Guess? Inc (GES) 2011 Q1 法說會逐字稿

Good day, and welcome to Guess first quarter fiscal 2011 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, sir.

Thank you.

Good afternoon, and thank you for joining us today to discussion Guess's financial results for the first quarter of fiscal year 2011.

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

I will first review some highlights for the quarter, and I'll go through the year, then Dennis will go into detail of our financials by business segments.

Finally Carlos will address the outlook going forward.

We are very pleased with our strong performance this quarter.

We continued to execute our key strategies and reach record in both revenues and earnings, which far exceeded our expectations.

Each one of our businesses performed extremely well, delivering double-digit revenue growth, and improving profitability significantly.

International business was a large part of our growth for the period, with Europe and Asia combined representing almost 60% of our revenue increase and more than 60% of earning growth.

During the quarter, we achieved a same-store sale increase of almost 10% in North America.

We manage our business and inventory well, and delivered significant gross margin improvement for the quarter.

These helped to drive an overall operating margin expansion of 230 basis points, with every business contributing to this margin improvement.

We were able to manage our business with a flat SG&A rate, even as we continued to invest in marketing and in our infrastructure to support our key growth initiatives.

All in all, we reported record earnings of $0.54 per diluted shares, a 54% increase over last year's diluted earnings of $0.35 per share.

In our North American retail business, our Guess by Marciano brand outperformed our expectation, delivering the same store sales growth in the teens.

G by GUESS also had a good growth.

[Margins] remained challenging in US and Canada, but we were able to capitalize on our customerology program to increase sales.

Margins were healthier throughout the period, and inventory position remained clean and well managed.

We believe our product assortment is strong, and the customer has reacted positively to our collection and design.

In Europe, we expanded our business also ahead of expectation.

We have a significant contribution for both our new jewelry business and our retail stores.

Europe drove the largest part of our revenue growth for the Company, as the business increases top line by 28%.

Asia, once again, delivered strong growth with a 50% revenue increase, and nearly a three-fold improvement in profit in the period.

[Wide sascariva] drove most of the increase.

We continued to improve China bottom line for a better product assortment and a faster speed to market, which has contributed to increased sales and better margin.

Finally, our licensing business also exceeded our plan in the period as several product [activities] such as watches, handbags, eyewear, and shoes, plus the strong sales.

As we look in the latter half of this year, we remain focused on three key priorities I outlined for you during our last call.

First to increase test productivity across all businesses.

We are confident in our product line, which has resonated well with our customers.

We plan to capitalize on full assortment that support the lifestyle of our Guess customer, and we will continue to invest in the marketing program to protect and further develop the consumer awareness of our brand.

Second, is our expansion in Europe.

We made solid progress this quarter, our goal to continue to be the strong team in Europe, adding several key members to our management in that region, including supporting function for our new businesses.

We continue to expand the weaker source network in that region, adding 39 stores during that quarter.

We plan to open a total of 85 stores this year in Europe.

Of course, we are fully aware of the macroeconomic issue affecting the region, and we remain focused on our long-term strategy.

We will continue to develop this market, [as we plan to enjoy] a strong consumer awareness that's where our business is underpenetrated.

Our third goal related to the expansion of our retail business in US and Canada.

For this year, we now plan to open 59 stores.

In addition to these key three priorities, we see significant market opportunities in Asia, and we are dedicating strong capital and human resource to support the region growth and its developments.

A week ago we announced the appointment of Kitty Yung, our new President of Guess Asia, and made other key management appointments in the region.

With many of the critical members of that team now in place, we feel we are poised to grow our business even faster in that region.

In China, we have been opening flagship stores in (inaudible) Shanghai, Hong Kong, Macau, and Beijing and we plan to continue growth in China by expanding secondary cities where we do not yet have a significant presence.

We also plan to continue growth in South Korea through expansion of our growth in new businesses, such as our new intimate business.

For the remaining of this fiscal year, we plan to open 41 stores in Asia, in addition to the 12 stores opened year to date.

And plan to continue to enjoy tremendous momentum worldwide.

Looking forward, we are excited about opportunities to continue to capitalize on this positive momentum.

We believe that our brand, our global diversified business model and experienced leadership team provides us with a great advantage to perform well and gain market share in that environment.

With that, I will pass to Dennis.

Thank you, Paul, and good afternoon.

We are very pleased with our financial results.

We grew each of our businesses, expanded operating margins, and increased earnings by 55% to a first quarter record of $50 million.

Total first quarter revenues increased by 22% to $539 million.

In constant dollars the increase was 16%.

