Guess? Inc (GES) 2010 Q4 法說會逐字稿

Good day and welcome to the Guess fourth 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.

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

Today, we reported very strong fourth quarter results.

We posted record revenues and record earnings in the period and this performance brought to a close a solid year for our Company in spite of many challenges posed by a difficult economic crisis.

It was a year of significant accomplishments for Guess.

A year where we were very focused on key initiatives and executed our long term strategies.

We effectively remain well positioned for market share gain and profitable growth, and our team delivered on all fronts.

In the fourth quarter each one of our businesses expanded and contributed to an overall 14% increase in revenues.

More than half of this revenue increase was driven by business in Europe which posted a 24% top line increase, fueled in great power part by our retail expansion there.

In North America, we approached the season strategically, capitalizing on high traffic periods and limiting our promotional activities to protect our brand and our margins.

We delivered great product with innovative design and a focused assortment.

We executed well and posted mid-single digit positive comps.

Our Asia business had a very successful fourth quarter with a 55% increase in revenues mainly driven by strong performance in South Korea.

While our top line results were obviously strong, our bottom line performance was even stronger with each division posting solid margin improvements.

With careful inventory and cost management, we have fully restored the margin structure of our business expanding operating margins by more than three points.

With this performance, we set another earnings record for the quarter as we increased our earnings per share to $0.96, a 45% increase over last year fourth quarter, excluding charges in both areas.

For the full fiscal year we posted all time highs in both revenues and earnings as well.

Full year revenues increased to more than $2.1 billion with product sales growing across all of our segments and a higher mix of international sales.

For the full year, earnings per share reached $2.64 - another record.

During the year we focused on several key initiatives that we consider critical to the long term success of our brands.

Our first initiative related to G by GUESS, as it gained considerable traction with positive full year comps and better bottom line.

We plan to add at least 32 stores in the next three years.

Also, our push to extend our customer loyalty programs across all our retail concepts has proven very successful.

We currently have over 2.8 million members in our database which allows us to market directly to our most loyal customers.

In Europe, our business continues to expand outside of Italy with France, Spain, Germany and UK collectively growing 22% for the year.

Our retail business in Europe drove most of the growth in that region adding 81 retail stores, owned or licensed.

We also introduced pre-collections for fall and winter '09 and spring and summer '10.

With these initiatives, we are delivering our product into the market much faster than before.

In fiscal 2010, we executed our plan in view of the world financial melt down.

It was exactly the right strategy during that time to protect our capital structure but also protect our brand and customer relationships.

Now, moving in the future, our 3 priorities for this year are first to increase our sales productivity across all businesses.

The Guess brand enjoys tremendous momentum around the world and we see an opportunity to gain market share in our space.

We feel we have a significant advantage having a lifestyle brand.

From casual jeans wear, dresses, tops & outerwear to handbags, footwear, watches, jewelry & eyewear.

We're not just in one category, but instead we support an entire lifestyle of our customers.

Of course, denim is our world.

And if you visit any of our stores in New York, Miami, or Los Angeles, the message is clear.

Second, it is our expansion in Europe, which remains a key priority for us.

We continue to build a strong team in the region to support this important initiative.

Our focus remains on countries where the brand is well known but still under-penetrated like UK, Holland, Germany, Belgium and many more countries.

Expanding our retail business in Europe is critical.

Fiscal 2011 we plan to open 85 retail stores in that region.

Most of these stores will be concentrated outside Italy which represents currently half of our sales.

This plan would result in roughly 380 stores in Europe by the end of the year.

We continue to feel that we can grow our business in Europe to $1 billion in sales in the next two to three years.

Third is our US and Canada retail expansion.

This year we plan to open 52 new stores in North America.

Many of these openings will be concentrated on our newer concepts especially G by GUESS and GUESS accessory stores.

These are our focus areas.

We do have a complex business model which is very diversified in product, categories, concept and geography.

But because of that diversification, we can plan very ambitious goals for the future of Guess brand around the world, and not fear any saturation of the market on any concepts we currently have.

That's why we preach and truly believe that the world is our field.

Future perspective looks very strong to us as long as we stay disciplined and focused on the strategy and its execution.

That's what brand integrity is.

With that, I will ask Dennis to walk through the numbers please.

Thank you, Paul, and good afternoon.

Today's press release includes disclosure which reconciles our GAAP results to adjusted results excluding non cash impairment charges related to our retail stores.

During the conference call, our comments exclude these charges as we feel this provides more relevant period to period comparisons that are consistent and more easily understood.

We are very pleased with our results.

Earnings for the fourth quarter reached a record of $89 million which represents an increase of 44%.

Diluted earnings per share increased 45% to $0.96.

Total fourth quarter net revenues reached $642 million, clearly exceeding our overall expectations.

