Guess? Inc (GES) 2010 Q3 法說會逐字稿

Good day and welcome to Guess's third 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 third quarter of fiscal year 2010.

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

We are very very pleased with our third quarter financial results.

In the last quarter each of our businesses exceeded our expectations in both revenues and earnings.

In fact, we set another record for net earnings in the quarter.

Overall, we delivered earnings per share of $0.69.

Our management team continues to execute well in what is still a challenging environment.

Our diversified business model and margin structure remain intact and our global brand recognition with our customers continues to expand.

It was over a year ago that the global crisis exploded in every region of the world and I strongly believe that the sharp, immediate action we took at the time to protect our business are now paying off.

We have faced significant challenges and addressed them head on.

Through this process we have remained true to our brand and never lost our focus on styling, quality of our product and brand integrity.

In the third quarter we posted revenues of $523 million, significantly ahead of our expectations.

Our businesses in North America and Asia both grew and our licensing business was about flat.

In Europe we had a solid quarter especially considering the effect of our Fall/Winter pre-collection that shifted shipments out of the third quarter and into the second quarter.

In North American retail we performed well, even as customers continue to shop cautiously.

We grew this business as a result of square footage expansion.

During the quarter we posted a 3.4% comp decrease which was stronger than we had expected.

Our comps accelerated during the quarter, culminating with a positive low single digit comp in October.

We are gaining momentum in all of our retail concepts.

Next is Europe, which also outperformed our expectations.

We made good progress developing our business outside of Italy as we increased our penetration in France, Spain, the UK and Germany.

So far this year, our combined businesses in these four markets have grown by 18%.

But, as we had planned, our revenues declined in the quarter given the pre-collection shift.

We also expanded our owned retail business significantly - a high priority for us.

In total, we added nine new retail stores in the quarter in such cities like Montpellier, Dusseldorf and London, where we just opened our new flagship store on Regent Street.

Our revenues from our retail business increased by over 40%.

In addition to the stores that we own, our partners opened another 21 stores in the region, in cities like Brussels, Helsinki, Warsaw and Lisbon.

Next is Asia, where we have several businesses in different stages of development.

Korea continues to drive our Asia business, posting a double digit comp this quarter with a 60% revenue increase.

We just added a new underwear line and now operate 22 underwear locations.

And in China, we had a better quarter, as a result of significant improvements we made to the product assortment offering.

China grew by double-digits in the quarter and we remain very focused to build a strong foundation for the future of our brand.

In licensing, our performance far exceeded expectations and improved relative to the trends of the past few quarters.

Our businesses in handbags, jewelry and eyewear were all very solid.

Now, going forward.

We are still finalizing our operating plans for the upcoming fiscal year.

As we look past fiscal 2010, the core principles of our long-term strategy remain intact.

Our business is still concentrated in some major markets around the world, and we believe that we can take advantage of our strengths to grow our business in markets where the brand is very well known and present, but definitely underpenetrated.

Europe remains at the top of the list.

I strongly believe that Europe can reach $1 billion in sales in the next two to three years.

Retail growth will remain a major part of our strategy.

Our goal for next year is to open 100 Guess stores across all concepts in Europe.

In addition to our apparel stores, we see accessory stores as another important tool for us to penetrate new markets.

We are working very closely with our partners and together, our goal is to open 60 Accessory stores globally in the next fiscal year.

Another area of opportunity in accessories is jewelry.

We have decided to internalize our international jewelry business, and our first deliveries will take place in January 2010.

This is a $40 million additional business for the next fiscal year.

Asia has remains critical to our growth.

Korea has been a great market for us where we have already gained significant share.

And we are approaching China cautiously, working with licensee partners to open stores and together expand our distribution in the key secondary cities.

Taiwan is also operated now directly by us since March 2009, we are just at the beginning of our penetration there.

Finally, in North America, we plan to resume expanding our store base in every concept.

Thank you.

Dennis will now take you through the numbers.

Thank you, Paul, and good afternoon.

Total third quarter net revenues decreased 1% to $523 million.

Total Company gross profit was $237 million or 2% lower than last year.

Gross margin was 45.3% compared to 45.8% a year earlier.

