Guess? Inc (GES) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the GUESS third quarter fiscal 2011 earnings conference call.

For opening remarks and introductions, I would like to turn the call over to Maili Bergman, Vice President of Investor Relations.

Please go ahead, Maili.

Good afternoon, everyone, and thank you for joining us today.

On the call are Paul Marciano, Vice Chairman and Chief Executive Officer, Maurice Marciano, Chairman of the Board, Dennis Secor, Chief Financial Officer, and Russell Bowers, Chief Financial Officer of our North America Retail Business.

During today's call, we will be making forward-looking statements, including comments regarding future plans and our financial outlook.

The Company's actual results may differ materially from those current expectations based on risk factors included in the Company's quarterly and annual filed -- annual reports filed with the SEC.

Now I would like to turn the call over to Paul Marciano.

Paul?

Thank you, Maili.

Good afternoon and thank you for joining us.

Today we reported solid third quarter results both in terms of revenues and earnings.

All other business segments contributed to our performance, delivering diluted earnings per share of $0.75, a new third quarter record for the Company.

We delivered operating margin of 15.1%, 160 basis points stronger than our expectation just a quarter ago.

In the quarter we made significant progress against our strategic growth initiatives, especially in international markets where our brand continues to be underpenetrated.

In the third quarter, Europe and Asia businesses combined represent over two-thirds of our revenue increase.

Our brand enjoyed tremendous momentum worldwide.

In the last two years, we have opened 386 new stores and our plan this year is to open another 241 stores.

At the same time we're growing, we continue to manage our business well resulting in a solid increase in earnings per share significantly ahead of expectations.

Let's start with Europe and Asia.

In Europe, we had a very strong quarter increasing revenue in local currency by 40%.

Our growth in Europe was driven by new store openings and strong comps in our retail stores which we expect to continue throughout the end of the year.

Our retail presence in the region has grown with the addition of key flagship stores.

Most recently, in Knightsbridge in London across from Harrods, then Paseo de Gracia in Barcelona, and in the center of Milan where we expanded our existing flagship store.

Additionally, our new international jewelry business performed well above expectation in Europe, Middle East and Asia.

In Europe, our brand recognition is getting stronger year after year.

Because of the fast expansion of our retail stores, we are affirming the position of GUESS as a global lifestyle and affordable luxury brand.

This quarter we added 22 retail property and 17 licensing stores in Europe, ending the period with a total of 379 GUESS branded stores.

We expect to open a total of 126 stores in Europe this fiscal year.

We announced in 2008 that we will be focusing on France, Spain, UK and Germany, and since then we have opened 75 retail property and licensee stores in these four countries.

We will now expand on that development to North of Europe, where we basically have no presence.

We believe there's a potential for another 75 stores in the North over the next three to five years.

Next is Asia, where our development in South Korea and China drove a 35% increase in revenue in the quarter.

We're making great progress in expanding our brand's presence in Asia.

With our partners we opened 15 new stores during the quarter and we expect to open a total of 44 stores during fiscal 2011.

I just returned from China three weeks ago.

Every aspect of that country is ramping up to accommodate the growing consumer segment that is demanding new and exciting branded products.

Consumers are responding well to the GUESS brand and we feel we're in a good position for increased penetration in that region, but again, it will take time and patience to have a real presence in China.

Next is North America retail.

We improved sales productivity slightly, delivering the same-store sale increase of 1.5%.

While the North American consumer remained cautious, we continued to improve our conversion rate despite traffic that was flat.

The pace of the back-to-school season did not pick up until September this year but our assortment sold well.

We managed promotions effectively to protect the integrity of the brand, ending the quarter with a clean inventory position.

Going forward, we see some real positive signs in different areas and Dennis will address that in his guidance.

During the quarter we opened 27 stores meeting our goal of store openings ahead of Black Friday and the upcoming holiday season.

We intend to continue our strategy of growing our retail base in North America focused on Accessories and G by GUESS stores.

We will open ten stores during the Q4 which will bring the total store openings for fiscal 2011 to 58 stores, compared to 18 store openings in the last year, which shows a solid momentum in US and Canada.