All segments delivered double-digit revenue growth, led by our international businesses.

Total Company gross profit increased 33% to $235 million.

Gross margin expanded significantly in all segments, resulting in a Company-wide improvement of 340 basis points to 43.6%.

The gross margin expansion was driven by higher European product margin, given a higher mix of European retail sales, and our new international jewelry business, which both carry high product margins.

Currencies also favorably impacted our product margins, and we leveraged our occupancy expenses given the positive comps in North America.

Our SG&A expenses increased to $158 million.

The SG&A increase supported the additional business in the quarter, including a larger store base in both Europe and North America.

The expense increase is also related to the addition of our new businesses, higher marketing investments to enhance our brands global awareness, and the unfavorable impact of currencies.

Our SG&A rate remained flat for the quarter at 29.3%, even as we are making significant investments to support our growth.

In the quarter, we accelerated the amortization of deferred pension costs associated with Carlos' departure.

This resulted in a non-cash charge of $6 million, or about $0.04 per share.

For the period operating profit increased 48% to $71 million.

This includes a $5 million favorable currency translation impact, or about $0.04 per share.

Operating margin expanded 230 basis points to 13.2%.

Excluding the accelerated pension cost amortization, operating margin would have expanded 340 basis points.

For the quarter, we reported other net income of $3 million, or about $0.03 per share, which primarily represents unrealized mark-to-market gains on non-operating assets and foreign currency contracts.

Our effective first quarter tax rate was 31%, compared to 33% in the prior year first quarter, and we are planning the remainder of fiscal 2011 with this 31% rate.

As we announced in today's release, the Company has expanded its segment reporting to segregate Asia from North America wholesale.

Our first quarter results conform to this new reporting structure, and our release also includes revised conforming fiscal 2010 data.

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

In North American retail, our comp store sales increased by 9.7% or 5.8% in constant dollars, and revenue increased 14% to $236 million.

All of our retail concepts grew and posted positive comps.

Guess by Marciano delivered the strongest comps as it continues to benefit from product improvements and our rebranding efforts.

With improved sourcing, we expanded product margins and leveraged our occupancy costs as well.

Our gross margin improvement was partially offset by increases in our SG&A expenses as we invested in store expansion and in initiatives to improve our service levels.

Overall operating margins for our retail segment expanded 160 basis points to 10.3%, and operating earnings increased 35% to $24 million.

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

In North America wholesale revenues increased 27% to $43 million.

Both our US and Canadian businesses grew.

We're pleased with our improvements in this business as the consumer begins to come back, and as our retailers are increasing their orders.

Product margins expanded significantly in both the US and Canada, and we leveraged our SG&A cost given the strong top line.

Overall operating margin expanded by 920 basis points to 23.9%, and operating earnings more than doubled to $10 million.

In Europe, revenues increased 28%, reaching $187 million.

In euros revenues increased 22%.

The largest contributor to our growth was our new jewelry business, followed by our retail business where we posted mid-single-digit comps and increased our store base to 96 stores.

Our existing wholesale businesses also increased revenues with our handbag and Guess apparel businesses performing best.

Gross margins increased significantly, given stronger product margins in most businesses including in our retail stores, and the addition of our high-margin jewelry business.

The improvement in gross margin was partially offset by a higher SG&A rate due to retail business mix impacted by new-store opening costs, and by infrastructure investments to support our new store rollout.

Operating earnings increased 49% to $34 million, and operating margin expanded 250 basis points to 18.4%.

In Asia, revenues increased by 50% to $49 million.

In constant dollars, revenue increased 32%.

South Korea continued to drive our growth with many more doors, mainly to support our new intimates business, coupled with positive comps.

China also delivered a significant revenue increase as we continued to develop our business in secondary cities, and improve productivity in our existing locations.

Gross margins increased significantly in Asia, with strong product margin improvements in China, contributing to our second consecutive quarter of profitability in China.

Overall for Asia, operating profit increased 186% to $7 million, and operating margin expanded 700 basis points to 14.7%.

Licensing revenue increased by 15%, exceeding our expectations and reaching $25 million in the quarter, despite the loss of royalties from the internalization of our international jewelry business.

And now I would like to turn our attention to the balance sheet.

Our cash flow continues to be solid.

We ended the quarter with cash reserves of $518 million, $205 million higher than a year ago, after investing in our retail expansion and working capital to support our growth.

Accounts receivable increased 4% over last year, to $283 million.

Overall, DSOs improved slightly.

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

We ended the quarter with inventory levels at $246 million, about 17% higher than last year.

Our inventory continued to be very clean.

