Guess? Inc (GES) 2010 Q2 法說會逐字稿

Good morning and welcome to the Guess second quarter fiscal 2010 earnings 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 second quarter of fiscal year 2010.

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

We are extremely pleased with our second quarter financial results.

We did exceed our expectations but we also did set a second quarter record in gross revenues and earnings, which is a significant accomplishment, especially considering the current retail environment and the challenges posed by foreign currencies.

We believe this result clearly underscores the power of the Guess brand and highlights the strength of the diversified business model to deliver strong results in the current environment.

Moreover, these results are testaments to the skill of our management team and their ability to quickly adapt to change and respond in a way that preserves our margin, our brand integrity and our solid financial position.

The strong steps that we took nearly nine months ago controlling our inventories, our expenses, and our capital, with very strong discipline, are clearly evident in today's results.

The second quarter, we have succeeded in growing our business, increasing in constant dollar revenue by 9%.

More importantly, we achieved our goals in a very profitable way.

We delivered product margin flat to last year and controlled our expenses very effectively.

We expanded our product margin significantly and delivered earnings per shares of $0.64, a 14% increase over last year.

Europe performance was key to our results.

Our efforts there to deliver products earlier were very successful, far exceeding our expectations as well.

Our products are hitting the markets faster and positioning us to benefit from early season demand.

For the quarter, Europe local currency revenue increased by 35%, with most of European business posting increases over last year.

We leveraged our expense base in a significant way, which drove an improvement in operating margin.

In North America retail business, we also exceeded our expectation, as we posted a modest increase in profit, in spite of the negative comps.

With tight inventory management and strong expense control, we improved our product margin and expanded operating margin from a year ago.

Regarding our international business, global expansion continues to be a major priority for us.

Today's results validate the tremendous potential of the Guess brand on the international stage.

We believe, now more than ever, that we can continue to gain global market share and that our brand can achieve worldwide recognition as the economy recovers.

We strongly believe that our future growth has been linked to retail expansion in global markets.

Europe again is a high priority for retail expansion.

So we will continue to make investments there to support that retail growth.

By the end of fiscal year, we plan to directly operate 75 retail stores in that region.

We also are making key investments to support both retail operations, as well as our wholesale business in Europe.

In Asia, we remain committed to develop the Guess brand in China, where we see a long-term opportunity.

Our management team is in place and focused on refining our model, growing our business and improving our results in the region.

Multiple challenges exist in that region, so we are very cautious on any major investments.

Outside of North America, we've already opened 62 stores year to date and plan to open another 49 stores by the end of this fiscal year.

Last, regarding our infrastructure, we're continuing to improve our global supply chain, where we are investing in strong strategic relationships and partnerships with key vendors.

We are also investing in technology to support operations, enhance our efficiency and improve the customer's experience both in our stores and in the e-commerce sites.

We definitely feel that the conditions are stabilized in a number of ways but that doesn't mean that the crisis is over.

And there will be no doubt that some challenges are ahead.

Thank you.

Dennis will take you through the numbers of Q2.

Dennis?

Thank you, Paul.

And good afternoon.

Total second quarter net revenues increased 1% to $522 million.

In constant dollar dollars, the growth was about 9%.

This increase was driven by Europe, where revenues grew 21% despite the stronger US dollar.

Revenues benefited from a sales shift as we continued to distribute products earlier in Europe.

The shift was higher than we had previously expected and totaled $29 million for the quarter.

Total Company gross profit was in line with last year, reaching $232 million in the second quarter.

Gross margin was 44.4%, compared to 45.1% a year earlier.

Product margins improved in North America and in Asia, as tight inventory management resulted in fewer markdowns and less clearance.

This was more than offset by the impact of the negative comps or our retail occupancy costs and the impact of the strong US dollar on European product purchases, which we expect to continue in the third quarter.

We managed expenses tightly and gained substantial leverage over our cost structure.

Our SG&A rate improved 160 basis points, declining to 27%.

Total SG&A expenses decreased 4% to $141 million.

Variable expenses were generally lower than a year ago despite the increase in revenues and store growth.

Overhead expenses declined in the quarter as well.

For the period, the Company's operating profits increased 7% to $91 million, despite a negative $9 million currency translation effect.

