 20%.

Our Korea and China businesses should deliver growth in constant dollars, though some of that growth will be offset by currency.

For the entire wholesale segment, we expect second quarter revenues to decline in the low to mid teens in US dollars, assuming currencies remain consistent with current levels.

Our licensees continue to experience organic growth in certain product categories such as footwear, handbags, eyewear and jewelry, but the overall business is still impacted by the economic downturn.

For the second quarter, we are expecting a revenue decline in the mid teens for this business.

To summarize, we expect total company revenue to reach between $465 million and $485 million.

With respect to gross margins, due to the current market conditions, we do anticipate that our product margins will remain under pressure.

We also expect that occupancy costs will continue to impact our margins due to the negative comps.

On the other hand, the shift in European revenues, which carry a higher margin than the overall business, and an improved currency environment should contribute to partially offset some of the margin shortfall.

Regarding expenses, the changes to our cost structure have been fully executed, though recent currency changes will result in increased expenses for our foreign operations.

Assuming that the current exchange rates continue, we expect second quarter expenses to decrease in the low to mid single digits range.

Now let me update you on the impact of currency.

On our last conference call, we said that if we converted last year's results with the exchange rates that prevailed at that time, the negative translation impact on earnings per share would be about $0.20 for the full fiscal year, affecting the first three quarters almost equally.

As Dennis reported, the first quarter impact materialized.

As to the second quarter, if today's exchange rates persist for the remainder of the period, there would now be a negative $0.04 translation impact instead.

In addition, these rate would result in a mark to market charge of about $0.04, related to our currency contracts and our foreign subsidiaries' US dollar denominated liabilities.

As to the third and fourth quarters, if today's exchange rates persist during those periods, there would be a negative $0.01 translation impact on the third quarter and a positive $0.03 translation impact on the fourth quarter.

Given the recent volatility in the currency markets, however, we do not think it is prudent to plan that the prevailing exchange rates will remain at the current levels for the remaining of the year.

Regarding earnings, we expect second quarter operating margin to be around 14%, and diluted earnings per share of between $0.42 and $0.45.

This includes the mark to market charge that I just described, which would affect non-operating income and also takes into consideration the accounting change that Dennis described regarding participating shares.

In connection with capital expenditures, we continue to pursue our initial retail expansion plans and have also identified several great new store locations, mainly for G by Guess, accessories stores and Europe as well.

Depending on how landlord discussions proceed, our capital expenditures, net of tenant allowances, could reach up to $90 million for the full fiscal year 2010.

In closing, we view this year as one of transition, where we build the necessary capabilities and infrastructure in our company so that we emerge from the recession even stronger.

We are currently focused on the development of a global line, enhancing our supply chain capabilities and strengthening our organization and team development.

We expect that when conditions ultimately improve, with our strong global brands, solid capital structure, strong cash flow and seasoned management team.

We will emerge in an even stronger position.

With that, I close my prepared remarks and would like to open the call to your questions.

Operator?

I think we were 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, thank you.

Congratulations on your performance in Q1, everyone.

Thank you.

My question and a half, if I could, product margins you mentioned both in Europe and US as being down.

I was just curious if you could provide a little more color on that.

Is it pressure in cost of goods, planned lower pricing or more end of season promotional pricing or incentive pricing that is compressing those?

As we go through the balance of the year without providing guidance, do you see relief from lower costs from that?

My other one would be just on Europe.

If you could just give us more color on again going through your top three or four markets of continental Europe and the performance in Q1 on a year-over-year basis generally speaking?

Sure, Jeff.

Let me start with the margins.

Really because of the complexities of our business I think you have to look at the different businesses separately.

So starting with retail.

We were pleased that Dennis mentioned that we were able to protect our margin structure.

Now, of course, there was some impact on our retail margins.

The biggest concern that we had during the quarter was regarding occupancy because of the productivity that suffered as a result of the negative comps.

That being said, we did have a small decline in product margin.

It was all related to the fact that in many cases the customer was looking for reduced pricing and looking for value.

We carried less clearance throughout the period.

And really our average unit retail has been pretty much in line with the same period a year ago.

With respect to Europe, our margins were down pretty significantly, about 750 basis points, 550 basis points was split between foreign exchange which represents about half of that and the rest was related to IMU and some promotion at retail.

The remaining of the 750 which is 200 basis points was due to occupancy costs.

Similar type of issue that we faced in North America.

We had more stores that we run during the quarter relative to a year ago and, of course, the first quarter is a low productivity quarter so that weighted more heavily on the margin.