Fourth quarter gross profit was $295 million, a 30% increase over last year.

Our gross margins expanded 550 basis points to 46%, a very strong performance.

Product margins improved substantially in every one of our operating segments.

Our SG&A expenses reached $170 million this quarter which represented 26.5% of revenue.

These levels were higher than last year due to higher selling expenses to support our sales growth, and a larger retail store base coupled with increased performance based compensation, given this year's stronger results.

For the period operating profit increased 38% to $125 million.

This includes an $8 million favorable currency translation impact.

Operating margin expanded 330 basis points to 19.5%.

For the fourth quarter we reported other net income of $5 million or $0.04 per share, which primarily represents unrealized mark to market gains on currency contracts.

These contracts support fiscal 2011 inventory purchases.

Last fourth quarter we reported net other expense of $6 million, a variance of $11 million or $0.08 per share between the two quarters.

Our effective fourth quarter tax rate was 30.2% compared to 26.6% in the prior year fourth quarter as we finalized our tax rate for the full year.

We closed the full year with a tax rate of 32% versus 32.9% last year.

Our strong fourth quarter performance ended a year for us that delivered solid results.

We reversed a 3% year-to-date revenue decline going into the quarter and closed the year with a 2% revenue increase, achieving another record this year.

We managed costs and inventories carefully all year improving our gross margins and expanding our operating margin to 17.1%.

For the fiscal year we increased net earnings by 7% to $246 million and increased EPS by 10% to $2.64.

For the full year the negative currency translation impact on EPS was about $0.06 per share.

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

In North American retail, our comp store sales increased by 5.3% in the fourth quarter and total revenues increased by 7% to $309 million.

In constant dollars comp store sales increased 2%.

We expanded our product margins by more than 500 basis points.

We leveraged occupancy and SG&A costs given the positive comps.

Overall, this strong performance resulted in a 570 basis point improvement in segment operating margin and a 60% increase in operating profit for the quarter.

In our wholesale segment, fourth quarter revenues increased by 21% to $85 million.

We continued to experience rapid growth in our Asia business while revenues in our North America wholesale business declined slightly but exceeded our expectations for the period.

Operating margin in the wholesale segment expanded 530 basis points to 18.8% primarily due to improved product margins.

Operating profit increased 69% to $16 million.

In Europe, fourth quarter revenues increased 24% reaching $223 million.

In euros, revenues increased 14%.

Over half of this growth was generated by our retail business where we posted positive quarterly comps and increased our retail base to 84 stores.

Our wholesale business also grew in the period led by our accessories business and our new jewelry business as we began direct operations in January.

Operating earnings increased 49% to $58 million and operating margin increased to 26.1% versus 21.7% a year ago.

Product margins improved by over 500 basis points and drove the operating margin expansion.

Licensing revenue increased by 12% reaching $25 million in the quarter which was significantly better than we had expected.

Now, turning our attention to the balance sheet.

Our cash flow was very strong all year.

We generated operating cash flow of $358 million, a 57% improvement from last year's level.

We invested $78 million in net capital expenditures mainly to support store growth and infrastructure improvements.

We increased our dividend and paid down all of our short term debt.

This resulted in a very strong cash position ending the period with $502 million.

Accounts receivable increased 10% over last year to $290 million.

Overall, DSOs improved slightly.

At the end of the year about 46% of our receivables were supported by insurance coverage, bank guarantees and letters of credit.

We ended the year with inventory levels of $246 million, about 3% higher than last year.

We are very pleased with our inventories which are very clean and well aligned to support our growth.

And we remain flexible to chase business in categories that are performing.

Lastly, our Board of Directors has approved a 28% increase in our quarterly cash dividend to $0.16 per share payable on April 16, 2010 to shareholders of record at the close of business on March 31, 2010.

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

Thank you, Dennis, and good afternoon.

Today we will provide revenue, operating margin and EPS guidance for the first quarter and the full fiscal year of 2011.

As Paul said, this year our focus will be on resuming profitable growth.

In line with this, our goal is to grow our revenues between 8% and 10% in spite of anticipated currency headwinds.

This growth will be driven by our North American retail business, Europe and Asia.

In North American retail our goal is to increase revenues by about 10%.

The 52 new stores that Paul referred to will contribute to average square footage growth of about 4% and we plan to increase comp store sales in the mid single digit range.

In Europe our goal is to increase revenues in the low teens range, driven in similar proportions by our retail expansion in the region and our new businesses.

We plan to grow our wholesale business in Europe in local currency but at this time we expect that this growth will be offset by currency headwinds.

Regarding our wholesale segment our goal is to increase revenues in the high single digits this year, completely driven by Asia.

With respect to timing among quarters, we expect to accelerate revenues into the second quarter from the third quarter as we complete our European jeans wear business model transformation.

We expect this shift to impact revenues by about $20 million.