Operating margin increased 90 basis points, reaching 17.4%.

For the quarter, we reported net other expense of $1.3 million.

This primarily represents net mark-to-market charges on our foreign currency contracts and account balances, partially offset by mark-to-market gains on various non-operating assets, given the improvements in the equity markets.

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

Overall, net income attributable to common stockholders increased 11% to $59.6 million and a diluted earnings per share increased 14% to $0.64.

This EPS amount includes a $0.09 benefit from the sales shift and a negative $0.06 currency translation impact.

Now, I'll review our revenues and earnings by business segments.

In North American retail, our comp store sales declined by 10.2% in constant dollars and 12.5% in US dollars, resulting in total revenues of $227 million, 6% lower than last year's.

Our gross margin was flat to last year, with the improvement in product margin being offset by occupancy deleverage from the negative comps.

Retail segment operating expenses declined compared to last year and the SG&A rate improved by 100 basis points.

Operating profit reached $30 million, slightly higher than last year.

And the operating margin improved 90 basis points to 13.3%.

During the quarter, we opened five new stores and closed three, ending the period with 431 stores in the US and Canada.

Average square footage increased by 6.6% over the prior year's second quarter.

In our wholesale segment, revenues declined 13% in US dollars, reaching $63 million in the second quarter.

We continued to grow our Asia business, with revenue increases in both Korea and China, though the strong US dollar nearly offset that growth.

As expected, our North American wholesale business was down, given lower consumer demand at US department stores.

Wholesale segment operating margin increased 90 basis points, reaching 15.8% in the second quarter.

Improvements in product margins in both North America and Asia more than offset higher occupancy costs due to the growth of our business in Asia.

Operating profit declined 8%, reaching $10 million in the second quarter.

For the quarter, European revenues totaled $210 million, increasing 21% in US dollars and 35% in constant dollars.

Second quarter sales benefited from the sales shift that I mentioned earlier, which was driven by the successful introduction of a precollection in our wholesale apparel business.

Sales at our owned retail stores increased as a result of new store grow compared to a year ago.

Operate earnings increased 30% to $52 million and operating margin expanded 190 basis points to 24.9%.

This margin expansion was driven by effective expense control, partially offset by lower product margins.

As you know during the past couple of years, we have made substantial infrastructure investments and are now achieving significant leverage on those investments.

In the second quarter, our SG&A in Europe -- our SG&A rate improved by 520 basis points compared to the prior year quarter.

Licensing revenue decreased by 16% to $22 million in the quarter, in line with our expectations.

Now, turning our attention to the balance sheet.

We ended the quarter with cash reserves of $330 million, $35 million higher than a year ago.

Since last year, we have reduced our debt by $41 million, leaving us virtually debt free and improving our net cash position by $76 million.

For the first half of this fiscal year, our operations generated $121 million of cash flow versus $116 million for this same period a year ago.

Accounts receivable increased 2% or $5 million to $297 million, compared to the prior year.

In constant dollars, receivables increased by 9%.

The increase in receivables is primarily due to the revenue increase in our European business, which is mainly a wholesale business.

Roughly 75% of our receivables support our Europe business.

Overall, DSO's declined slightly compared to the same period a year ago.

During the period we managed overall credit risk prudently and tightly, including the use of outside insurance programs.

At the end of the quarter, about 55% of our receivables were supported by insurance coverage, bank guarantees and letters of credit.

Our inventory management was once again very strong.

We ended the quarter with $259 million in inventory, slightly lower than a year ago.

During the quarter, we invested $20 million in capital expenditures, net of tenant allowances, primarily to support our retail expansion in the United States and Europe and investments in our infrastructure in all regions.

Finally, we announced today that our Board of Directors has approved a 25% increase in our quarterly cash dividend to $0.125 per share.

The dividend will be payable on September 25, 2009, to shareholders of record at the close of business on September 9, 2009.

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

Thank you, Dennis and good afternoon.

I will give you an overview of our outlook.

Consistent with previous calls, today, we will provide revenue, operating margin and EPS guidance for the current quarter.

We will also update you on how our business has been trending and other factors that will affect our financial results.