We have been investing in certain product categories or regions strategically.

Our goal is to support new-store growth, to provide a more effective replenishment and to deliver products more evenly throughout the season.

During the quarter, we invested $16 million in net capital expenditures, mainly to support store growth and remodels.

Finally, our Board of Directors has approved a quarterly cash dividend of $0.16 per share, payable on June 25, 2010, to shareholders of record at the close of business on June 9, 2010.

With that I'll turn the call over to Carlos.

Thank you, Dennis, and good afternoon.

Now I will give you an update on our expectations for each of our business segments, and an overview of our outlook for the fiscal year and the second quarter.

We are very pleased with our business performance in the first quarter.

Our business in North America remains stable with solid sales momentum and a healthy margin structure.

Our business in Europe continues to grow in local currency, and we have exceeded our expectations to expand in new markets.

We continue to grow our business in Asia with good results, and our wholesale business in North America is beginning to show encouraging signs of growth.

We exceeded our first quarter expectations, delivering earnings per share that were $0.10 higher than the top of our guidance range, if you exclude the impact of the non-cash acceleration of pension-cost amortization.

As we look forward, our business continues to perform well, and we expect to capitalize on this favorable trend.

We have made excellent progress against our three key growth initiatives, as Paul described earlier.

Regarding retail, for the rest of this year, we see opportunities to open more new stores than we had initially expected as we continue to find very desirable locations in attractive markets.

So while business trends are generally at or above our anticipated levels, the euro has now weakened significantly below our planning assumptions.

If these trends persist, this would impact both our earnings translation and our margins negatively.

We have updated our guidance, assuming that the euro will not rebound, and will experience further softness.

This decline in the euro will result in a further negative EPS impact on translation and margins of about $0.16 per share for the remainder of the year, in addition to the $0.12 translation headwind that we described on our last conference call.

So based on these factors, we are now expecting consolidated revenues for the full fiscal year to range between $2.350 billion and $2.4 billion.

We also expect operating margin around 16.5%, and EPS in the range of $2.80 to $2.85.

This EPS guidance, assumes average diluted shares of about 93.5 million, and no further share repurchases.

Our revenue guidance assumes mid-to high single-digit comps in North America, 59 new store openings, and total revenue growth in the low teens range.

In North America wholesale, our guidance assumes a revenue increase in the high single digits range.

For Europe, based on our visibility given current orders, and our expectations for our retail stores, we now expect a revenue increase in the low to mid-20% range in local currency, which should result in a US dollar increase of around 10%.

And finally, for Asia, we expect revenues to increase in the mid-20% range.

We now expect that full-year gross margins will be down slightly.

IMU improvements in the first part of the year will be more than offset during the remainder of the year by higher raw material and labor costs, currency headwinds, and a higher occupancy rate.

We are also planning the year, assuming that our SG&A expenses increase in line with our revenues, producing a flat SG&A rate for the year.

Now with respect to timing, the majority of this year's new-store openings and remodels will take place in the second and third quarters, positioning us to take full advantage of the holiday season.

This will put pressure on our occupancy and SG&A rates in those quarters, resulting in lower operating margins.

In addition, as we reported last quarter, we are supporting our growth initiatives this year with increased marketing investments to enhance the brand's awareness globally, putting further pressure on operating margins for the same period.

We see the fourth quarter as our next opportunity for operating margin expansion when we expect to drive a 20% growth in our operating earnings.

Moving on to our guidance for the second quarter, we expect revenues to grow between 7% and 10% to a range of $560 million and $575 million.

We expect an operating margin of around 16%, and earnings per share in the range of $0.65 to $0.68.

In retail, thus far in the month of May, we have delivered flat comps, impacted by a calendar shift due to the Memorial Day weekend.

Once this shift is normalized, we expect our trend to be in the mid-to high single digits range, and we plan the quarter to be in line with this trend.

In North America wholesale, based on our current backlog and the pulse of the business, we expect second quarter revenues to increase in the mid-teens.

In Europe, our wholesale backlog is currently up about 15% in local currency, and it includes orders for our new jewelry business.

Growth in these businesses, combined with our retail expansion, should contribute to an overall local currency revenue growth in the 20% range, and a US dollar revenue increase in the high single digits.

For Asia, consistent with our annual guidance, we expect a second quarter revenue increase in the mid-20% range.

Finally, based on current trends, we expect second quarter royalties to increase in the mid-to high single digits.

Regarding gross margin, we continue to manage inventories well, and are pleased with our current position.

We expect product margins to be consistent with last year's second quarter, with a larger mix of retail stores helping to offset the currency headwinds.