Product margins improved in every one of our operating segments and we operated with a higher occupancy rate, primarily due to a larger mix of European retail stores.

We continued to manage expenses very tightly, reducing our SG&A expenses by 3% to $138 million, and improving our SG&A rate 60 basis points to 26.4%.

Both variable selling expenses and marketing expenses were down from last year.

Partially offsetting these savings were higher retail selling expenses and mark to market adjustments related to our compensation programs.

We improved our operating margin which reached 18.9% for the quarter, versus 18.8% a year ago.

For the period the Company's operating profit reached $99 million, which was a slight decrease to last year's level.

There was no material currency translation impact on this quarter's operating results.

Our effective tax rate for the third quarter was 33%, essentially flat to last year's third quarter.

We are planning the fourth quarter with this same rate.

Overall, net income attributable to common stockholders increased slightly reaching $64 million, and diluted earnings per share increased 3% to $0.69.

We consider this an outstanding performance particularly when you recall that the European shift that Paul mentioned impacted the quarter's EPS by $0.09.

Now I will review our revenues and earnings by business segment.

In North American retail, our comp store sales declined by 3.4%.

Total revenues increased 2% to $240 million, given this quarter's larger store base.

We expanded our gross margin by 50 basis points, driven by stronger product margins.

We leveraged our SG&A expenses, which declined 5% resulting in a 170 basis point improvement in our SG&A rate.

These resulted in a 220 basis point expansion of operating margin to 13.8% for the quarter.

Operating profit reached $33 million, up 21% from last year.

During the quarter, we opened two new stores, ending the period with 433 stores in the US and Canada.

In our wholesale segment, third quarter revenues increased by 10% to $87 million.

We continued to grow our Asia business as revenues increased both in Korea and China.

Revenues in our North America wholesale business were down, but did exceed our expectations as one of our largest US customers requested orders earlier than we had planned.

Operating margin in the wholesale segment expanded 280 basis points to 20.4% and operating profit increased 28% to $18 million.

Product margin increased in North America and in Asia, and we leveraged expenses in both regions as well.

In Europe, third quarter revenues declined $17 million from last year, or 9%.

As expected, our European wholesale business was down, given last quarter's $29 million shift.

This was partially offset by an increase in revenues in our owned retail business.

We ended the quarter with 77 stores in the region.

Operating earnings decreased 18% to $41 million and operating margin declined to 24.2%, versus 26.6% a year ago.

Product margins improved, but were offset by our higher occupancy rate given our retail expansion and a higher SG&A rate due to the revenue shift.

Licensing revenue was essentially flat, reaching $28 million in the quarter, which was significantly better than we had expected.

Now turning our attention to the balance sheet, our cash position remains very strong.

We ended the quarter with cash of $345 million and virtually no debt.

Our net cash position has improved by about $150 million in the last year.

So far this year, we have generated operating cash flow of $165 million versus $93 million last year, an improvement of over 75%.

Accounts receivable increased 6% or $19 million to $318 million compared to the prior year.

In constant dollars, receivables decreased by 5%.

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

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

We ended the quarter with $262 million in inventory, about 4% higher than last year's third quarter.

We are very pleased with our current inventory position.

During the quarter, we invested $16 million in capital expenditures, net of tenant allowances.

For the full fiscal year, we are now expecting this amount to be approximately $80 million.

Finally we announced today that our Board of Directors has approved a quarterly cash dividend of $0.125 per share.

To summarize, we have been managing our business effectively, keeping our inventories clean, our cost structure lean and deploying our capital carefully.

As a result, our margins have expanded, our cash flows continued to strengthen, and our balance sheet remains solid.

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

Thank you, Dennis, and good afternoon.

Today I will update you on our business trends and provide revenue, operating margin and EPS guidance for the fourth quarter.

This fourth quarter, we plan to improve profitability and expand our revenue base.

We are expecting consolidated revenues to range between $585 million and $605 million.

Our goal is to reach an operating margin of about 18% and diluted earnings per share between $0.77 and $0.80.

With respect to currency translation, given the recent strengthening of the Euro against the US dollar, we do not feel it is prudent to forecast revenues and earnings at prevailing exchange rates.