In North American retail, ever since last year's post holiday season, we have managed our inventory levels very tightly, ensuring that both the integrity of our brands and our margin structure were protected in this environment.

As we were planning this year's business, we anticipated a slowdown in consumer spending and adjusted our inventories and purchase plans accordingly.

This action resulted in strong margins for the period and enabled us to maintain our current lean inventory position.

Over the last several months, we have learned more about what is motivating customers in 2009.

Today, customers spend less time in the malls and shop around events.

They are looking for compelling values but as always, they demand great product.

We are responding accordingly and have made adjustments to our promotional calendar that we hope will allow us to benefit from the peak traffic periods, improve our conversion rates and ultimately, begin to reverse the negative comp trends.

In addition, we have identified trending products and have made investments in those categories, which we feel can help drive our sales for both back-to-school and holiday, as well.

Our month to date comp performance in August is down in the negative high single-digit range, which is in line with our overall expectation for the third quarter.

Based on this assumption and our store growth, we are now expecting third quarter total revenues in the retail segment to decline in the low to mid-single-digit range.

In Europe, for the third quarter, we are expecting revenues in US dollars to decline in the mid-to high teens range.

This decline represents the impact of the shift that Dennis mentioned, partially offset by a revenue increase in our retail business as a result of new store growth.

Our business has remained healthy in Europe and our backlog is currently flat to last year.

The backlog for fall/winter, 2009 is down as a result of the shift.

While the backlog for spring/summer 2010 is up, reflecting this year's earlier sales campaign.

I will now address our wholesale segment.

We continue to expect that our North American wholesale business will contract in the third quarter.

Our current US backlog is down almost 17.5%.

In Asia, we expect that our business will grow in constant dollars in the third quarter by over 30%, with much of that growth being offset by currency.

All considered, we expect revenues for the entire wholesale segment to be down in the mid-single-digit range in US dollars, and this is for the third quarter, assuming that currencies remain at current levels.

In our licensing business, we expect that our third quarter revenues will decline in the mid-teens, given our most recent trends and the ongoing impact of economic conditions on our licensee partners.

These expectations would result in total Company revenues between $465 million and $485 million in the third quarter.

We expect that gross margins will decline in the third quarter compared to a year ago.

Our goal in North America is to maintain product margins at last year's levels, though the negative comps in retail will result in occupancy deleverage.

In addition, the sales shift in Europe will result in a relatively lower mix of European business in the third quarter compared to last year.

This will have a further negative effect on comparative third quarter gross margins, as European sales carry higher margins than our other businesses.

Regarding expenses, assuming that the current exchange rates continue, we expect third quarter expenses to be slightly down compared to last year's third quarter levels.

Now with respect to earnings, overall, we expect third quarter operating margin to be around 14% and diluted earnings per share between $0.46 and $0.49.

This assumes no material mark-to-market charges.

For the full fiscal year, we are still expecting that our capital expenditures, net of tenant allowances, could reach up to $90 million.

In closing, I truly believe that we're running our business well, managing cost and cash flow aggressively, strengthening our customer relationships and capitalizing on our strong landlord and vendor partnerships more than ever.

Our team is strong and highly committed to take the Company to a new level of growth and profitability.

We have $330 million in cash and no debt.

And expect this cash reserve to grow considerably by year end.

We are constantly assessing growth opportunities and see a bright future in front of us, as the global markets continue to open wider.

This crisis has helped our team to work more closely together, to think more strategically and creatively to win in this challenging marketplace.

And today's results demonstrate our team's commitment to winning.

I will now turn the call back to Paul for closing remarks.

Thank you, Carlos.

To conclude, in the last three decades, our Company, Guess company, has survived through downturns because we never, ever doubted our confidence in our brand, in our people, in our strategy, in our product.

When you add, on the top of that, passion, trust, teamwork, enthusiasm, you can seize pretty much any challenge, any competition, any crisis.

But even with all of that mentioned, we continue to question that same beliefs, every day, every month and ask ourselves "and what-if"'s?

And that's what keeps us alive.

Thank you, I will now open the question.

Please, operator.

(Operator instructions).

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

Good afternoon, congratulations.

Thank you, Eric.

Good afternoon.

Let's talk a little bit about the US stores.