Regarding expenses, given the investments we are making, we expect to operate with a higher SG&A rate compared to last year's second quarter, and we are continuing to plan for capital expenditures net of tender allowances of around $170 million for the full fiscal year.

In closing, I want to remind all of you, that this will be my last earnings call with the Guess family in my current capacity.

But I am excited that I will remain as part of our Board.

As many of you know, this has been the hardest decision I ever made to leave this amazing Company where I spent the best ten years of my career.

I have tremendous respect and appreciation for the strong vision, outstanding leadership, and relentless commitment that Paul, and Maurice Marciano contribute to this Company day in, day out, and to me personally.

My relationship with Paul and Maurice over the years became a very special one and I consider them my great friends and part of my family.

I want to thank them for these amazing years together.

Next, I want to thank our executive team.

We have a very strong team, which has consistently produced outstanding results in good and in challenging times.

I'm very proud of what this team has accomplished, and I strongly believe it will continue to perform at the highest levels, to maximize our Company's potential, which is, in my opinion, simply outstanding.

I also want to thank our associates worldwide, who exhibit a remarkable attitude and a strong passion for our brand and our Company.

And last but not least, I want to thank our Board, our partners around the world, and our shareholders and analysts for all your support and interest in our story.

I am very honored that I will remain on the Board and continue to be a part of this amazing journey.

I look forward to many years of continued success.

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

Operator?

I think we are ready to open up the lines for your questions.

(Operator instructions).

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

Please proceed.

Yes, thank you.

Couple of questions.

One on China, encouraged by the progress in that market, particularly going out into the second tier of distribution.

Could you shed a little bit more light on -- or a little bit more information, detail on points of distribution, primary or first tier markets versus second tier, what you are seeing in terms of the performance of the brand between those two?

And any updates.

I know ultimately it could be a much larger brand, but just in the next year or two, what growth rate do you anticipate in terms of new unit adds?

Yes, Jeff, this is Paul.

As you know, we have articulated that several times, but now the same emphasis we put in Europe the last three years, we want to gear up to do a similar strategy in Asia, and structuring not only the management, but also the infrastructure of the support being logistic, being MIS, being the stores, being the training, everything.

So all of that is going to be focused mainly in retail expansion, being direct all on partnership or on franchisee.

We think in the next two years, we should grow that market rapidly and the brand awareness is there, but is not where we could be if we put the right investment.

So I think 20%, 25% of the existing goal per year is a good goal, and it might be much more than that depending on the availability of space and all of that.

So we are very, very confident there.

Jeff, just to add for this year, we have a plan to open six additional doors between property and franchisee stores, and the very encouraging signs that we have here is that the product is selling very, very well, and as a result of that, we were able to achieve profitability for the second quarter in a row.

So we are very excited about the changes that we are experiencing in the region.

Just one clarification, in terms of your pricing in that market, can you share again, for Mainland China in particular, what is the pricing comparable to Europe and US in terms of a retail?

And just one other thing, in terms of the European exposure and the volatility of the euro, are there any other updated thoughts or any other strategies in terms of your hedging going forward, given the extreme volatility in the FX today?

Yes, with respect to the pricing, we enjoy a margin structure in Asia that is very similar to what we are seeing in the North America business, and that is with the changes that we have made, and we feel that we are very competitive at the prices that we are right now.

So we are very pleased with the structure of the business right now, and we think that we can look into a double-digit operating margin over time in the China market, over time.

Of course, for that, we need to get the type of size that we need for that business, and so forth, and as we grow the franchisee business that produces a better return.

With respect to your question regarding what we are seeing for the euro, we have a much larger hedging structure today than we did a year ago.

I don't know Dennis --

Yes, Jeff, we're about -- if you look at our dollar contract, we've probably got about 40% more hedged right now than we did a year ago, so -- we -- that -- the program has been expanding.

We go out anywhere from about nine to 12 months based on our visibility of the business.

So the program has been helping.

There is a lot of value that's embedded in the contract.

Some of that value has already been recorded because of the way the hedge accounting rules work, but the program is intact, and we have got a lot of value in those contracts.

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

Please proceed.

Thanks.

All of my questions center around Europe, actually.

I wanted to ask you about, especially in the Italian market, are you seeing anything on the ground that is impacting the business, given all of the news headline flows, and the volatility in some of the financial markets, not just from your wholesale business, are you close enough to what is going on the ground, given a lot of your business over there is a wholesale model, to really get a feel for are consumers being impacted by this?

And then I also wanted kind of two technical questions.