Overall, we see big opportunities in many of these areas to improve.

With respect to Europe, we think that the gross margin going forward offer big opportunity.

One thing I didn't mention is the shift that we affected from the first quarter shipment into the fourth quarter last year and that happened to be a lot of product that carried very high margins.

So that also depressed the first quarter margins relative to a year ago.

And also we think that there are opportunities with same-store sales.

We saw the month of May in Europe were the reversal of the negative comps was pretty significant.

We ended the month with a 3% comp decline.

With respect to the retail business in general here in North America we have several opportunities between assortment changes, we are running with very clean inventory still.

The Marciano business is running with improved margins relative to last year because of the how clean the inventories are.

We have big changes in the assortment that we think will help the margin.

Your second question was about Europe.

And with respect to Europe, what we saw is a contraction of the business in Italy but a lot of that relates to the shift that we experienced from first quarter last year into fourth quarter this past year -- first quarter this year in to fourth quarter last year, and we did see an increase in retail penetration in Italy of about 9% but wholesale declined about 12%.

There are other factors there like we are being careful with credit and being very careful with who we ship to because we want to make sure that we get paid and the environment has been a little more challenging and the access to insurance is not as strong as it was in the past.

Carlos, any other color on other European countries that might be trending?

Yes.

The great thing is that really that the other side of this story is that we have gained penetration in many of the countries we had targeted.

Like France was up 2%.

Spain was up 1%.

UK was up 1%.

Germany was flat in spite of the shift.

And the countries that were down, which are primarily Middle East and Eastern Europe, are all affected by the shift as well.

We are very, very pleased with the results.

And just to clarify, did you say your European retailed owned store comp down 3% in May.

Yes, 3.2% I think it was.

What did they comp down in Q1?

Similar to the US in the low teens.

Thank you.

Thank you.

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

Please proceed.

Good afternoon.

Congratulations.

Housekeeping question on Q2 guidance and I want to ask what should we look at in terms of shares outstanding and how should we think about this accounting change you made?

And in terms of the business, how was the premium denim - the $158 denim for you during the quarter?

Let me take this.

The first two, on terms of shares, the first quarter is when we have our annual grant.

So you probably should be adding about a million shares on top of the first quarter and that's obviously a function of where the share price is during the quarter.

That will get you roughly in the ballpark.

What was the question?

Participating shares represent a penny a quarter for every quarter this year and last year.

Okay.

In terms of how premium denim did.

The denim business?

Yes.

Well, this is Paul.

If you talk about-- I think your question is about premium.

Mainly, I think we addressed that on the last conference call.

The bulk now of our pricing sales on all denim men and women is between I would say $95 to $129.

Then you have a small portion going up to $159.

We used to have up to $198 and $218, I think, some of them.

We don't have that segment, almost non-existing now.

We reduced to maybe one style or two styles.

So to tell you that's what we saw coming in October is that the premium would be affected.

It did get affected and people are really looking for super quality, super wash, enhanced product with a value price.

Okay.

Thank you.

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

Please proceed.

Thank you and my congratulations.

Thank you.

Could you talk a little bit more about the progression of comps over the first quarter in your major regions, how they may have differed in the expectation in Q2?

My half question is just on the licensing that came in better than expected.

Could you just give us -- elaborate on that a little bit.

Thank you.

Okay.

With respect to the comps, really the comp performance was relatively consistent throughout the quarter.

The only thing that really made that a little different was Easter.

But if you put March and April together, the business performed pretty much in line with what we saw in February.

And frankly that performance was in line with what we saw in May as well.

With respect to the different areas within the country, Canada continued to outperform the rest and then we saw some weakness in the west coast and in the southeast.

Other than that, all the other areas did better than the chain in total.

Northeast did better.

The Midwest did better.

States that did better were New York, New Jersey, Massachusetts, Texas.

States that were pretty tough for us where we had big business were Florida, Vegas, California because that is a big market for us.

Arizona was also weak.

Did you see the same consistency in Europe and Asia?

Asia is a very different story for us because we are in full launching of the brand in many new markets, so it's a very different story.

Our business in Korea which is more of an established business was very good in local currency but obviously we had to be up against the currency issue.

With respect to licensing, the reason why the business was better, I mean, several of our licensees, as I said, are experiencing organic growth and it was a little better than what we had anticipated, but we think that it was just part of the circumstances.

We still see some concerns going into second quarter because of the whole slowdown, the concentration of doors.