Therefore, our guidance assumes that the US dollar will strengthen during the quarter.

Now let me address our expectations for each of our businesses.

I will start with North American retail.

In this business, we bought inventories tightly and lowered costs in almost every area that did not impact our immediate ability to service our customer.

We are investing in trending categories like denim, both premium and basic, leggings, woven tops for men and women, dresses, sweaters and outerwear.

Our inventory position in these categories is strong and our merchandise presentation is very appealing, including a selection of great gifts offering outstanding value.

We also see opportunities in accessories and footwear, especially hand bags, watches and boots.

We plan to continue to use our loyalty programs to communicate directly with customers, bring them into the stores and convert those visits into sales.

With membership now reaching 2.2 million customers, this has become a great vehicle to improve the productivity of our stores, including our Guess by Marciano stores, which have greatly benefited from our rebranding efforts.

Now, I would like to update you on our current trends in this business.

For the Friday after Thanksgiving, our business was up in the mid to high single digits and margins were consistent with last year.

With this performance, we closed the month of November with positive same-store sales in the low single digits, consistent with October's trends.

Our November product margins showed an improvement of more than 300 basis points versus last year, as a result of improved sourcing and less promotional activity throughout the month.

We continue to run with less inventory than we did a year ago for comp stores, and our promotional efforts were focused on key events.

Our November performance gives us confidence in our ability to deliver our fourth quarter plans.

We do expect that the environment will remain relatively stable, with most retailers like us managing inventories tightly.

All considered, we expect a substantial improvement in margins and we are assuming that comps will be slightly positive.

This would translate into a revenue increase in the low single digits for the period.

In Europe, our current wholesale backlog is up in the mid single digits.

This includes orders for our pre-collection line, which we are shipping for the first time this Spring/Summer season.

This may result in increased shipments this fourth quarter at the expense of the first quarter next year.

In our European retail business, we expect an increase in revenues of over 40%, mainly due to the new stores.

Lastly, we expect the jewelry business Paul mentioned, which will be part of our European operation, will be immediately accretive to earnings, with a favorable fourth quarter EPS impact of as much as $0.02.

Overall, for the fourth quarter, we are planning our European revenues to be up in the mid to high single digits in local currency.

Given our assumptions regarding exchange rates, this would result in an increase in the low to mid teens range in US dollars.

I will now address our wholesale segment.

We do expect modest growth in the wholesale segment in the fourth quarter.

This growth will continue to be driven by Asia.

In North America, we expect the department stores will continue to manage their inventories conservatively, resulting in lower shipments from a year ago Currently, our US backlog is down about 10%.

In our licensing business, we expect that our fourth quarter revenues will decline in the mid single digit range.

This includes the impact of our direct operation of the international jewelry business.

With respect to gross margins, we expect to achieve an expansion over last year's fourth quarter of about 250 basis points, company wide.

This will be driven by product margin improvements in all of our businesses, which will be partially offset by a small increase in our occupancy rate due mainly to the larger European store base.

Regarding expenses, we are planning the fourth quarter with a slight increase to our SG&A rate, primarily due to last year's fourth quarter reversals of certain performance based compensation accruals.

In closing, we like where we are.

Our brand has significant momentum globally and we are gaining share in key markets.

Our product offerings set us apart from our competitors and we strongly believe that strengthening customer relationships will result in further market share gains.

I will now turn the call over to Paul for final remarks.

Paul?

Thank you.

To add to what Carlos just said we continue to see strong opportunity in each and every concept we have developed in all regions of the world.

What matters to us is the execution and discipline in the expansion of our brand, that we have been trying to do the best we can the last six or seven years.

But more importantly it is a passion of accretive scene, that reflection of quality and develop of products and of customer acceptance of our brand.

That's what matters to us.

We now would like to open the call to your questions in queue.

Operator?

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

Please proceed.

Thank you.

Congratulations, everyone, a fantastic quarter.

Really great job.

Thank you.

And your product looks great by the way.

And your Regent Street store and positioning in Europe looks terrific.

Thank you.

Just I guess a question and a half since I have to keep it to one, product margins sounds like a real point of strength for you across all divisions.