This year, we also plan to expand gross margins modestly.

The opportunities will be weighted towards the first half with improvements in IMU and markdowns.

Currencies and higher raw material costs will begin to offset these gains in the second half of the year.

In terms of expenses we are planning to make additional investments in our organization, primarily to support retail expansion and our newer brands and businesses.

We also plan to invest in our growth in Europe and in marketing programs to enhance our brand's awareness around the globe.

Some of these investments will be in advance of revenues, therefore, we expect that the increase in the SG&A rate for the year may offset any improvements in our gross margins.

Historically, our marketing investments impact the first and third quarters most significantly.

For this year, we expect the SG&A rates for these two quarters to be similar.

We see the fourth quarter as the first opportunity for SG&A leverage this year.

With respect to currency translation, we are planning the year assuming that the US dollar strengthens by about 5% from current levels.

This would result in a negative effect after the first quarter, impacting second quarter EPS by roughly $0.02, and the third and fourth quarters by about $0.05 each.

We are planning this year with an effective tax rate of 31%.

All considered, our full year guidance includes revenues between $2.3 billion and $2.35 billion.

We expect our operating margin to be about 17% and our full year earnings per share in the range of $2.87 and $2.95.

This assumes weighted average shares outstanding for the year of about 93.5 million shares.

Now, with respect to capital spending, we plan to increase our retail store openings both in North America and Europe.

We also expect to remodel several stores in North America.

All combined, we are planning capital expenditures, net of tenant allowances, of about $170 million.

Now, let me share more about specific business trends and our outlook for the first quarter.

In our North American retail business, we feel that consumer behavior has stabilized, even when customer traffic remains soft.

We have a plan to increase sales productivity across all concepts.

We feel our product lines are strong and the customer response so far has been very encouraging as we have improved conversion rates and increased average dollar sale.

Our approach is consistent with the strategy we used in the fourth quarter when we achieved mid-single digit comps and expanded margins.

In February we closed with a high single digit comp and have improved upon that trend so far in March.

We are making excellent progress with our newer concepts, Comps in Guess by Marciano have led the chain for several months now and G by GUESS is also performing very well.

Based on these improving trends, we are planning comps in the mid to high single digits which, coupled with remodels and a slightly larger store base, would result in a revenue increase in the low teens for the quarter.

In Europe for the first quarter we are planning that revenues will increase by about 20%.

Our revenue increase will be driven by new store growth and positive comps in our European retail business, along with the addition of our new businesses.

In our wholesale segment, we expect that revenues will increase in the mid teens range for the quarter.

This growth will be driven by Asia.

In North America, we anticipate modest growth in the period.

In our licensing business, we expect that revenues for the first quarter will be roughly flat as growth in our on-going licensed businesses will be offset by the effect of internalizing our international jewelry and intimates businesses.

We expect to achieve gross margin expansion over last year's first quarter of about 250 basis points, company wide.

This will be primarily driven by improvements in product margins.

So to summarize, for the first quarter we are expecting that revenues will grow between 12% and 15% resulting in consolidated revenues between $495 million and $510 million.

We expect first quarter operating margin to be around 12.5%, and diluted earnings per share between $0.46 and $0.48.

This would represent an EPS increase between 31% and 37%.

With that, I would like to open the call for your questions.

Operator?

(Operator Instructions).

Your first comes from the line of Jeff Klinefelter with Piper Jaffray.

Please proceed.

Yes, thank you very much.

Congratulations everyone on a terrific year.

A couple of questions.

One is on Europe.

It sounds like trends are going very well there, and appreciating that a lot of the growth is going to come outside of Italy and also with retail, specifically your own stores.

With respect to the growth of just wholesale, ex the new retail doors, what sort of trend are you looking for overall?

And that would be concentrated, I would imagine, in those core markets outside of Italy?

Yes.

Jeff, this is Carlos.

You are absolutely right.

We are looking for growth in local currency for the wholesale business.

However, because of the currency headwinds we are expecting, and this could prove to be conservative, but because of that, that would be offsetting the growth that we are expecting.

So, in dollars we expect this business to be roughly in line with last year's volume.

And that's for just the wholesale.

Then your retail would be really all of your net growth.

Exactly.

All the growth is going to be in similar proportions between the retail business, all the new stores we are opening this year plus the stores we opened last year that we will annualize this year.

And the other side of that is the new businesses, primarily the jewelry business but also intimates and international.

One other thing, your margins were very strong this year, very impressive management of those margins.

Can you share where it is coming from?

Are you getting sourcing benefits from your internal sourcing initiatives, or is it coming from markdown management, or what combination?

A lot of it is due to sourcing improvements.

We have made great progress last year with IMU improvements and we were able to deliver that and maintain or improve the quality of the product that we offer to the customer.

But in addition to that, we did a much better job with markdown management.