Our licensing business delivered a 19% increase in revenue.

All categories performed well above plan, especially watches, handbags and footwear on a global scale.

Our partners have opened 15 freestanding Gc stores in the last two years.

These Gc stores sell only Swiss made watches by GUESS ranging from $350 to over $4500.

The plan is to double the number of these stores by the end of the next fiscal year.

I want to take this opportunity to welcome Michael Prince as the new Corporate Chief Operating Officer.

And I want to say that the talent of our team and the proactive management of the business have sustained our strong market position and we feel we're poised to grow our top line and to expand our earnings.

At the center of that is the GUESS brand.

We strive to constantly adapt ourself, while staying true to who we are.

It is this consistency of mission and vision that we will repeat time after time to our partners and our consumers around the world which we also believe is our most valuable asset to succeed on a global scale.

With that, I will pass that to Dennis.

Thank you, Paul, and good afternoon.

Total third quarter net revenues reached $614 million, a 17% increase over last year.

In constant dollars the growth was about 21%.

Each one of our segments posted increases with the largest revenue growth coming out of Europe.

Total Company gross profit increased 12% to $266 million and our gross margin declined 190 basis points to 43.4%.

Currency headwinds and higher markdowns in Europe and North America retail were the main factors contributing to the lower gross margin.

SG&A expenses increased 26% to $174 million primarily due to our retail expansion with higher store selling costs and infrastructure investments to support our larger global store base.

During the quarter we recorded a $4 million noncash impairment charge related to certain of our retail stores in North America and Europe.

Performance-based compensation increased during the quarter as did our marketing expenses though not as significantly as we had planned.

Our SG&A rate increased 190 basis points to 28.3%.

For the period, operating profit decreased 6% to $93 million including a $4 million unfavorable currency translation impact.

Operating margin decreased 380 basis points to 15.1%.

For the third quarter we reported other net income of $6 million which primarily represents net unrealized mark-to-market gains on non-operating assets and foreign currency contracts and balances.

Our effective third quarter tax rate was 29.1% compared to 33% in the prior year quarter.

During the quarter we adjusted this years' full year tax rate estimate to 30% and we are planning the rest of this year with this rate.

Overall, net income attributable to common stock holders increased 8% to $69 million and diluted earnings per share increased 9% to $0.75 compared to $0.69 in the prior year quarter.

Now I'll review our revenues and earnings by business segment starting with our international businesses.

In Europe, local currency revenues increased 40%.

Given the relatively weaker euro compared to a year ago, US dollar revenues grew 28% to $216 million.

All of our European businesses contributed to this growth led by our new jewelry business.

We expanded our retail store base while also delivering strong comps and growing our existing wholesale businesses as well.

European gross margins declined primarily due to the stronger US dollars impact on product purchases.

Although SG&A expenses increased in local currency, our SG&A rate improved.

The higher expenses primarily related to additional infrastructure and administrative expenses and higher store selling expenses given our larger owned retail store base.

Operating earnings increased 15% in local currency in the quarter and increased 4% in US dollars to $43 million.

Operating margin decreased 450 basis points to 19.7%.

The impact of currencies accounted for roughly half of this operating margin decline.

In Asia revenues increased by 35% to $55 million with all of our businesses delivering strong revenue increases.

The growth in the region continues to be driven by new store growth in South Korea and China as well as by positive comps.

Our sales in China also included earlier shipments to our licensees compared to the same period a year ago.

Operating margins expanded 160 basis points to 15.1% driven by SG&A leverage.

Overall for Asia, operating profit increased 51% to $8 million.

In North American retail, revenues increased 6% to $254 million and we posted a same-store sales increase of 1.5% in US dollars.

Gross margins declined in the quarter compared to a year ago primarily due to higher markdowns and an increase in our occupancy rate due to our new store opening cost.

SG&A increased both in terms of dollars and rates given the larger retail store base, impairment charges and infrastructure investments.