They are experiencing the same type of results that we are seeing domestically like Macy's with the consolidation and so forth and the lower inventory levels.

Overall, some of the categories did very well including handbags, shoes did well as well.

But, on the other hand, watches was a little more difficult.

Thanks a lot, guys.

Good luck.

Thank you.

Your next question comes from the line of Randy Konik with Jefferies & Company.

Please proceed.

Thanks a lot.

I was in Europe last month and going to some of the stores in London and Paris and noticed in London there was some use of some American style denim and so forth and some of the American style product.

Can you give us a bit on color on what's going on the design side if you are changing anything for Europe?

Secondly, I think you also completed some of your winter sell in.

Kind of just give us a little color on how that did across your different geography from your perspective in Europe.

Thank you.

Yes Randy.

I mentioned that one of our key initiatives is to create a global line.

And division is to create a line that will serve as a core assortment across all regions.

This is a major and ambitious goal but we have made significant progress on that.

And some of those markets are now receiving product that is inspired in many cases produced through our North America operation.

The store that you were at is one of them.

So we are making solid progress on this.

We are very excited about it because the more work and the more products we make, the more opportunities we see.

Not only to address the markets more effectively with this type of products the customers are looking for, but also to take advantage of leveraging opportunities with purchasing and others.

And just with the winter sell in, any color on that?

Well, the guidance we gave you, we said you are talking about Europe, right?

Yes.

The guidance that we gave, our backlog is up 8% in Euro.

However, a lot of that is represented by this shift that we talked from third quarter into second quarter.

That is just a timing issue that if you are going to assume that that is going to increase our second quarter you have to take it out of the third quarter or whatever your expectations were.

With respect to the -- what we are seeing is, that's -- if you take that shift out, the true backlog is up about 4% for fall/winter and that is slightly better than what we are seeing for the first quarter once you -- the previous season -- once you eliminate the impact of the shift.

So the business is pretty stable.

The good thing about that is that we do have the increase in retail business so we see that this is, if anything, a net gain going forward.

Now, of course, we still have the issue with currency.

Great.

Thank you.

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

Please proceed.

Thank you and congratulations on another solid quarter.

Thank you, Christine.

Wondering if you could share with us during the quarter what were your stronger product categories and I guess looking ahead to the second half of the year where do you think some of the opportunities are, and you called out G by Guess.

What do you think is contributing to the outperformance of G by Guess?

Thank you.

Okay.

I will start with the product that -- what did well.

Paul mentioned denim and this continues to be at the core of everything we do and we are very pleased with what we have done in terms of both design, price point, adjustment and where we are going after with the development.

So denim overall did very well.

Then we had success with sweaters.

We had success with skirts.

In the men's category we saw success again with denim woven tops.

Men's accessories did very well during the quarter.

We had some success also with jackets and outerwear.

In the accessories line I mentioned handbags which did well in our stores as well, eyewear and overall we see big opportunities going forward on that.

Footwear had success with casual shoes, sandals and even boots and Guess by Marciano had success with dresses, skirts, sweaters, accessories and knit tops.

With respect to product opportunity, we really have a lot of big ideas.

In many cases we think that we missed some sales because of the inventory lightness that we had throughout the quarter and that is primarily in the YC area, the womens world.

So there are a lot of categories that turn very fast and we are strengthening our offering in those categories.

We are buying SKUs and more depth right now.

And, again, denim will continue to be in the forefront and there is a lot of change coming for back to school and holidays as well.

We see opportunities with our Guess List.

As you may know, we merged the two files for the Marciano loyalty program and the Guess List.

This happened on May 11.

And we see a lot of opportunity to do cross marketing and we are already seeing some of the impact of that.

Our traffic in the Guess by Marciano stores has been high.

You asked the question about G by Guess and we think that assortment is much better, especially in womens.

Importantly, we think this offering caters to what the customer is looking for today which is a lot of fashion, good quality, good brand at a competitive value.

Okay.

Great.

Thank you and good luck.

Thank you.

Your next question comes from the line of Omar Saad with Credit Suisse.

Please proceed.

Thank you.

Good afternoon.

I wanted to follow up with you guys and see if I can get a little more detail out of you in terms of your plan in some of these new countries in Asia that you are ramping up and launching on and maybe some of the newer markets in Europe where you are still very underpenetrated.

How do you see this process unfolding?

How do you see the rate of change occur as you start to develop penetration and is the global nature of this recession going to hold you back or do you think you can grow through it?