Obviously the fourth quarter was probably the biggest opportunity that we saw, as the fourth quarter of the year before it was very difficult in terms of promotional productivity.

But we plan the business very strategically, like Paul said, and I think it worked out very well.

We are being very careful the way we are promoting.

We are taking advantage of high traffic periods and being very strategic with the use of our customer loyalty program.

Great.

Thank you.

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

Please proceed.

Great year, guys.

Congratulations.

On the SG&A line, given the growth that you experienced in the quarter, given the guidance for a really solid 8% to 10% top line, obviously you are investing in the business.

Just great.

We love to see.

How should we think about operating leverage in the model?

How do you think about operating leverage in the model?

Is this a year where you won't see that and maybe down the road you will be able to lever some of those fixed costs more?

Or do you think if the comps stay high like this you could generate some operating leverage?

How should we think about your SG&A allocation in that context?

We are seeing this year, a year of investment to continue to position the Company for further growth because we see a lot of opportunity for that.

So really, when you look at how the operating margins could work this year, we are looking at slightly improved gross margins across the Company.

We still see some opportunities, especially in the front end of the year.

But that improvement will be offset by SG&A rate increases that are primarily based on building a stronger team across the board.

We have some big initiatives like the building of the retail organization in Europe to support the rapid growth that we are seeing in stores.

But also in our newer brands here in North America.

And also, we are planning to reinvest in marketing, going back to historical levels of spending.

All of that is embedded in that.

We think that there is tremendous opportunity for leverage on the operating margin line as it continues to grow.

But we are not planning the year in that way right now.

Okay.

Great.

Then a quick question on China.

Can you update us on your strategy there, where the business stands, where you think it's going, what's the right way to approach it, how big is it.

Whatever you can share would be great.

This is Paul, hi.

Definitely the efforts you have seen happening from our organization to Europe the last three years, has brought some good results.

And now we plan to do basically the same effort in Asia.

We have a presence in Southeast Asia already for 20 years.

We have close to 85 stores there in Southeast Asia.

But the greater China, Hong Kong, Macau, Taiwan and all that, we are now really pushing that region now.

So, whatever support structure organization we did on each division for Europe, we plan to replicate that in Asia.

And definitely clearly, we see the result of South Korea where we have a super strong team, very effective and the results are way, way above what we expected.

So, there is no reason that we cannot do that, the same in greater China.

But I think the territory is so vast.

The language barrier is a major, major obstacle.

And that's why we are now focusing to build the team, absolutely in the top priority at every level from the retail field to support to construction to every level.

And in the next, I would say, three to five years, we plan to open at least 150 to 200 stores, at least, in that region.

Great.

Thank you.

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

Please proceed.

Thank you.

And congratulations on yet another great year.

Wondering if you could comment a little bit about the product categories that have been working for you so far in February and maybe March.

And as you look ahead towards the second half of the year, what were some of the missed opportunities in the fallen holiday of calendar '09?

Thank you.

Yes.

Shoes, we had a great fourth quarter.

Knit pants, leggings, of course, was a big category this season.

Premium basic denim, we had great success.

Sweaters, woven tops did very well in the women's world.

Accessories, we had good success across the board.

Some of the categories were up against very big numbers from a year ago.

But still comp up well.

And leather jackets.

We had many areas of the store that did very well.

But again, we bought very strategically in the fourth quarter.

We had less success with some areas.

In fashion denim, for example, in some of our stores.

Men's in general was a tough category overall.

And knit tops and skirts.

Those were the categories that had some challenges.

We see tremendous opportunities for the year.

One of the big ones is the big opportunity related to the fact that last year we were very, very thin in the inventory.

So we have been able to go into those categories where we saw big opportunities and really invest in inventory.

The denim continues to be our world, like Paul said.

We are improving and investing in the position in denim.

We see big potential with Power Skinny, various washes.

Men's is now improving significantly so we see a big opportunity in men's across the board.

We just introduced premium basic there.

And then in alternative classifications within denim.

We are also working with a much more balanced assortment and adding more of dressy categories in the women's world.

And that is working very well already early in the season.

And again, continuous improvement in accessories.

Then, with respect to Marciano, since the conversion, you have made product adjustments there and I think you called out that it is actually doing rather well.

When do you plan on accelerating square footage growth there?

We are still refining the model.

We are very pleased.

Actually, the great thing about the story is that in addition to the comp increase which has been pretty remarkable, we are seeing a significant margin improvement for the business.

So the profitability of the model has improved dramatically.

But we are giving ourselves this year to really refine that model, increase the sales productivity and then consider resuming growth for the concepts.

We are opening a couple stores in Canada where the concept has done extremely well.

But before we resume growth in the US we want to give ourselves this year.

Thank you very much and good luck.

Your next question comes from the line of Randal Konik with Jefferies.