Operating margin for our retail segment declined 620 basis points to 7.6% and operating earnings decreased 42% to $19 million.

New store opening costs and impairments negatively impacted operating margin in this segment by 270 basis points.

During the quarter we opened 27 new stores and closed 2, ending the period with 473 stores in the US and Canada.

In North America wholesale, revenues increased 22% to $56 million with all of our businesses posting double-digit increases in sales.

We supported our customers efforts to ramp up for holiday selling by delivering product earlier than we had anticipated benefiting current quarter EPS by $0.02.

Operating profit in the wholesale segment increased 36% to $17 million and operating margin expanded 320 basis points to 29.7%.

The licensing business continues to perform very well posting revenues of $33 million, an increase of 19% over last years' third quarter.

Now turning our attention to the balance sheet.

Our business continues to deliver positive operating cash flow.

In the quarter, our operations generated $30 million in cash and we ended the quarter with cash reserves of $469 million.

We remain virtually debt free except for the lease for our Italian facility.

Accounts receivable increased 19% over last year to $372 million.

In constant dollars, the increase was 24%.

Overall, DSOs improved slightly compared to a year ago.

At the end of the quarter, about 44% of our receivables were supported by insurance coverage, bank guarantees or letters of credit.

We ended the quarter with inventory levels of $346 million, about 28% higher than a year ago.

The growth in our inventories primarily supports our growing international businesses.

About two-thirds of the increase is in Europe, primarily to support earlier deliveries, within the fourth quarter and a significant increase in our retail store base.

About a quarter of the increase supports our North American business growth.

Overall, we feel we are well positioned with our inventories with strong position in trending categories to support our business for the upcoming holiday season.

During the quarter we invested $43 million in net capital expenditures mainly to support store growth and remodels.

We now expect total capital expenditures, net of tenant allowances, will be around $130 million for the full fiscal year.

So in summary we are very pleased to deliver earnings significantly stronger than our previous expectation.

Overall, our businesses performed at or above the levels that we had anticipated and we benefited from several factors which helps to drive our earnings.

We did not increase our marketing expenses as we had originally planned deferring those investments into the future.

Licensee shipments were much higher than planned and the headwinds from currencies eased.

We also benefited from a lower tax rate and an acceleration in North American wholesale shipments that have shifted $0.02 of EPS from the fourth quarter into the third.

These were partially offset by the noncash impairment charges we recorded in the quarter.

Looking into the fourth quarter, our underlying operating expectations remain similar to those implicit in our full year guidance from a quarter ago.

In addition, we are planning, assuming that currency headwinds will be less significant than we described on our last conference call.

So with respect to fourth quarter guidance, after accounting for the $0.02 wholesale shift and improved currency environment, we expect total consolidated revenues to range between $710 million and $730 million.

We expect consolidated operating margins of about 19.5% and EPS in the range of $1.02 and $1.06 per share.

Given this fourth quarter guidance, our full year expectations are for revenues to range between $2.440 billion and $2.460 billion, operating margin around 16.5% and consolidated EPS in the range between $3.02 and $3.06 per share.

In Europe we expect that our strong performance in growth will continue into the fourth quarter.

We expect revenue increases will be driven by our owned retail business where we have increased our store base by nearly 70% compared to a year ago and where we are planning with positive comps.

The other significant growth driver will be our existing wholesale businesses which includes the introduction of a Spring pre-collection for Guess by Marciano.

Overall wholesale backlog is currently up 22% compared to the same point a year ago.

Our expectations also include growth from our jewelry business which we began to operate directly during last years' fourth quarter.

Overall for Europe, in the fourth quarter, we expect revenues in US dollars to increase in the low 20% range and to increase in the mid 30% range in local currency.

This would result in full year US dollar revenues to increase about 20% and local currency revenues to increase in the high 20% range.

In Asia, we are expecting fourth quarter revenues to grow in the mid-teens resulting in a full year revenue growth in the low 30% range.

In North America retail, conditions in the malls are more stable and there certainly are signs of optimism leading into the holiday season.