You said you are assuming the euro is going to continue to be soft or softer, last quarter you said, I think a 5% decline, what are you kind of assuming now in your guidance?

And then the other technical question is, for your European business, do you source in dollars or in euros?

Thanks.

With respect to the first question, Omar, our business in Italy for the first quarter was up almost 13%.

This is total business, and that has three components.

One is the new jewelry business, which really drove most of that increase, but also our retail business was up, and we did experience a small decline in the wholesale business.

As a result of this, and because we increased the revenues and business in the other countries that we have been targeting, we saw that now we are less dependant on Italy.

So the total revenue for the quarter was about 46% versus 50% a year ago for Italy, with increases experienced in the other countries that we have targeted like France, Spain, UK, and Germany.

So we don't see a significant weakness in the business at all, we continue to experience positive comps, positive comps for Italy in the first quarter were almost 6%, and in month of May, are at almost 17%.

So we see a pretty desirable business growth, and we feel that -- that where we are addressing the country is pretty much in line with our long-term goals.

With respect to -- you want to --

Yes, with respect to the euro, similar to the way we planned last year, we're looking at the rest of the year at about 5% off of where we are today.

So that takes you into the 120 range.

Maybe the high one-teens kind of range.

In terms of the purchasing, the majority of our accessories that we buy in Europe, those are sourced in US dollars, and about -- a little less than half of the denim product is sourced in US dollars.

Overall for Europe probably a little more than half the product is in dollars, and the rest would be sourced in euros.

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

Please proceed.

Thank you, and congratulations on a great quarter.

Thank you, Christine.

Thank you.

I wanted to talk about the US business.

How are you feeling about the health of the US consumer?

And how does the euro weakening impact the US business with respect to tourism?

And then I have some other questions.

Thanks.

Yes.

Overall, our US business in the first quarter was healthy.

We did -- we continued to experience a decline in traffic, but we have been able to more than overcome that with an improvement in conversion, and units per transaction has also increased.

Those two components have helped us to achieve that kind of comp that we reported.

In the month of May, we -- we see a decline in traffic that is higher than what we have seen, but that is primarily impacted by the shift in the Memorial Day weekend.

We expect that after that is normalized, we'll be back in the same kind of territory that we were for the first quarter, and low single-digit comp traffic drop.

And we think that we have the ammunition to be able to continue to offset that traffic decline.

That being said, we think we have to be right with the product, and we feel great about our assortment, and if we can continue to deliver on those -- on that front, we think that our guidance, and our expectations of mid-to high single-digit comp growth in -- in the retail business is very achievable.

In fact, we see some opportunities based on the implied comps that you would see once you normalize the last three or four years based on the first quarter performance.

Now, after that with respect to tourism, our tourist stores did significantly better than the non-tourist stores.

I'm talking about the first quarter.

And that was pretty rewarding.

Now if you assume a very low euro going forward, time will tell, we don't know what kind of impact that will have.

As you know, we do very well in tourist locations.

And of course, if the tourists are not there, we will definitely feel an impact in those stores, but we haven't seen an impact.

In fact we have seen exactly the opposite.

Your next question comes from Dana Telsey, with Telsey Advisory Group.

Please proceed.

Good afternoon, everyone.

Can you talk a little bit about what you are seeing product cost wise and how that influences prices for the Fall, and also on trends just for Fall, both men and women, what you are seeing different this year than last year, and lastly as you are looking to expand into other countries besides Italy, any updates on that progress?

Thank you.

Sure, Dana.

With respect to sourcing, what we see is -- we made great progress last year with sourcing.

We actually picked up about 80 basis points in IMU for the full year, which was a great success, and we had a -- also a goal that was ambitious for this year.

We have been on goal for the first part of the year, and we are starting to see some pressures in the back a half, and that is impacted by raw material costs, labor costs, even freight costs due to capacity, the price of cotton is up, price of yarn is up because of capacity issues.

So in the guidance that we provided today, we have embedded a less optimistic forecast for the back part of the year.

This is primarily in -- would impact the fourth quarter.

And we think that we are being conservative with our numbers.

With respect to the traffic trends and what we are seeing between the two businesses, we are very pleased with what we are seeing with men's, because this ia business that last year was weak for us, but we saw a pretty nice turn around, and this is across brands, that we're seeing the men's customer coming back and spending, and we are posting very good numbers with that.

Now, your question about outside Italy?

Yes, we're addressing -- the four markets that we're addressing are France, Spain, UK, and Germany.

We did very well in the quarter in each one of those markets.