Please proceed.

Yes, thanks a lot.

Carlos, you talked about the operating margin guidance or expectations for 2010.

How do you think about the long run sustainability of the margin structure looking out a couple of years, especially given the change in geographic mix and the channels by distribution mix?

And then just the other question would be are you seeing any differences, any trend changes, on the fashion side that we should be looking for on the US versus Europe?

Any changes there?

And then finally, just curious about wholesale ordering patterns across your US business versus your European wholesale customers.

Are you seeing any one group order more aggressively than others in the past indicating we're seeing more stabilization in the market?

Again, you touched on North America or US getting more stable.

Just those three questions, thanks.

With respect to the operating margin, as I mentioned before, we see big opportunities for margin expansion over the medium term.

Part of that will be, as we continue to grow, some of the regions, like Europe, which carries much higher operating margins, as that becomes a larger part of the mix, of course that is going to result in margin expansion over time.

We also see big opportunities in retail, frankly.

Every five-points of comp would result in one full point of operating margin expansion for our retail segment, so the segment is very sensitive to store productivity we think we can improve significantly there.

And then Asia, the only big business that we have, like Paul said, is South Korea.

But we are carrying a pretty healthy double-digit operating margin there.

We don't see any structural issues over time.

The other regions within Asia could carry a similar type of operating margin.

So overall, when you talk about the newer brands, they have been losing money.

It is very small money but as we turn those businesses around, and we think we are on our way to accomplishing that, that will be very significant, additive to operating margin.

Your second question was about fashion.

And I think that what we are seeing is that a lot of the styling that we are using in part of our global line are very, very consistent and a very strong image of the brand and a strong representation of the brand.

So we see that demand is becoming very consistent across the world, and we are thrilled with that type of results because that is exactly our thesis going with a global line.

And with respect to the wholesale business, our wholesale appetite here in North America has been modest.

But we just had a major strategic meeting with our main partners in that business.

And it is very successful.

A great relationship.

And we see that we may start seeing some growth in the near feature there.

With respect to the wholesale in Europe, the business is much more fragmented.

Depending on the territory, the story may be a little different.

Italy has been under some pressure but many of the other markets are growing, like Paul mentioned.

Thanks.

Your next question comes from the line of Jeff Black with Barclay's Capital.

Please proceed.

Thanks.

I will add my congratulations.

On the investing side, can we just drill down a little bit more on the CapEx.

Are we to understand that it is mostly retail and mostly corporate expenses?

Are there other aspects to this in terms of technology or more investment in the newer business that we should understand and know about?

And then on the Europe side of the equation, what gives us confidence?

The last time we talked London was doing a lot better.

Have France and Spain given you indications that they can, indeed, sustain a lot more store growth, and if so what are those indications?

Thanks.

This is Dennis.

In terms of the CapEx for next year, the vast majority of those investments are going to be in retail expansion.

We pulled back this year because of the crisis.

But we think this is the time to reenergize that growth.

About three-quarters of that is going to go into expanding new retail both here in North America as well as in Europe.

And the rest of it is going to be in some infrastructure as well as making some investments in growth in Asia.

Paul alluded to that being a substantial priority for us.

And in terms of the question about the business in France and UK, I think you mentioned, and Spain, definitely these are the countries where we have said repeatedly, consistently, that we are going to focus on there.

And the results are coming stronger and stronger.

When positive comps the last few months, on all these countries, and we expect to expend much more stores in these countries.

France could be as big as our business we have in Italy which is representing half of the business of total Europe.

So, we see the goal and hope we have in Europe.

Spain, we should reach 25 stores on our own or with some franchisees.

And we are doing also some joint venture right now in Canary Island.

And we just started to operate with a partner also in Portugal.

So we are very active all over Europe.

I want to go back to what I mentioned before.

We are not really a denim company.

We are a lifestyle brand company.

And that's what I think has been a real surprise and success in Europe by the consumer acceptance of the product.

Because we cover basically everything.

And very strong, very successful products on each category, being the handbags, being the watches, being the eyewear now.

We are absolutely growing so fast.

And also the handbags, I think I mentioned that.

So the footwear.

I think this has been, it is not usual in Europe to find the total concept with a brand.

You have specialized people that do just denim or you have other people to do other things.

But to compete lifestyles, you don't have that many.

And that's what I think we are trying to capitalize on that as strongly and as fast as we can.

Good luck, thanks.

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

Please proceed.

Good afternoon, congratulations.

Could you talk a little bit about the changes you have done at G by GUESS that gives you the confidence after a few years of not really ramping up that you can really ramp up this concept?

And what should we think about in terms of longer term growth for this concept if it works?

Can this also be a European concept too?

Eric, there has been a lot that has been done to improve the concept.

And I think, as you know, all the changes have been very effective.