Could you talk a little bit about the -- in the comps for US for Q2, what -- was it the same throughout both Marciano, G by Guess and the Guess concepts or was there significant variations between those?

And if there were, what kind of was the different drivers for those units?

Yes, Eric, we do not address comps by division but I can tell you that there were some variations between brands.

The retail comps were probably the most significantly down and it was driven by traffic in the malls.

We believe that the traffic has been the main driver for the comp decline and we think -- that has been pretty consistent throughout every month of the quarter.

Okay.

Thank you.

Thank you.

You're welcome.

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

Thanks, great quarter, guys.

Congratulations.

Thank you.

Thank you very much, Omar.

I want to understand a little bit better the Europe and the pull-forward of shipments.

Which kinds of customers, is it across the board in Europe?

Is it purely a timing issue, where they're trying to get goods in early, or is it a reflection of any sort of change in underlying demand level there?

Can you see any patterns across -- because it seems pretty lumpy.

Last quarter, you had it pulled forward in the first quarter -- or in the fourth quarter rather.

Help us understand this dynamic.

What's the underlying kind of business reason why this has been lumpy quarter-to-quarter?

Yes, Omar, this has been something that we have been really doing and it has been very successful so far.

We have been trying to really move the business into the earlier quarters for both the first six months of the year and the second.

And the idea here is to really have a much smoother calendar.

And with operating with the four seasons the way we operate in the States.

Over there, historically, the market has operated with two seasons that ship at the beginning of each of those six month periods.

And we have been trying to really change that business model because it would help the opportunity for early demand being satisfied.

It would open the opportunity for reorders later in the season.

And it smoothes out the investment in inventory for both our customers and ourselves.

So, we are very pleased with the fact that we have been able to move a lot of this business from third quarter into second.

It's been very successful and very profitable.

And the change, we think, it has been very effective.

We feel that we are reaching now a level where we are comfortable with the way the business is running because the last change has been more impactful on the apparel business, which was the last big business that we wanted to effect this change.

And it's across the board because we are offering this pre-collection line.

And people love the product and want it in earlier.

And so, we ship -- fortunately, we have the product in our warehouses and we were able to ship accordingly.

Thanks for the color.

Thank you.

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

Hi, great, thanks a lot.

Carlos can you just give us a little color on performance in the European continent by different regions, just to give us a little bit more granularity on what you saw in the quarter?

Thanks.

Yes, as you know, Italy is the most significant market for us and the most developed market.

And the penetration for the second quarter relative to a year ago, was identical, about 46% of total sales.

In France, we gained some share, growing by about 2 points.

The whole Spain area and, Iberica, we call, was slightly down and we think that that is a direct result of what's happening in the economy there.

The UK was up, again, gaining some share.

And the rest of -- Germany was about flat and there were some of the Eastern countries for which our business was down relative to the total.

Great.

Thanks.

Thank you.

Your next question comes from the line of Stephanie Wissink of Piper Jaffray.

High, thanks for taking our question.

If you could just talk a little bit more about your Asian business?

In follow-up to the last comment, any key markets of opportunity there and your store plans for that region?

Thank you.

I couldn't exactly understand.

Did you say European markets?

Asian.

Asian markets.

I'm sorry.

I'm glad I asked.

Well, so with respect to Asia you heard Paul's remarks, really, we are taking that territory in a very cautious way.

We have -- we launched the brand only a couple of years ago and we have, and I'm talking about China specifically, we have made pretty significant progress in penetrating some of those markets.

We have a combination of strategy with key stores in fashion cities and then, we are working with partners throughout China as well.

So our plan to open stores in overall Asia are significant when you combine all of the efforts with our partners but we are not opening significant stores directly right now.

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

Thank you, and congratulations on yet another fabulous quarter.

Thank you, Christine.

Thank you.

I was wondering if you could talk a little bit about product.

What worked well for you during the quarter, both in the US, as well as Europe if it's different and then Asia?

And then, geographically in the US, what were your stronger regions?

Thank you.

Sure, with respect to the North America business, YC was the best performer throughout the store.

Followed by accessories.

Our men's business was the toughest one.

I think that this is kind of like general in the environment that we are operating in right now.