Could you talk a little bit more about that, how much is coming from sourcing versus how much is coming from the efficiencies of managing your one global assortment?

And where would you see product margins heading into next year, how much of a year-over-year improvement, because we are hearing a lot about sourcing efficiencies as well.

And the other would just be on retail growth, I mean you are emphasizing that Paul, and it sounds like it is going to be a big part of your growth strategy, can you put it in the context of a square footage growth strategy for Europe, into next year, and Asia if you can as well?

Thank you.

Yes, let me start with product margin.

This is Carlos, we, we were very pleased with our performance, with respect to product margins because as you know, the business have changed pretty significantly especially in the fourth quarter of last year.

We are very pleased because our margin structure has been intact from prerecession levels, and most of that has come from the way we are managing the business, our inventory levels have been very much under control in line with the demand that we saw.

And we did benefit from sourcing, but that number was not even close to the expansion of margin that we saw because of how we manage the business with promotional events.

So but, that doesn't mean that the number is not significant.

We would rather not disclose the type of numbers that we are seeing there.

We expect that that benefit would also continue into next year.

So we are seeing ways to improve the way we are sourcing including moving some of the sources throughout the world including there.

About -- this is Paul.

About the square foot increase specifically about Europe and Asia, in fact we'll be flying to Europe in the next few hours, to have a recap next year and the year after about where we stand with potentials.

We look at I would prepare to give you a percentage.

We look to increase our space, our own space that we operate directly in double digits and the same for Asia.

I am comfortable with that, but definitely, what we just said before, the $1 billion benchmark is definitely in sight for us when five years ago it was $60 million or $70 million.

So that is definitely a big focus and of course Asia which we mention on every conference call.

Paul, could you just share the economics that you are experiencing in Europe?

I mean what the catalyst for this growth I would imagine it's a number of things but can you compare and contrast the economics of running retail in Europe versus the US?

Well, it is, as you well know it is a much larger investment when you do it yourself, because you deal with much more higher occupancy due to the fact of key money.

That's sometimes very substantial.

And also, it is different operation than U.S., definitely.

The productivity is higher, much higher, if you look at dollar per square meter, and because it is not such a large base of shopping centers and mall all over Europe, it is much more concentrated and that's what we are experiencing.

But for example, France is a key country for us, we see that country becoming very, very significant for Guess now in the next three years, to think we can do 300 million to 350 million euro business is definitely in our sight.

Just in France.

So that gives you the potential about what the rest of Europe is.

Okay.

Thank you.

Thank you.

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

Thanks, great job, congratulations.

Thank you.

As I listen to your prepared comments you were running through all of these different countries, these different businesses, accessory, Europe, China, how do you prioritize, what would you prioritize is the top one or two or three most important opportunities for the brand?

And as you look at the SG&A control that you've exhibited in this environment, how do you think about SG&A spending as you need to build out the team and the frame work and the infrastructure to leverage these opportunities going forward?

Well, you can go different ways, first of all when the crisis exploded last year, the impact was much, much stronger in US than anywhere in the world and this is where we put up the brakes right away, here.

Meanwhile the effect in Europe was much slower to come in.

We have a lot of stores, and deals in process, and we proceeded with that.

So, how you prioritize is now, you see the world as a free region to decide.

I mean, you have that much cap ex to deploy, and you have to look at what is a priority -- as a brand first, what is important for the Guess brand and these different concepts and evaluate what you think is right according to the competition in the market acceptance of the product.

But because we are a lifestyle brand and there are very few lifestyle brands for example in Europe, of course the chances have been much, much higher, acceptance there than anywhere.

And because we have been advertising our product there for so long, without selling any product, that when we decide to sell product, the brand was already extremely known.

So we had to execute and deliver and have the discipline for execution to go country by country, what was a knowledge of Europe, and when you see that Europe will at one point or another, have the size of business for U.S., because of the sheer number of countries and if you add Russia and Middle East in it.

That is definitely a clear signal that we have to put equal if not more capital in Europe.

And Asia as I mentioned on a different conference call, is much slower pace there, on a sense that we are still in a growing process to don't be overconfident, to think we know everything, we don't.