This is Paul.

Definitely.

We first of all meet very frequently with our partners, with our licensees all over the world.

And of course as soon as we saw what was happening in September, we immediately changed in the other direction and advised to hold back until we have better visibility as much as we could about potential location, leases, everything.

Definitely our plan has not changed as far as the big picture which is a slowdown, massive slowdown.

But we are gearing up again now to reconnect.

In fact, next Saturday we will be in Europe and the week after that in Asia to remap again all the locations and stores that we are planning to open.

About the area where we look at, of course in Asia we managed to still have very big, big work to do and we started this year in Taiwan.

It was a licensee for many years and now it become our direct operation like we do have in Korea.

Korea was a licensee for 18 years and now it's our operation and we're extremely pleased there.

Japan remains still question mark for us until we see a turnaround which, according to the news, seems to bottom out after ten years it appearing.

And we are looking at doing the right joint venture or direct operation.

We have licensees over 20 years with two different partners and none of the strategy worked for us.

We are continuing to try and we will continue to try until we succeed.

For China, of course, definitely we are there.

We are sharing that country in three different regions and same thing again that because the economy slowdown that has given us opportunities to look at the different aspect of occupancy, price of stores and construction, everything.

So now we are remapping again that in the next four to six weeks and we are continuing to cruise there.

We just launched in Korea a new line which is an underwear line.

We have already most of the categories in Korea and we see that as a big potential if it works there to expand throughout all Asia.

Europe, Europe will be a priority of course.

What you heard many times on our conference call which is Spain, again, the same question of recession, getting out of recession which Spain has been hit the hardest of all the countries in Europe, UK and Germany, of course.

Germany we are basically no existence.

We have a joint venture now in France where we accelerating to open stores on a direct operation and we find a joint venture in Spain to open at least 10 to 12 free standing stores in the next 12 months in Canary Island and then the next will be JV for Spain.

We are very active on a sense of we -- as much as we can we want to take control or majority control where we see big markets, and that is the case in Italy.

That is the case in France.

That is the case in UK, Spain and Germany.

Germany remains as tough a market for us as Japan.

From all over the world the countries I will tell you the big question mark for us still remains Japan and Germany which are huge markets but toughest market to penetrate for many, many reasons.

So that is basically is the picture.

Thank you.

Congratulations on a great quarter.

Thank you.

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

Please proceed.

Good afternoon and congratulations.

Thank you.

Very good job.

I was just wondering, Dennis, if you could talk about the SG&A.

I think you said you thought it would only be down low single digits in the quarter, I think it was down 11% in the first quarter.

I'm wondering why there would be such a shift there.

And I was also wondering if we could just dissect the guidance a little bit.

So if the guidance is for EPS of -- I can't find it now, but I think it's like $0.41 or $0.45.

Is some of that inclusive of this $0.03 to $0.04 shift out of the third quarter or does it also include the mark to market charge.

I'm a little confused what it is on a pure basis.

And then lastly if you could just discuss how the transition at Marciano is going with the lower price point focus there and maybe also comment on how you brought in the Guess accessories and how they're doing.

Maybe just a little comment on the transition going on at Marciano.

Thanks so much.

Start with the expenses.

We really focused hard on expenses.

We had said before based on the exchange rates two months ago that we would be down 5% for the full year.

We were down 11% for the quarter.

That's really despite having funded the additional store growth for the first quarter.

We did focus on and reducing our marketing spend was done.

Their variable selling costs with lower revenue so that was down and our overhead was down.

It was the result of really tight management for the quarter.

In terms of the guidance, the range we gave was $0.42 to $0.45 per share.

That includes both the shift into the second quarter from the third that Carlos talked about relative to the precollection.

So that is favorable within that range and also includes the $0.04 mark to market charge on the currencies if the currencies remain flat, so both of them are in there.

So they wipe each other out.

Essentially.

Yes.

Okay.

So basically from operations then you think you can earn $0.43 to $0.45, Dennis?

That's how it appeared to me.

I just wanted to delineate it.

From operations, the only thing is that the mark to market charge doesn't affect operating.

Well, I understand that.

Okay.

All right.

You are right, Dennis.

That's right.

I got it.

I just wanted to make sure that -- and then we should lower our third quarter outlook by $0.03 to $0.04?

Is that how you want us to be thinking about it?

Correct.

You asked about the transition and it's going very well.

Our traffic, just to give you a couple of numbers, in March prior to this transition was down about 10% in Guess by Marciano.