Collectively they grew at roughly twice the rate of the European business.

Collectively almost 40%, and each one of those markets individually grew at a rate that was higher than Europe in total.

So we made significant progress, and expanded our penetration of those markets.

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

Please proceed.

Thank you, congratulations.

And best of luck, Carlos.

We'll miss you.

Thank you.

I did want to ask Dennis as follow up to the commentary you gave regarding those four territories in Europe.

Could you give us any indications on how those businesses have trended in May, and if you are getting any indications on those on a local consumer base, and how they are reacting to some of the changes going on in those economies beyond May and to the back half of the year.

And then separately, I was wondering if we can talk about the North American concept.

You mentioned that Marciano outperformed the other brands.

Can you give us a sense on the productivity of Marciano, and also the profitability.

And also regarding G by GUESS as well.

Thank you.

Yes, I'll start with the May -- I don't have the numbers in front of me for Germany.

But I can tell you that for the other three markets, the trends continued and all posted strong growth, either in the high single digits or in the double digits.

And then with respect to the US business or US and Canada, rather.

Yes, the Guess by Marciano business continues to benefit from the rebranding efforts that we initiated last year, and as a result of this we're now converting a lot of that traffic into real sales.

We have been doing very well in addition to, like Maurice said, much improved product assortment, and that -- part of that product assortment also incorporates some new components like a very strong line of handbags.

I'm sure you saw that in the stores.

And as a result of this, of the brand, they delivered profitability during the latest 12 months, and we are very excited about this.

We think that there is more to come.

We think that we can continue to improve productivity in the space that we do have, and as a result of that, the profitability could continue to grow.

That's our plan.

With respect to G by GUESS it did produce positive comps, not as impressive as Guess by Marciano, but G by GUESS was up against positive comps a year ago for the same period, so we were very pleased that we were able to anniversary that with positive numbers.

And the margins are better than they were.

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

Please proceed.

Yes, hi, thanks, and congrats.

Good quarter.

Can you just publicly talk about how we're handling the transition here near term with Carlos?

How deep is the team?

Who is taking over the responsibilities?

How much comfort we have around that?

And did I hear you, Carlos, say that you're -- you're hoping to open even more stores this year than you had originally planned?

What gives us the confidence, and particularly in Europe, that we should even remain on track with this growth plan given what is happening on there -- or over there?

Thanks.

I'm sorry just to address that one comment, Jeff, the -- our -- our comment about opening more stores was exclusively related to North America, where we are going to open about 59 stores, and it's all driven by the type of locations that we are being offered with, and the attractiveness of the economics or the -- the markets that we are being offered.

In terms of Europe, we are not opening more stores, in fact we are not opening some of the ones that we had originally planned.

We are being very careful with what we do in terms of new locations, of course.

And this is Paul, about the transition that you mentioned before, there would be -- as you know, we -- we announced that there would be a search, and it is a search currently for the President of the Americas which cover retail business, wholesale, e-commerce, Mexico, Central and South America.

Then the COO, which would be a global position, will be -- which is under like logistics, or seeing all of the CFOs in different regions, and of course, all of the construction in HR.

And then after that, we will have the EVP, CIO, which is Mike Relich, who has been with us many, many years, and which have also all of the strategy planning and global market, and then present your offers in Asia.

We are very active on the search.

In fact we are very confident that in the next three -- maximum four months, we will be able to fill in these positions, but meanwhile, of course, I -- I am on a day-to-day, always here with my brother Maurice, and definitely, we are covering all avenues and subject to be addressed.

So I have absolutely no concern about it.

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

Please proceed.

Yes, good afternoon.

Just a clarification question, Dennis, on the guidance.

That guide of $2.80 to $2.85, includes the $0.04 of the pension amortization?

Yes, it does.

Excluding that is $2.84 to $2.89?

Exactly.

So if you take the midpoint of your previous guidance, so essentially you lowered by $0.04 or so from the midpoint, of which $0.16 is negative FX, correct?

So this is -- the best way to think about it, that based on the acceleration in your business, you are essentially raising it in constant currency field by $0.12?

That's correct.

Okay.

Just wanted to clarify.

And then, if we look at your revised revenue guidance, which was, I think $50 million higher, how do we think about what the constant currency growth in revenues was originally planned for the year?

And what is it today based on kind of the movement in FX rates?

That would be helpful if you can give us some sense of that.

I think in -- for the second quarter, you are looking at a constant currency rate probably in the 15% kind of range, and then probably for the full year, I would guess your -- you are slightly higher than that.