And within YC, Young Contemporary, we did very well with denim.

We did very well with sweaters, knit tops.

And there are many categories here where we were very lean in inventories and we were able to chase product throughout the period.

Even non-denim pants also did well for the quarter as well.

Accessories had some categories that did better than others, handbags, watches.

And there were some categories that were a little more challenging for us, jewelry but that business is turning around pretty nicely right now.

And then things that were a little more difficult for us were basic denim in YC and in men's, we had a more challenging environment with knit tops and woven tops.

Guess by Marciano had a much better quarter than what we had seen.

And overall, what drove that business was sweaters, dresses, pants, skirts and accessories.

We launched the new line of handbags, which has been very successful.

The great thing about the Guess by Marciano business is that our margins were significantly improved, as our inventory was in a great position throughout the period relative to a year ago.

Footwear was a little bit weaker than the rest of the store.

I'm talking about overall footwear.

But we have made some adjustments to both the product assortment and the pricing, which we think are going to be very, very positive going into the second half of the year.

And then, geographically?

With respect to the geographies, the two areas that were very tough for us, one was the Southeast because we know -- we think that some of the tourism and some of the other events that are taking place in that area are -- have impacted our business negatively.

And the West Coast was very difficult.

We are seeing some signs of improvement and our business in August has been better than what we experienced in the second quarter.

And we see some improvement in those areas as well.

Overall, the strongest areas were the Southwest.

Canada also had a much stronger second quarter than the rest of the chain.

The Northeast was strong, relatively speaking, I'm talking about still negative.

And the Midwest also had a better quarter than the rest of the regions.

And then, you called out Marciano, have you seen more cross-over shopping since you switched the name to Guess by Marciano?

Yes, as you now, we also combined the two lists of customer loyalty lists and that has been a big success for us.

Our traffic has increased tremendously in our Guess by Marciano, as we are benefiting from the strength of the Guess brand.

Now, what we are doing is changing the assortments so that we can really satisfy the needs of that customer that is also looking for other pieces in the line, like denim.

So we have strengthened the offering of denim and some of the other more casual pieces.

We'll still carry some dressy in the stores as well.

So, it has been very, very successful.

We think we still have a ways to go because the conversion has not followed the traffic.

So, there is still a lot of opportunity to convert more and improve the overall performance of the store.

Thank you and good luck.

And the stores do look great.

Thank you, Christine.

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

Good afternoon and congratulations.

Just to talk about the US market for a little bit more, I was wondering, Carlos, you said that August has been a little bit better than the second quarter trend.

Do you think that there's been any pressure because of calendar shift and would you expect that the business might see a better September than August?

Yes, actually, as I'm sure you heard, Janet, we are expecting that the overall quarter for third quarter for retail will be pretty much in line with what we have experienced so far in August.

And we are up against much weaker numbers in the upcoming months.

The reason why we are thinking about this is, we do believe that there is going to be a late Labor Day, of course.

There was a movement in Labor Day.

Last year, it was this coming weekend.

Right.

So, we do anticipate that that is going to impact August sales and negatively.

And the reverse is going to happen in September.

That's the expectation.

Also, the fact that we are up against weaker numbers.

Okay.

And also, on the sourcing front.

I know you were doing -- you have a lot of supply chain initiatives there, helping your product margins.

I'm wondering, above and beyond that, if you are witnessing more advantageous pricing from your vendors or if you're switching to different vendors because of more advantageous pricing?

And if that could help out product margins, as well?

my question is, if you are seeing it, for how long might we see the benefit coming through the product -- the gross margin line?

Yes, last year, coming into the end of the year, we were seeing pressure on product margins.

I'm sure you remember.

And since then, we have been working very hard with our suppliers.

And I think that Paul made a comment regarding this, strengthening our relationships and really consolidating the vendor base.

All these efforts are ongoing but the great thing is that we are already seeing some impact on our IMU.

And the great thing is that we have been able to do what we needed to do from a pricing standpoint and remain very competitive.

Putting more quality into the garments and better publications, in many cases.

And still being able to really see an improvement in IMU going in to the second half of the year.

So, we are very pleased with what's happening on the supply-chain side.

Okay.

And I wanted to just say congratulations.