In April the traffic was up 10% and then it was up 10% again in May.

Now, our conversion why it is up it is lagging the traffic and we are looking for the opportunity.

We think that is just a matter of time.

We are very excited about the assortment, as I said before.

We have a new line of Guess by Marciano handbags where we see as a big opportunity will be in the stores in the next couple of months and there is going to a lot more premium denim, more casual dresses and tops, sophisticated contemporary looks.

We think there is a lot of opportunity there in the second half of the year.

Okay.

Great.

So you are happy with how that transition is going, Carlos?

We think that the team is doing a good job.

It's a tough business right now, in that space I'm talking about.

I think everything we are doing should work.

Yes, we are, we are very happy.

Lots of luck to you all.

Thank you.

Your next question comes from the line of Chi Lee with Morgan Stanley.

Please proceed.

Good afternoon, guys.

Just a little bit more detail, if possible, on the performance in Asia, particularly Korea.

I know you mentioned volumes were up during the quarter in both regions, local currency.

Has the performance been consistent month on month?

The performance has been better in the Korean Won, as I mentioned.

Because of the impact of currency, when you look at the earnings for the wholesale business, the Korean operation really contributed to a deterioration of earnings, about $1.3 million of the $5 million drop that we experienced.

Constant currency, you are still seeing fairly consistent performance in Korea?

Yes.

Definitely.

We think we are making significant strides toward becoming and being the number one market share in the Korean market in our space.

And then just on retail, have you seen any material differences in the outlook performance sequentially and has that been a contributor to the better than expected comp in the first quarter?

No.

Really, it's interesting.

Our performance in outlets versus the full price is very consistent between the two.

We are not seeing a significant change between one.

Maybe the full price did a little bit worse than outlets but overall the performances are comparable.

Okay.

Dennis, in terms of mark to market charges, can you help us frame how we should think about it in the back half of the year?

Volatile quarter on quarter despite the currency moves.

Well, what we are saying is if you look at it on a flat basis, in other words if prevailing exchange rates hold flat, we would take a mark to market charge in the second quarter because they have changed significantly already in the second quarter.

If you then hold them flat for the remainder of the year you will see no further mark to market charges.

Got it.

The only impact is what I mentioned.

Okay.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Holly Guthrie with Boenning & Scattergood.

Please proceed.

Thank you and let me add my congratulations.

You guys reacted quickly and efficiently to the worldwide economic slowdown and we see that in your expense controls, your inventory levels and your mark down.

I was just wondering if you could share with us a little bit about other things that you may have learned over the past six months and how it might be reacted in your products and assortment and pricing both domestically as well as in Europe?

Well, if I can answer you that.

What we learned always in tough time is to focus on what we do the best and to try to less diversify ourselves on sudden need to try to do everything and concentrate on what we know, for example, the best which is denim and accessories, and as a balance between denim and accessories, if you look on the market being in US, being in Europe or being in Asia, very few brands will be well balanced as we are that the amount of unit or dollar or Euro that we sell in every region is very balanced between apparel and accessories which is very unusual.

The companies are all strong in accessories or strong in apparel or strong in denim, but very unusual balance.

So we had multiple meetings and seminar with our licensees to apply what we apply in our company here at Guess in Los Angeles is to tell them to focus on what you do the best and what is not important, what is not called to your expertise still wait on that time in crisis.

That lesson I will say really impacted us the most.

We have worked in denim in the last nine months harder than we did when we started the company 28 years ago.

I mean, this is, our life and blood is denim and we cannot forget that.

You are going to see a window in four weeks, which will be back to school believe it or not, and you will see the advertising in magazine in four weeks which will be August magazine but it comes out in July.

Everything will be consistent with billboard and windows and magazine and everything and products will go into the store and get the message.

Then you go in the store a little bit further and you will see a statement of product of accessories that is very focused, very strong, very unique as an assortment on each of its own.

Being if it's handbags, being if it's jewelry, watches, if it's eyewear now and, of course, footwear.

Even the footwear has been readjusted to adapt to the focus on denim.

So this is, I think if I can tell you my experience and our experience in all the management here is that crisis made us focus to what we take us to the other side of that bridge.

And this is where we are.

Thank you.

Thank you, Holly.

And your last question comes from the line of Betty Chen with Wedbush Morgan.

Please proceed.

Thank you and good afternoon, everyone.

Congratulations.

I was wondering if you could give us a little bit more color around the inventory composition, very clean as you've discussed being flat versus the year prior.