We just go step by step where we feel stronger and stronger, and just move at the pace we have to move cautiously.

So that's also the capital is adequate to that assessment.

Omar, your second part of the question was related to SG&A.

And the way we have been funding SG&A has been following the strategy for the business and the expansion of the brand like Paul was mentioning.

So as you can see for example, when we saw that Europe was exploding during the last few years we worked very quick to build an infrastructure and we created several centers including administration and selling groups in Lugano, Switzerland and now this year, the first time we are anniversarying that type of investment.

So a lot of this investment has been already incurred.

We are now increasing our development and spending as it relates to the retail team, and we just open and we are operating a new distribution center, which is a pretty significant that will service the whole business in Europe.

So a lot of exciting developments as it relates to spending.

We have been able to because of the growth we experienced we have been able to really keep our SG&A rate in fact lower this year than that what we have seen in years past in spite of that investment as we annualize the spending.

And we, that's the way we plan the business and that's the way we are looking at next year as well.

Thank you.

That's very good color.

Thank you.

Your next question comes from Randy Konick with Jefferies.

Please proceed.

Hey guy, it is actually Taposh Bari filling in for Randy.

First of all, congrats on a great quarter and I guess what we wanted to know more about is we're hoping you can provide more color by division of the Marciano concept versus Guess versus accessories domestically during the quarter?

Yes.

I think I mentioned in my prepared remark, that Guess by Marciano really benefited significantly from the rebranding efforts, and we had seen significant improvements in traffic since those efforts were initiated early in the year and what we are seeing now is a lot of that traffic is converting into sales.

We are excited about that as we have not only rebranded the name of the Company but also -- or the division.

But also we have aligned a new product assortment in the stores including the introduction of handbag, and much more denim as part of the assortment.

So we are excited about what we see in Guess.

We think that the product really sets us apart from the competition today.

We have also aligned pricing, the quality standards are very high, and the assortment is very balanced, offering the customer several options, dressy and more casual part of the line.

The Guess stores have also performed very well.

We are seeing some improvement.

In fact when you see what happened throughout the third quarter, we saw an improvement going into October, and that improvement has been pretty much in line in the month of November as well as we saw increases in margin.

So overall, the traffic is lower than a year ago but the conversion has been higher and that says a lot about the assortment because we are being less promotional than we were a year ago.

So to see an increased level of conversion, with a lower level of promotional activity says a lot about how good the assortment is.

So we are very pleased overall, we think we have the inventory in the right categories and we think that what we saw in November really confirms that our plans are very realistic for the fourth quarter.

Thank you.

Your next question comes from the line of Jeff Black with Barclays Capital.

Please proceed.

Thanks.

I will add my congrats on a nice quarter.

On the square footage growth, can you address what level of square footage growth we see next year and is that weighted to the US?

It sounds like it is more weighted to Europe but if you can provide some color on that.

Then on the inventory levels it sounds like they are geared to what's happening in the US but could you give us a little color there, too, on carry-over levels and just where the inventory is distorted by business that gives you the kind of comfort you say you have?

Thanks.

Hi, Jeff.

With respect to square footage, anything related to next year, Jeff, I'm going to ask you to be patient we are not prepared to talk about our plans for next year.

We will do that when we release fourth quarter numbers and results but overall, Paul mentioned that we are prepared to resume growth in North America, we see a lot of good real estate in front of us.

We think the economics are very compelling.

We will definitely reinitiate those efforts, and yes it is true that we have big plans for Europe to expand.

The great thing is that we have the very strong cash flow so really our ability to fund any growth opportunities is pretty significant.

With respect to inventories, we have been running with lower inventories on a comp store basis in North America and the growth if we had any is coming from both Europe and Asia just because of the organic growth that we see in the business, period, and in the case of Europe, we also have some additional purchases that we made, and received just to address the pre-shipments that we discussed.

So overall we feel great about out inventory positions today and our plans are to continue to run the business pretty much in line with demand.

Maybe we could be more aggressive with inventories.

We don't think that's the name of the game in this environment.

It is more about going after the margin.

Agreed.

Good luck.

Thanks.

Thank you, Jeff.