I think your back-to-school assortments are amongst the best in the mall right now.

Thank you, very much.

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

Hi, good afternoon, guys.

Congratulations.

Thank you.

Carlos, could you provide us with a little bit detail in terms of how much progress have you made on the vendor consolidation and how much potentially more you have to go for the balance of the year?

Yes, it's not going to happen in the balance of this year.

I can tell you that globally, we have reduced the vendor base by about 20% to 30% and we want to go another 30%.

But it's not going to happen by the end of this year.

We are looking at this project as 1.5 year to two-year project.

Okay.

And that 20% to 30% reduction achieved thus far, is that relative to the end of last year or is that the year-ago period?

No, it was right at the end of last year when we started the project.

Okay.

So, 20% to 30% since the end of last year.

Got it.

Okay.

And then, you mentioned the ability to chase a lot of goods during the quarter.

Can you just talk about what you're seeing from an excess capacity perspective?

Have you seen any of that excess capacity go away since the first quarter or are you still seeing a lot of availability out there?

You mean product availability?

In terms of from your vendor base, excess manufacturing capacity?

No, we always have the opportunity to really chase goods.

And our people are pretty much experts when it comes to this.

That's the way we have operated.

We want to be on trend and every time we see an opportunity, we go after that.

And in many cases, it depends on whether we own fabric or if we can really get together with a strategic vendor that we work on that project.

And so, there is a lot of planning that goes into this, even when you are acting based on the current trends.

And we have not had issues in finding the type of product that we were looking for.

So, I think that capacity is quite aligned with demand right now.

Okay.

Great.

Thank you very much.

Thank you.

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

Thank you.

Good afternoon and congratulations.

Thank you.

Thank you, Betty.

I was wondering if you can address a little bit about the European business?

I think, Dennis, you had commented earlier that it had seen significant expense leverage as you are starting to lap a lot of the investments made last year and really the last couple of years.

How should we think about that, either in Q3 or the balance in the second half of this year, as we continue to anniversary some of those investments?

Even though I know you said, Carlos, that in the third quarter, there will be some impact on margins because of the shift into Q2 as well as the product mix.

Yes, the way I would look at it for the year, overall, I would expect to see pretty strong leverage in the European business on their own expense base.

The shift helps the second quarter on it.

So, it might be difficult for us to achieve that in the third but overall, I would expect to see nice expense leverage in the European business for the year.

Okay.

Great.

And then, going in to the first half of next year, Dennis, will we continue to see some of those benefits before we anniversary the initial benefit?

Yes, we've started seeing some improvements, starting in the fourth quarter of last year.

So next year, we should be fully comparable.

But let me add to that, I'm sure you heard, Paul made a comment that in Europe, we are investing in several areas.

That includes building a strong infrastructure for running this retail business, which was a very small retail business up until recently but now we are adding several doors.

And also, we are strengthening the team that runs the whole jeanswear business.

So this is going to require some investments.

So, I think that, yes, there are a lot of infrastructural investments that we've already made that we can leverage.

But at the same time, there are some others that we will need to continue to make to position the business there in such a way that we can continue to grow at the rate that we want to grow.

Okay.

On that, Carlos, can you give us any color around where these stores geographically are located?

The timing, I know that by the end of the year, I think we're looking at 75 openings, should we expect that to be equally spread out between Q3 and Q4?

Well, I can say -- when you say "where," you know that we have said that the key areas that we were targeting include France, Spain and we continue to open stores in Italy.

We are opening several stores in the UK and a couple of stores in Germany, as well.

So, our plan there is to really go into many of these underdeveloped territories.

And we want to do that with the right representation of the brand and there's nothing better than our own stores to do that.

The majority of the stores will be, of these 49 stores remaining for the year, will be mainly concentrated in France and Italy.

Okay.

That's very helpful.

And then also, I lastly, was wondering if you could give us any color around inventory?

It was very clean coming out of the quarter.

How are they positioned from -- whether it's the European segment versus wholesale or the retail channel?

Yes, the retail inventories are roughly flat, which is very nicely aligned with our expectation for the upcoming quarter.

And that includes the investments that we've made in the trending products that Carlos mentioned.

Asia, the inventories are up very slightly, while we see the business growing faster than that.