Product assortment is probably one the biggest ones.

We believe that the store design is very appealing and very attractive and we are very excited about that.

And so are the landlords because we bring a concept that is very unique in the marketplace today.

We believe there is still more to do.

And we have been strengthening the team to be able to accomplish more improvements on the product side.

We think that the concept has a lot of potential.

We have been limiting our presence to certain markets where we think there is tremendous potential for the concept.

Where we believe it gives us an opportunity to cluster some of the stores.

We are targeting some areas using that criteria.

Long term, we see a multi hundred store opportunity eventually.

But, we have a lot to do in the US before we even start thinking about other places in the world.

Time will tell.

I'm sorry, did you say 32 or 52 stores in the US this year?

52.

Not in the US.

North America, this year.

5-2.

That includes Canada, I assume?

Right.

That is primarily US and Canada.

Okay.

Thank you.

Your next question comes from the line of David Glick with Buckingham Research Group.

Please proceed.

Good afternoon.

Add my congratulations.

Just a couple of quick questions.

I was wondering if you could give us some insight into what is happening in your most mature market, Italy, in terms of comp store sales trends, your wholesale business trends, order book.

Just give us a flavor of the fourth quarter and year-to-date in how the business looks to you in 2010.

And then secondly, just give us a little more specifics on what drove your increase in licensing.

We were obviously expecting a decrease versus the nice increase after having taken back jewelry.

So if you could give us a few more details there, thank you.

With respect to Italy, Italy has been soft for us.

Same-store sales for fiscal 2010 were down in the mid single digit range.

We did experience a lot of that drop early in the year.

Our fourth quarter was a positive comp, so we were very pleased with that.

And our trends are consistent with that since then.

The wholesale business was also soft in Italy.

And we think that we should expect a flat business in wholesale this year, as well.

We are planning comps up.

And we have a lot of new stores that we'll be annualizing, too.

We think there's a lot of opportunity to do things better, too, in terms of planning and allocation in those stores.

So we are going after that.

That is part of the improvements in infrastructure that we are building.

With respect to licensing, we were very pleased with the out performance.

Many of the categories did extremely well.

Handbags did exceptionally well.

We had a great quarter in watches.

Footwear also had a great quarter.

Because of this category, it did much better than what we had anticipated.

Even the loss of jewelry was more than offset with that growth.

Thank you for the color.

Just one quick follow up on the Q1 gross margin.

Based on the strength in Q4, what would have to happen to put up that kind of gross margin in Q1?

Because it looks like you had a pretty significant drop last year in Q1 as you did in Q4.

Is that just being a little bit conservative?

It sounds like you have momentum in your business.

No, not really.

I think that our 250 basis points is a very realistic goal.

Remember that last year, yes, in the fourth quarter we dropped, I think it was 500-and-change basis points.

But we had a lot of excess inventory which we liquidated during the fourth quarter.

So obviously that took a huge toll on our profitability for that period.

But then going into the first quarter we were very clean and we had planned purchases very lean.

We did not have the impact of the liquidation sale so the gap now is not as significant as it was for the fourth quarter.

Thank you very much and good luck.

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

Please proceed.

Thanks, and great quarter, great year.

I'm wondering what your base case assumption is for comps beyond Q1 in North America and International.

If you can give us a sense of what you are thinking.

We are planning the business.

Obviously we had a good fourth quarter in North America with comps in excess of 5%.

That was the first quarter that we started annualizing the impact of the crisis.

So the opportunities, we see them to be more significant in the first three quarters of the year in terms of comp growth.

But we are planning the business with healthy comp growth going forward so that doesn't mean that we are planning on negative comps for the fourth quarter.

And that type of thought and strategy is similar in Europe, as well.

I just wanted to clarify on the EPS guidance.

It is inclusive of the forex impact that you expect, $0.02, $0.05, $0.05, $0.12 a share of pressure just related to the forex on a 5% stronger dollar.

That's exactly right.

That's including our assumptions.

Perfect.

Great, thanks and best of luck.

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

Please proceed.

Good afternoon and I add my congratulations.

I wondered if you could comment on how the jewelry line launched and give us more color on the intimate apparel.

Also a question on your program to consolidate your vendor base and when that might positively impact the bottom line.

Hi Margaret.

This is Paul.

About the jewelry, which you understand, it is everything in the world except US.

We believe it is coming for very strong results because I just came back from Europe visiting quite a few countries.

And the results of this business is really, again, above what we expected.

And we have not addressed Asia on that.

We are starting to address Asia in the jewelry.

In fact, this week is the Basel show of jewelry, which is the most important show of jewelry in the world.

And definitely we think that this is just the beginning of a great division.

Could be as important as maybe the eyewear or maybe even closer to footwear because it is a very vast field there.

What kind of prices are we talking about, Paul?