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

Could you talk about I guess the trends you are seeing in accessories and why you are confident you are running jewelry.

And will we see that jewelry business in the US.

Yes, this is Paul.

Currently we have a licensee in Europe -- in US which have been with us for at least close to ten years now and we don't see any change for the moment.

In fact, that licensee is responsible for the department stores as well as our stores.

In Europe it is very different.

We have a licensee and we decided to internalize that, in a few of the growth we have there.

We think that as a potential in next few years, could be between I don't know around between 70 million to 100 million.

Which is Europe and the rest of the world.

So that's that, for the accessory stores, we continue to be way, way, way underpenetrated of what we could do in every region of the world starting really right here in North America, Canada, US, Mexico.

We have a very small number of stores in accessories, and I think, total in North America we have only 37 stores, hich is not that much.

And we think we have a potential of North America between 150 to 200 stores between 700 square feet and 1200 square feet and the potential that we have on so many places that we are not present to be on any way or means.

So, again because of the diversity and the strength of the different categories of licensees from the watches to handbags to jewelry to eyewear to, belt.

Our eyewear business is on fire.

And if you look at just three years ago to today, it doubled.

And we think that that business is going to just continue to grow.

So again, it is the brand, it's the integrity of the product, and again it is the execution that is why we spend day and night energy on a view of the growth but also to make sure what the customer is looking for, which means quality, great brand, at a decent price.

Congratulations.

Thank you.

Thank you.

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

Please proceed.

Thank you, and congratulations on yet another fabulous quarter.

Thank you.

Was wondering if you can talk a little bit about what product categories drove the comps in the third quarter and November.

What do you wish you had more of, what do you wish you had less of and then if you could you talk a little bit about the performance of G by Guess.

Christine, well, with respect to the product, overall, the women's business performed pretty much in line with the overall performance of business of the stores, we had several categories in pants that did very well.

Leggings were a very strong category this quarter, but also within denim, we had a lot of good performance in the premium basic category and the basic denim as well, Non-premium fashion, we had increased business, however we are shifting some of the assortment into some of the other categories.

We did very well with woven tops, we did very well with jackets especially denim jackets, we had some success with dresses.And then we had some challenges in categories like capris or shorts, we had really planned the business that way too.

So we expected that we would lose some business in those categories.

We did have some success recently with outerwear, and this is especially in the non denim categories.

Men's was a very tough business this quarter.

However we did have success in denim as well and also we did very well with plaids in the woven category.

Guess by Marciano was a big success overall as we converted more sales really we saw big improvements in every category, Paul mentioned about accessories to eyewear being on fire, and this impacts also the men's business as well.

We had success with jewelry.

We had success with headwear, women's belts, the categories that were under more pressure were watches, handbags, and wallets, but we had big plans for the fourth quarter where we see we can pick up some business there.

Shoes was a great category for us driven by boots and this impacted every one of our concepts.

So overall a very successful quarter.

You asked a question about G by Guess.

We continue to refine that model.

We think that the concept is right.

There is considerable competitive pressures there on pricing.

So we continue to look at how to address the market effectively and I think we are doing a pretty good job.

But we believe that the way to win there is not just about price but about delivering product that is unique and is in line with what that customer for that brand is looking for, and I think that the team has done a great job in aligning that.

We were very good with men's and I think that is translating into the assortment in women's, and our accessory business has been very strong, and continues to be strong.

No plans for G by Guess to go into malls where full price, the idea is to keep it separate.

We would not like to talk about strategy of growth until we have an opportunity to present the whole plan, but the strategy has been pretty solid and kind of like in line with what you know about the brand.

Great.

Good luck for the holiday.

Stores look great.

Thank you.

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

Please proceed.

Good evening, guys.

Congratulations.

Hi.

Thank you.

In terms of your backlog trends it sounds like there's some firming up I believe you said they were up in the mid single digit range relative to where we had been flattish.

Can you talk about regionally where you see the better tone of business?

Yes.

The backlog I have to keep in mind that the backlog includes this changes in the ordering that I mentioned.

So, the fact that we are up in the mid single digits doesn't necessarily equate to a complete organic growth of that business.

That's why we are saying that there may be some impact in the fourth quarter and that's embedded in our guidance.