And that's really the result of our continuing to improve our management there.

And the European inventories are down slightly in the quarter and that includes the additional inventories to support the earlier spring/summer collection this year.

Great, thank you so much and best of luck in Q3.

Thank you, Betty.

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

Thank you and congratulations, everybody.

Thanks, Holly.

Quick question on the comments that you made about North American retail and hoping to reverse the negative comp trend.

And looking at the trend that you're seeing with how the consumers are shopping, particularly around events.

I know you just said that your retail comment would -- I'm sorry, your inventories would probably be flat.

And that kind of answers one of my questions but if I could just get a little bit more.

In the past you've had some very successful events and you've kind of managed your inventory around those events.

And is that sort of -- with the success you've had in the past and your recent reads, is that sort of what we might look for around the critical holiday period, is those types of events like we've seen in the past?

Yes, Holly, what we are seeing is that the customer today is definitely motivated to spend at certain times.

And we have really positioned our business so then we could go after that business during the high, peak traffic times.

And for that, we are positioning our inventories.

We are positioning our people in the stores and giving more -- a better service level, investing in payroll.

And more importantly, it was great that we launched the customer loyalty program, where we have 1.750 million people right now.

And we are going and marketing directly to these people to invite them into the stores and giving them enhanced benefits relative to the rest of the people that would walk in to a store to shop.

We just ran an event last week and it has been very successful.

And we think that that is a way to win in this type of environment.

We will continue to do that -- within reason -- and really control how we promote, as opposed to just going into a plain markdown cycle like we have done in the past and especially, last year in the fourth quarter.

So we see a lot of opportunity in the way we are running the business today relative to what we had in the past.

We also launched the G by Guess loyalty program, this happened in July.

And we already have over 50,000 names in that list as well.

So in the future, we think that this is an opportunity for that chain as well.

Great.

Thank you.

Yes and last week, the traffic looked great in the store Tuesday through the weekend with the membership program.

So, congratulations.

Thank you.

Thank you, Holly.

(Operator instructions).

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

Thank you.

Good afternoon and I'll add my congratulations.

Thank you, Margaret.

I was wondering if you could comment on what you're seeing in terms of the response to back-to-school?

You've upped denim, you've lowered certain price points, made it more casual.

And if you could give us some insight into what changes you have in the offering for holiday?

And if you're seeing similar trends in Europe, have you done the same thing, upping the denim, lowering price points, et cetera?

Yes, really, this is -- When you say "lowering price points," in some cases, we increased price points, based on what we saw how the customer was reacting.

A good example for that is in some of the dresses in Guess by Marciano.

So we went after each of the product categories and did what we thought was right based on what the customer was looking for.

We see a lot of opportunity in denim.

We continue to see it.

There are opportunities, even in non-denim, dresses, sweaters.

We have positioned the whole assortment concerning the trends that we saw earlier in the year.

Plus the rock and roll vibe that you saw in the store now.

So we feel that we are very well positioned.

The handbag assortment is also very strong.

Footwear was another category that the whole assortment and the pricing was re-examined and changes made.

So we think that there's a lot of opportunity in front of us.

And this impacts, not just our Guess stores or Guess brands but also the Guess by Marciano brand, the G by Guess brand and even in our factory outlet division, we have improved assortments as well.

Margaret, this is Paul.

If I can just use the right information about denim, in fact, the non-premium denim in men and women, the price did not decrease, we are, in fact, increasing.

The average price on non-premium last year was $88.

This year it's $92 for women.

For men's, the average non-premium last year was $97 and this year, it's $106.

On the premium, we lowered a little bit.

For men, it went from $160 average to $155.

So, it's nothing.

And for women, it went from $153 to $137, as an average price.

So it was a price that was pretty there.

Well, I think what you're trying to do is gain share from the retailers selling denim over $200.

Yes.

In fact, you are right.

Also Margaret, you mentioned about Europe and we have made significant progress on the -- what we call the global line.

And doing a lot of common styles between the two.

And we have -- so a lot of the denims that you see in the North American line is now shared, to a certain extent, with the European and with great success.

Yes, it looks great.

I was wondering if you might have another shift in Europe in Q4 from Q1 with Spring?