I can tell you exactly.

Are we talking in euro because it is only in euro.

We don't set anything in dollar.

On the retail side it will start from, I would say, 35 to 40 euro, and then after that, I am talking just like a little pair of earrings, and then it goes easily to 150 euros, 180 euro, up to 250 euros.

And do the math and you see what is the average price in dollar.

So you will be in Asia this year, or next year?

We are already, through our stores.

But we have not addressed the big business of department stores.

And we address that for our stores.

We are going to address department stores business.

We just hired some regional commercial directors and they're going to focus now on the wholesale business.

The intimats, we started in Korea just a year ago in lingerie.

And we plan to expand that lingerie program in all the countries close to where it is generated which is Seoul.

And that should go now in different channels from Taiwan to Greater China and other places.

And as you know, we internalize the lingerie also from Europe which was licensed for seven years, eight years, I think.

And now we do that internally for our office in Guess Europe in Lugano.

So we just started, and that's a small business.

The competition there is massive in Europe.

But, again, we don't intend to compete with all the major brands of lingerie who specialize in that.

We are the brand.

We have a place where customers come and shop a lifestyle.

And we plan to take advantage of that as brand recognition.

Also the lingerie will extend to swimwear, men and women.

And it is a nice business but we don't expect miracles on that business in Europe.

It will be much larger in Asia.

And your next question was about sourcing and the vendor base.

We have already successfully contracted our vendor base by about 40%.

We have been experiencing some improvements in IMU that are related to that type of contraction.

Last year I think we had an 80 basis point improvement in IMU Company wide.

And the primary reason, help, came from that vendor consolidation.

But we are doing many other things including strengthening our team and our operations in Asia with our Guess Asia operation.

And we feel there is more to come.

One of the challenges now is that prices of the raw materials are going up and we do anticipate that that is going to have an impact on our first costs.

Will you be able to price your products to offset?

Actually, we have been able to deliver more quality, better washes, better treatment, better product, and still hold the line on pricing.

We are going to protect the business.

But we do believe that there are other ways to get there in terms of engineering the products better, trying to be closer to the market when we do develop products.

And being more efficient internally.

Okay.

Thank you.

(Operator Instructions).

You have a question from the line of Janet Kloppenburg with JJK Research.

Please proceed.

Hi, everybody.

And congratulations.

I had a couple of questions.

Just to clarify on Italy, Carlos.

Are you expecting the Italian wholesale business to be down all year?

Or is there some opportunity for that to improve as the year unfolds?

This is Maurice.

What we have to understand is that in Europe, the market is much earlier than here.

And so, for the beginning of the year, we have the wholesale which is going to be a little bit soft, a little bit flat, or a little bit soft, just for the beginning of the year, because they took the orders in June of last year.

You remember June, it was not a great environment.

We've experienced now for the line coming for fall of this year, where we already took the order.

We have seen a great improvement of the orders and a good increase of the orders.

So we expect the end of the year to be stronger.

And that's particularly for the Italian market.

Yes.

I am talking the Italian market.

That's the most developed market for us.

Fabulous.

Then another question I had was if you could just talk about your rate of square footage expansion expected for fiscal '10 and roughly what it was for fiscal '09 please.

And maybe your thoughts about square footage expansion going forward, if it will stay about the same level as '10 or could you see it moving higher.

It is difficult to hear you well, Janet.

But I think, what I understood is you would like to know about the square footage expansion that we are expecting for this year.

That number for North America is about 4% of our square footage base.

That is primarily the 52 stores I was talking about that we are opening this year, considering an average of when those stores open.

The vast majority, they open between second and third quarter, and a few of them towards the end of the year.

So what about in Europe?

In Europe the square footage expansion is very significant because we are starting with a very low base.

We are talking about adding in excess of 50 stores internally.

These are the ones that we own.

And that is starting with a base of 85 stores.

So, obviously the square footage expansion there, as a percentage, is a very sizeable number.

But still the number of stores is a very manageable number.

If you look at just what we call Region 2 which is Europe and Middle East, we plan to open close to 85 stores.

But Janet, bear in mind that our stores in US average size is above 3,500 square feet.

In Europe average size among all concepts combined would be around 1,600 square feet.

Okay, but do you think that expansion in the US can move higher in fiscal '11 or will it stay around this level?

Fiscal '11 is the current year for us.

Fiscal '12, I am sorry.

Of course, when you look at 52 stores, it is really not a big number considering the opportunities that we see across all concepts.

So yes, that number could grow eventually.

My last question is on G by GUESS.

If you could talk about the rates of return you are seeing in that business, if it's productivity is where you would like it to be, and if it's making a contribution, if you expect it to make a contribution or is it hurting earnings in this year, and what the prospects are going forward.

Last year, G by GUESS was not a contributor to earnings.

We are making money on the four walls.