With respect to the strength, I think that Paul mentioned that there are four countries where we have gained share, and we have gained significant growth, and we are very excited about that, the sales penetration.

In Italy this is a percent to the total business, has come down, and that is not a bad thing at all, that's what we are trying to accomplish, and this has come from the growth from other markets like France, Spain, UK, and Germany and overall we think that we have significant more opportunities in all of those countries.

Spain is 2% of penetration for the quarter.

France was up 1%, the UK was up 1% and this is significant numbers for each of these countries, when you put it all together.

Overall, very pleased with where the backlog and where the business is going, and of course with our efforts to expand our retail business we have even more control as to where this growth could take place.

Okay.

Great.

Thank you.

And then just one follow up on the wholesale margin, Dennis, I am not sure if you have mentioned it but did you actually leverage occupancy in Asia this quarter and if so are we at a point now where the run rate of the business can we expect that continued occupancy going forward in the current environment?

For the whole segment the occupancy rate increases because of the mix.

I'm just quickly looking up if within Asia.

Within Asia, the occupancy rate also improved.

The reason that the wholesales segmented increased is because of Asia, the mix shift towards.

Okay.

Well, as Paul mentioned, this is Carlos, Paul mentioned that, we have seen a significant improvement in Asia.

We have seen a tremendous increase in productivity, in the stores that we do have there, and it's all related to the improvements to the product assortment.

We are very happy with how that market is reacting to the changes we are making.

We see more opportunity there as we go forward.

Thank you, very much.

Thank you.

Your next question comes from Holly Guthrie with Boenning and Scattergood.

Please proceed.

Good afternoon.

Great job.

My compliments.

Your stores are absolutely amazing.

Question I have about the jewelry business and maybe some potentially other businesses, if you go back to a year ago, when business overall for everyone was slowing dramatically and you made a number of changes.

I know at that time you also were in the midst of developing a Marciano line for men's.

Was there a, you know thinking about the jewelry line, were there other lines that you were involved in, at rolling out but maybe thought, put to the side because of all of these challenges?

You don't have to go into great detail but I'm trying to understand the genesis of what is a great idea in the jewelry business?

The question to mean like the move we just made, is it the right decision to go into the jewelry business - international?

Yes.

Again, if we -- we try always to be clear about what we know and to be clear about what we don't know.

And because we have a super strong team who can embrace with the jewelry business international we decided to go forward with that business, otherwise I don't think we will have done it if that's your question.

The performance has been great and we decide that we are not going to continue as a license, we are going to do that internally.

And does that mean for example, we just internalize underwear and lingerie and swimwear line in Europe, because we just have developed a strong team now in Europe for that we decided that we're going to do that directly and that's what's happening now.

The first delivery will be fall 2010 so that we go by opportunity but more important is again by execution.

It's not that we are overconfident to say what we are seeing everything and everywhere ourselves.

If we don't know how the team in place, with the know-how, with the experience and the discipline, we don't do it.

If we do have that we do it.

So time to time the opportunity will come out and we will act depending on what are the component of that opportunity, and that's what we did for jewelry, that's what we did for underwear and swimwear in Europe so the potential could be each of them in tens of millions, and we have to address that and we do.

And the great thing in this particular case, the numbers were very attractive.

You know as you can see, just for the business which are just going to ship one month of the quarter to see an impact to profitability of 2 cents is a pretty significant number.

You can imagine that the operating margin of that business is very healthy.

So in this case we had the strategic opportunity, combined with the great team, that Paul mentioned, and with the great business model, to go along.

I made the decision a great one.

Great.

Thank you very much.

Thank you.

Your next question come from the line of Margaret Whitfield with Sterne Agee, please proceed.

Good afternoon and I will add my congratulations.

Thank you, Margaret.

In terms of the early ship in Europe, I know the penalty in Q3 was $0.09, what would be the benefit in Q4?

That's my first question.

And then I was wondering if you could comment on your views on denim next year, whether you will stay at the same number in terms of penetration or whether it will increase and any other flavor you can give us about a spring merchandise outlook?

Thank you.

You are right, to use your word, the penalty of the shift was 9 cents into the second.