So -- and another way to look at that, if you take the full year, David, we -- the implied number in terms of dollars will be about $40 million higher, and this is after absorbing the hit because of the weakening euro, and we lost about -- almost $59 million -- almost $60 million because of the weakening euro.

So, if you add those two, you would get the impact of the strengthening of our assumptions and our top-line growth.

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

Please proceed.

Thanks very much.

Carlos let me add you will be very missed, good luck in your new job though.

By the way I think the market right now is pricing in euro dollar parity.

Yes.

So probably not much -- not a lot of down side there, but back to the Carlos replacement question, sort of where are you, or how are you doing in the search for that position?

This is Paul, definitely we have been, Carlos and I, working on that.

The first [meeting for that] we discuss that now -- I don't know; it was three weeks ago, four weeks ago, and we are starting the first interviews I would say in the next 10 days maximum.

So we're [confident] on both positions have been coming up, and I think in this market, and where the brand is positioned on a global scale, and where the opportunities are standing for us, I don't think it would be a -- too much of a challenge.

The real challenge would be to adapt to the future of Guess, and what this Company is about after 29 years, 30 years next year.

And I think that's a key element for us.

We are a very unusual Company on many sense, and many ways, and that's why we have so many people in the Company who are like 10, 15, 20, 25 years still in this Company.

We're confident on that.

I think it's really the issue of fit and understanding of the complexity of our business.

We don't have a simple business.

We --

I would like to add that -- I have been an integral part of this whole search process, and I'm excited to continue to be part of it, and I will be, and I think the structure that we came up with is one that is going to serve the Company much more effectively, because we have these two positions that will really give each of those big areas, the business area with Americas, and the whole infrastructure type of functions, an opportunity for somebody to really be very focused on each.

And the great thing is that we have very strong people underneath each of those two organizations.

So this gives us an opportunity to continue to really search for a very strong candidate for each, but each of the direct reports to these two positions, we're talking about VPs, and senior VPs in every case, people that have been with the Company for a long time.

So we do not anticipate to miss on the transition at all.

All of the functions have already been delegated and reassigned, and like Paul said, Maurice is here every day, Paul is here every day, so there is complete alignment of responsibilities and of course they know every one of these areas as they have been running the Company for 30 years.

The great thing is that we are seeing significant strength in the candidates that we think we can go for each of these two, and in some cases candidates are expressing interest in both positions.

And the other thing that we are seeing is that the candidates are very, very excited about the brand opportunity, because we have made pretty significant progress with the brand itself.

So the fact that we are a global Company, and there aren't that many, I think is of great interest to them.

So I agree with Paul, that this is in three or four months we should have very strong candidates in both.

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

Good afternoon, and again, Carlos best of luck in your new position.

You had given us ForEx impact by quarter last time you spoke, if you could give us an update with your thoughts on where you think the euro fight fall through the course of the year?

And also with the cash building, wonder what your thoughts are in terms of use of cash in terms of buy backs or M&A?

The currency, of course we talked about what are our planning assumptions.

I don't want to speculate on where it could go, but based on our planning assumptions, the $0.28 that we're now talking about, about half of that is going to impact the fourth quarter, and then you'll see between the second and third, there's a little -- they are roughly split a little more skewed towards the third quarter than the second.

But most -- most of it will fall -- or half of it will fall in the fourth quarter.

And with respect to cash.

Our top priority for the use of our cash continues to be the expansion of our business.

We're significantly increasing our capital spending this year to support the growth, both here, and in Europe, and that -- that continues to be our -- and Asia as well -- that continues to be our top priority.

We do have a share repurchase authorization, that remains about $134 million.

So that's still available, but our -- again, our top priority is the expansion and to invest in our growth.

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

Please proceed.

Good evening, everybody.

Sorry about the background noise here.

If I could follow up on the question on the European stores, Carlos, it sounds like there is still some flexibility perhaps pulled back on some of the leases, but can you help us better understand how many of the 50-plus stores in Europe that you are planning to open are locked and loaded for the year?

And then, just beyond May, if you could help us better understand perhaps how that European backlog growth at 15% breaks out, by your primary regions, I think that would be helpful.

And then the last question would be, I think inventories were up consolidated about 16% during the quarter.

How much of that came from North American retail, and given that it sounds like some of the specialty peers are all seeing inventory builds, are you starting to see inventory builds within the overall specialty channel?

Thank you.

That's one question.

Chi, unfortunately I do not have the numbers of backlog by business or by region, rather for Europe.

I can tell you that the growth that we saw in the first quarter by region was pretty level, and pretty significant across all of the countries that I mentioned.