And we do see profitability in the very near term.

That being said, are we completely satisfied with the productivity that we are seeing?

No, we see tremendous opportunity to continue to improve productivity.

We have seen positive comps now for several months, and we see more opportunity to go for further growth.

And that was on top of positive comps a year ago for the concept.

In other words, on a fully allocated basis, G by GUESS could make money this year.

This is a possibility.

And we pray for it.

Okay, I do too.

Congratulations.

I will talk to you later.

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

Please proceed.

Thanks very much.

Just a clarification on Italy, the outlook.

The weakness that developed last year and the outlook for Italy.

Then I have one other.

I am sorry, what was the question?

Janet was asking some questions about Italy and was it a function of weakness in wholesale.

My question is was it a function of weakness in the macro environment.

Is it a function of increased competition in Europe?

Or was it just your own execution?

I shouldn't say -- you had a fabulous year -- but was it a fault of your own execution?

No, we believe that the business last year was impacted in every part of the world.

Obviously with the crisis that everybody experienced.

So definitely that impacted Italy as it impacted many other regions.

We believe that country and the business is still very healthy there.

Our margins did not suffer.

And it could be that the way we are looking at the business is conservative.

Time will tell.

We have a very strong team that really runs the whole Italian market.

And we are making significant changes to be even stronger, especially on this denim side, which is one that offers development opportunities.

Also, remember what we said earlier.

We are expecting our wholesale business in Europe to be up in local currency.

And the only reason why we are giving you guidance for flat revenues in Europe is because of currency headwinds that we are not really anticipating but planning with.

Okay.

That helps.

And on the marketing spend, could you help me understand how much you are going to increase marketing spend.

When you say you are going to go back to historical levels, is there a way to indicate what those historical levels were, the percent of sales, or can you talk about the dollar?

We do not disclose that type of number or strategy.

Okay, but you are significantly -- is significant the right adjective to use in terms of your marketing spend?

No, I wouldn't call it significant.

Obviously marketing is an important part of our structure.

And it is important for brand awareness.

Actually, I think if you look at the amount of money that we spend in marketing, considering the strength of our brand and the size of our brand, and the reach globally, I think we are probably among the lowest in the industry.

Best of luck.

You have done a fabulous job so far and I look forward to great results in the current year.

We have a question from the line of Dana Telsey with Telsey Advisory Group.

Please proceed.

Good afternoon and congratulations.

As you think about real estate and expansion of real estate, what is happening with real estate costs, either lease renewal costs, renegotiations in outlets versus regular malls?

And what are you seeing for productivity.

And how does GGP and what's happening there impact you?

Thank you.

With respect to real estate overall, what we are seeing is big opportunities.

There aren't that many companies that are credited as we are with great concepts and a lot of flexibility, and with an appetite to grow.

So, we see a lot of opportunity for us to really find great real estate.

We have great relationships with landlord and I think all that has helped.

In terms of the costs, as you know, up until pre crisis time, real estate costs were increasing at an accelerated pace.

And it was very difficult to renew without having a significant impact on the total costs, whether had the location or you wanted to go into one.

Especially on the top level malls.

That being said, as you know, top level malls continue to be expensive but not at the rate we were seeing in those days.

So we are pleased with that.

We have been able to secure a lot of locations for our accessory stores, for example, and we are pleased with what we are doing there.

The model is highly profitable, considering the current rent structure and the productivity that we can achieve.

And then looking at the concept of G by GUESS, for example, it is very attractive because those landlords really love that concept.

So they are accommodating us in a great way.

We are getting great locations.

Factory stores, we continue to do very well.

And we are opening a few stores this year, as well.

And again, the returns are very appealing there.

To complete -- this is Paul -- when you look at the real estate in Europe, it is a completely different structure.

As you know, it is an issue of key money, location, street location.

And it is a much higher cost.

But, it is something that stays as you own this key money location in key cities, if it's Florence, if it's Milan, Barcelona, Paris, London.

Definitely you have that asset there.

And that's why CapEx is going much stronger this year because we are planning to open a number of stores in Europe and that's the cost of it.

Thank you.

At this time, there are no further questions.

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

Thank you.

And I just wanted to mention a quick word just to say that Maurice and I, we want to thank our team and associates and all managers and partners we have around the world about what a great deal we accomplished together, which this past year was not that obvious when we started the year last year.

It was pretty scary for everybody.

And nobody knew how this would finish.

So, everybody stayed calm in our organization and our team, and our partners.

And I want to thank them because it was an incredible experience, good and bad.

But what was key was the trust and loyalty that we have to each other.

And I want to thank everybody for that.

It was an amazing moment.

Thank you very much.

And we'll talk to you in two months which is, I think, May 27 for the Q1.

Thank you very much.

Bye.

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

All parties may now disconnect and enjoy your day.