With respect to the fourth quarter that doesn't impact.

The only thing we did talk about was because of pre-collection of the spring summer, this year, you heard Carlos say that there could be some additional shift into the fourth at the expense of the first.

Can you quantify it.

We did quantify that.

Okay.

Margaret, with respect to your second question, you talk about denim and as we said we are finalizing operating plans right now, but of course denim will continue to be a very strong part of our assortment next year and we have a plan to definitely protect that business and maybe even grow it relative to the rest of the store.

For Europe, definitely we have a plan to increase significantly the denim penetration all over Europe because comparing to US, we are well underpenetrated in denim, both men and women, and we are confident that from what we have already from the orders of our stores, and customers that a denim would be a much bigger priority for all over Europe.

Then with respect to spring, we feel that this past year or the current year rater, we have run with lean inventories especially at the beginning of the year, not knowing exactly where the customer was going, and we have a pretty good set of opportunities that we have, we are building our plans with, and those opportunities are related to some of the products where we were very lean including dresses, the whole, the dressy part of the line was very lean this year, and we think that there is a big opportunity there, the change in denim and going into more premium basic and basic denim more clean down, we think that is a great opportunity for a spring.

We also have opportunities for accessories as well, shoes, in some of the areas that really complement the jeans wear line.

Thank you very much.

Thank you, Margaret.

(Operator Instructions) Your next question comes from the line of Janet Kloppenburg with JKKR Research.

Hey everybody, congratulations.

Fabulous quarter.

I am really impressed with your US business and I know you haven't been highly promotional because I have been in the stores a lot but I was wondering if you can talk a little about your strategies for success.

Have you skewed price points more to opening levels, and have you done that successfully to advantageous sourcing, or are customers buying the higher priced full price product, maybe you can help us understand a little bit how you have not been as promotional as many of your competitors but still have turned your comps to a positive level?

I was also wondering if you can talk about your product margin advantages, lower costing that you seem to be getting on your product globally.

If we can look for those advantages to continue into next year?

Thank you.

Thank you, Janet.

I think that the team has done a great job, and really looking at pricing the line in a way that the customer sees significant value, but still gives us the kind of margins that we want to have to operate.

We did look at areas where we felt that there was an opportunity to increase our volume, and went after those categories with outstanding value, if you go to our store right now you will see there are a couple of sections in each of the areas that focus on great gifts and in that case our initial mark up was pretty compelling that we were able to really offer the customer a greet deal and still offering it at full price, which is an important thing for the brand and that product is selling very well.

We -- I think probably that the secret here has been to introduce best product every single month and even throughout the month and that best product being very unique and setting us apart from the competition.

Again the designers and our merchant team have done a great job in identifying what those categories are and what is it we need to really be different and then be fair with the price.

Our quality standards have improved, we have seen significant improvements in quality and the way we think about this as we develop this global line is approaching our main vendors with an opportunity to make much more in terms of volume and by doing that in significant quantities they can offer us a better pricing.

So, and a lot of that we passing on to the customer and a lot of that to enhance our margins.

So overall I think that the key thing is here is product.

And once we have the product that we think is going to sell well then we work with our vendors to improve the margin equation so we can offer great value to our customers.

The customer loyalty program has been very strong for us, and a great, great vehicle to stay very close to that customer.

Great.

Thank you.

At this time, there are no further questions.

I will now turn the call back over to management.

Thank you.

Thank you for your presence here, thank you for -- we are looking for this holiday season coming in.

It seems like everywhere you read, everything you watch, crisis seems to be over, we still have some serious doubts about that.

We see improvement, we see customers shopping, but we don't see the parking lot full that you cannot get in.

We don't see people pushing you in hallways in shopping centers.

We see some really strong -- consumer knowing what they want when they come in the mall, straight forward going to where they want to shop, so until we have a clear view of general improvement in the general business.

We continued to look at any sign that could be alarming us -- but we have resumed our expansion, resumed our investment, but we are ready to react if anything doesn't seem to be normal way, we would react adequately to that.

Thank you and have a great day and we will talk to you in February, I think, around February.

Thank you very much.

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

All parties may now disconnect.

Enjoy your day.