How should we think about that geographically between North America, Europe, Asia and then how much of that is carry over inventory, and then I just have a couple of follow-ups?

Okay.

This is Dennis.

You are absolutely right.

We are very pleased with the performance.

Regionally, our European inventories are up on the quarter.

They are aligned with our expectations.

As you heard, the backlog is up 8% and we have opened more retail stores and we need to support them with inventory as well.

In North America we are down on the -- from a year ago, about 4%.

We have aligned our inventories there with consumer demand.

There is a mix among the different business.

Wholesale is down the greatest.

We have invested in additional inventories and some of the trending businesses.

Canada is an example of that, Mexico as well.

And we've also taken within North America we have taken a position in fabric that shows up in that number there and that enables us to better chase sales into the remainder of the year.

In Asia inventories are down there despite the fact that our expectations are to grow that business.

Remember, it's a relatively new region for us and we have made initial injections in inventory there and as we have been learning more about that business and developing it, we are improving our inventory management there.

Thank you.

What I want to add if I can, I think I misspoke when I was giving the licensing revenues.

The number for the quarter was $22 million.

I think I may have said 20, it was 22.

Thank you.

And I also wanted to clarify, Carlos, your comments regarding North America retail.

So far in the month of May and also the expectations for the second quarter, could you remind us what you had said?

Our comps in the month of May were in the low teens in US dollars and local currency were in the high single digits, negative.

With respect to our guidance for retail, we said that we expect negative low to mid-teens a guidance in comp so we didn't say about that's what imbedded and our total guidance of negative mid to high single digits for retail.

Anything else?

Yes.

And then lastly I was curious, very stringent cost control in the first quarter.

Curious why perhaps we are only looking for SG&A dollars to be down low single digit to mid-single digit in the second quarter.

Anything that's kind of different between the two quarters other than the shift in the European sales?

The big impact is currencies.

The guidance we provided assumes the current rates which are the Euro, for example, is stronger in the second quarter -- right now than it was in the first.

Fundamentally the cost structure is intact.

Okay.

And then lastly in terms of housekeeping, could you give us a number of stores by concept at the end of the first quarter and also the open plans by concept for the year?

The quarter at the end -- for the 429 that we had at the end of the quarter, retail was 193, factory 104, Guess by Marciano 52, G by Guess 45, and accessories 35.

And Dennis how many are opening this year by concept?

We said our plan was 15.

We haven't specifically talked about it by concept.

Okay.

Also keep in mind that we are in negotiations with other potential locations.

That number may change when we go up to $90 million of CapEx net of tenant allowance.

And just to mention also something that just got done.

We opened our first major store in London on Regent Street.

We have a store like Covent Garden which is not really big statement.

This one will be a 6,500 square feet on one floor.

On Regent Street it will be open by September, I believe September 15.

Something like that.

That is an important step for us.

And we are negotiating right now, Paseo de Gracio in Barlenoa almost down to a key location in Barcelona.

So then in terms of the 15 openings, is that for North America or globally?

That's for North America.

Is there a rough number for Europe given the focus to push for retail operations there?

Again, that number is moving.

We had an original number of about -- similar to the North American number but we are in negotiations with several locations, some of them are the ones that Paul just mentioned.

And I can mention also just accessories for remaining of the year between now and February 1 of next year.

We will have another 45 stores of accessories between footwear and accessories stores which are on their way to be built.

Thank you so much.

The stores look great.

Best of luck for Q2.

Thank you.

At this time there are no further questions.

I will now turn the call back to management for final remarks.

Thank you very much.

Thank you for all the questions and we are now looking forward to next week in Europe to present a line for spring 2010 to our customers all over Europe and we will have a better view again by meeting one-on-one with our partners all over there.

What we feel about the countries to about the business of buying everything and also about the product we are going to present which will be even a stronger statement on the direction where we are going as a global line and especially the global denim line, and we are excited by that.

I'm personally excited about the campaign of advertising which will come out very soon.

It's very rock and roll, to say the least, and that's -- we are excited to see a little bit now of stability rather than to see the freefall that we have seen in the last five or six months to see the end and see the bottom and we don't see the bottom now but we feel things have definitely slowed down on that pace of decreasing.

This is where we regained confidence and feel that we want to react as soon as we react to the crisis.

We want to react and take back the business immediately and that's what we are doing right now.

Thank you very much.

And have a good quarter and we talk to you in the next few months.

Thank you.

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

All parties may now disconnect.

Enjoy your day.