I think I mentioned that Italy was up about 13%, if you include both the wholesale business, jewelry business, and the retail business.

So I'm going to have to get back to you on the wholesale question for Europe.

With respect to the stores, we have a pretty set plan.

Yes, we are delaying some of those openings, but it's not going to be a significant number.

Right now we have 54 more stores that are slated for opening, and many of these are already locked and loaded to go.

So we -- and this includes -- this is about -- a 64% increase in the base of stores that we have.

We plan to end the year with about 138 stores in Europe, and that is up from 84 stores a year ago.

Now with respect to inventories.

Inventories, we feel very strongly about our inventory position.

There are -- there are three pieces to this.

Europe inventories are up about 20%, slightly over 20%.

A lot of this increase is related to the timing of shipments.

We have -- we are presenting a collection -- Spring collection for the first time -- a precollection, rather, for the first time for the Guess by Marciano brand and that is inflating the inventories, artificially if you will, because we are shipping all that, especially in the front end of the second quarter.

So we don't consider that to be an issue at all, and really the inventory -- once you exclude that factor, the inventories that we have are pretty much in line with the trend.

In -- with respect to Asia, the same thing is true.

In this case we have inventories over last year, of about 21.5% increase, and it is perfectly aligned with the trends, and if anything, we think that the trend in our guidance may be conservative, based on what we saw in the first quarter, and how that business has been trending, especially in Korea.

And then that leaves North America, where we have an increase in inventory of about 13.5% at the end of the quarter, which is pretty similar to the position that we have today.

There are -- we made some strategic investments in certain product categories, one being denim, and the business -- when it comes to premium denim in terms of fashion, has not been trending.

We have been cutting that position pretty significantly, and we do have an increase in basic denim, which we believe was critical to support our service levels at the store.

We also have an increased position in handbags, but we did this concurrently with the plan for factory buys, and we feel that the increase in handbags that we have built, because last year we were running with very short inventories, we will decline that position as the second quarter evolves.

We have invested in watches, and the category is trending extremely well, and we have a similar situation with the Guess by Marciano, but overall that's what we are planning, gross margins to be consistent with last year's, because we don't see any markdown risk with our inventory position across the board.

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

Please proceed.

Hi, everybody, congratulations.

And Carlos congratulations to you on your new position.

And thanks for all of your great leadership.

I had a couple of questions.

You talked about inventory per square foot, or in comparable inventories, perhaps for the US business or the North American business, I know you just went through all of the categories, but what is the inventory on a comparable foot basis?

That would help a lot.

And also on the wholesale order of backlog, I'm wondering, Dennis or Carlos, last year there may have been some shifts in wholesale orders in the second and third quarter.

I'm wondering if any of those comparisons are distorting the back order rate?

Can you talk a little bit about that.

Also on the guidance front, I'm wondering if -- I understand why the guidance has come in a little bit, but I'm wondering if in the guidance, you have included the incremental stores that you are opening, the ones that weren't included in the guidance in the first quarter, and also if you have considered the favorable impact on expenses that the lower euro will have?

Thanks so much.

Okay.

Let me take it one step at a time here.

With respect to the wholesale question, we do not have -- the guidance that we gave today for wholesale is completely aligned with how we are reading the business based on the backlog order that we have.

So yes, there are some things that are really making the comparison more challenging, but we have taken that into consideration, and we feel that -- based on what we are seeing, and how retailers have been booking orders, and so forth, that this is the best knowledge that we can give you.

So we talked about the North American wholesale segment, which includes US and Canada, to be up in the mid-teens for Q2, and to be up in the high single digits range for the full year.

That's the best that we can do, taking everything into consideration, and that's an apples-to-apples comparison.

With respect to average inventory per store.

It's -- I do not have that number at hand, but I can tell you that inventories are pretty much in line with our growth in terms of both comp and square footage in the factory business.

They are down in our G by GUESS business, slightly down, and they are up in our Guess by Marciano, and retail business, and they are up because of those three categories that I mentioned, which are denim, handbags, and the watches.

Janet, with respect to the guidance, the guidance that we have given today includes both the impact of the additional stores, and the euro rate that we have talked about affects the full P&L, every line item on here.

So that's fully included in the guidance.

This concludes the question-and-answer session.

I will now hand the call back over to Paul Marciano for closing remarks.

Well thank you very much, and thank you to join us to today, and we will -- we will resume our call in three months from now.

I think it is August -- I don't have the exact date, but it would be --

No, we don't.

Yes.

Thank you and have a good day.

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

All parties may now disconnect.

Enjoy your day.