Any comment?

Well, as you heard, our backlog is up for spring/summer and it's primarily because of the earlier sales campaign.

So, there maybe a little bit of a shift too.

All we can do is really give you as much visibility as we can have by the time that we give you guidance for the fourth quarter.

Okay.

Thanks, and best of luck.

Thank you, Margaret.

Your next question comes from the line of Susan Sansbury of Miller Tabak.

Susan has disconnected.

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

Wedbush Morgan.

Well, hi.

I just had a quick follow-up.

Is there any color you can offer us on how we should think about currency impact in the third quarter?

And then I think, originally, we were thinking that perhaps by the fourth quarter it could actually become a benefit as we lapped some of the changes last year?

You still hit the nail on the head.

That's exactly the way to be thinking about it.

If you assume that the currencies stay relatively stable to where they are right now, we're talking about translation, but you'd see a very -- roughly neutral, maybe down about $0.01 in the third quarter.

And then again, if they stay flat in the fourth quarter, meaning flat to where they are right now, there's your opportunity to improve.

And that could be like a $0.03 or a $0.04 improvement on translation.

Great.

Thank you, Dennis.

Thank you.

Your next question comes from the line of Stephanie Wissink of Piper Jaffray.

Hi, just one follow-up on your European business.

I think Dennis mentioned that the product margins were down.

I think that was the theme in the last quarter as well.

If you could just give us some insight on your focus there to improve those over time?

Thank you.

That product margin issue is really driven by currencies.

So, what we said, was that they've -- we've been buying at a relatively weaker euro environment.

We would expect because of the inventory we sell in Q3, is inventory we bought in Q2, so we expect that impact to continue in the third quarter.

And then, once you get past the third quarter, then there's the opportunity to start neutralizing that impact.

Okay.

Thanks, guys.

Thank you.

Your next question comes from the line of Susan Sansbury of Miller Tabak.

Hello, can you hear me?

Yes.

Okay.

Sorry, I managed to cut myself off.

Thanks for letting me in and ask the questions.

At the beginning of this conference call, Paul made some comments about store plans for Europe, which I missed.

The incremental 49 stores that you're going to open in the back half of this year, is that greater than you originally expected going in, relative to your last quarter's comments about you were re-evaluating the new-store plan?

Not really, the valuation is minimal.

And I think that we are planning to open the 49 stores by the end of the fiscal year.

And I think the original plan was maybe 55, 56, maybe.

So it's not -- there was some opportunities that came along that were not in the plan.

And we were definitely trimming stores that we didn't feel that it was like AAA stores or A stores and we passed on early on.

And right now, I cannot give you the names, but some Asian brands are closing stores and some opportunities are coming out of nowhere.

And we have to act immediately because we're not too long in these locations.

So, these were not in the plans.

So we had locations that we were not planning on in certain cities and certain countries.

But because of the opportunity that came that XYZ decides to close a number of stores in Europe and suddenly, another company come with another closing of stores.

So we come up again with a new round of stores that we didn't plan but we cannot let that pass by and say, "No, we have a plan." We are disciplined.

We go with opportunity.

Okay.

That's very helpful.

Thanks so much.

Thank you.

That concludes the Q&A session.

I would now like to turn the call back over to management.

Well, thank you for all of the questions for this conference.

I wanted to conclude to tell you two things that we did not mention here.

One, is we continue to look at and evaluate and clearly decided that G by Guess, which is only two years old, we'd continue to expand and we are looking to open up to 150 stores in the next maybe, two, three years.

And the Guess accessory stores, we plan to -- we look at to open at least another 250 in the next three to five years.

After the -- and exactly right now, we have 190 Guess accessory stores right now.

So these are the two big projects we are working on.

And of course, what Carlos mentioned just before that, we are building an entire retail structure for Europe to assert the right support for all of the stores we plan to open in Europe, Eastern Europe and Russia, all of the countries around Turkey.

We have many, many countries, that we are way underpenetrated in.

And of course, Germany and England.

So, that's the three big things that I wanted to mention before we close.

Thank you very much and we will talk to you in November for the third quarter call.

Thank you very much.

Goodbye.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

And have a great day.

And you too.

Thank you.