We expect that consumers will continue to respond to big events such as Black Friday and we have proven strategies to take advantage of this traffic.

In December, we expect once again that customers may wait until deep into the month to do their holiday shopping and we expect that traffic after Christmas will be strong.

We have once again invested in trending categories and expect our recent strength in accessories and footwear will bolster our holiday performance.

Our inventory in these categories is well positioned.

While women are responding well to these categories, the market for women's apparel has been particularly competitive.

To support this business, we have developed many compelling key items which we believe will drive our full price selling.

Thus far in November, we've experienced comps that are roughly flat leading into the peak holiday selling season.

Based on our expectations for the holiday selling season, we're planning the fourth quarter with comps in the low-to-mid single digits.

Given this quarters' much larger store base, we expect the revenue increase over 10%.

For the full year, this would result in a mid single-digit comp and revenue increase over 9%.

In North America wholesale, taking into account the acceleration of shipments into the third quarter, we're expecting fourth quarter revenues to decline in the 20% range.

This would result in a full year sales increase in the mid-teens range.

And in licensing, we're planning royalties will be roughly flat in the fourth quarter resulting in full year revenue growth in the low teens.

Turning to fourth quarter gross margin, we expect a small decrease in product margins compared to last year primarily due to the impact of the stronger US dollar on European purchases.

We also expect a slight increase to our occupancy rate due to a larger mix of retail stores in both North America and Europe.

Regarding expenses, with most of this years' new stores now open, both in North America and in Europe, we do expect to achieve leverage over our expense base in the fourth quarter.

And finally today, we are announcing two enhancements to our dividend program.

Our Board of Directors has approved an increase of our quarterly cash dividend to $0.20 per share on the Company's common stock, a 25% increase over its most recent quarterly dividend.

The Board of Directors has also approved a special dividend of $2 per share.

Both dividends will be payable on December 23, 2010, to shareholders of record at the close of business on December 8, 2010.

And now we'll open the call to your questions.

Before doing so let me remind everyone to please limit themselves to one single part question.

If time permits, we will allow people to ask a follow-up question.

Operator?

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

Please proceed.

Yes, thank you.

Congratulations, everyone, another great quarter and very positive outlook.

Thank you, Jeff.

Thank you.

Given I'm the first question I suppose I have to keep this to one which is difficult, but on Europe is where I want to focus.

You said comps were strong.

Curious if you could share what the comp actually was in Europe for the quarter, unless I missed that, and then strongest to weakest markets within that region?

And just one other piece is, can you give us Europe growth with and without jewelry if that's possible?

Thank you.

Okay, so we don't specifically quantify the European comps.

They were in double digits, so very strong for our retail stores in Europe.

UK was the strongest of those markets and it cascaded.

France was the market where we did see some impact.

There was a lot of strike-- the striking going on there impacted our business as well, but those are the two endpoints, if you will.

And then with and without jewelry?

Hang on.

Well we haven't specifically quantified the jewelry business.

It was-- the good thing about the European growth this year, if you look at the three businesses, our existing retail business, the jewelry business and the existing wholesale businesses, all of those businesses contribute to the growth.

Okay, thanks.

Thank you.

Thank you.

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

Please proceed.

Thank you.

Great job, guys.

Thank you.

Thank you, Omad.

I wanted to ask a question, I thought I heard Paul say in his prepared remarks, plans to open 241 stores.

I wasn't sure if you're talking about this year or next year.

It was this year.

This year?

Fiscal 2011.

Could you-- are you willing at this point to talk about kind of longer, you talk about the great under penetration in international markets, are you willing to talk about kind of store opening plans?

I assume at this point in time you're looking forward beyond just the fourth quarter in terms of your real estate?

Are you talking about going forward passing fiscal 2011?

Yes.

The only thing I think we can tell you is clearly, if you take fiscal 2009 we opened 225 stores, fiscal 2010 we opened 161 stores and fiscal 2011 we will open 241 stores, that shows a clear momentum from last year.

So we have the intention to continue on that path and-- but we don't have a solid number to deliver here because we are still working with our partners, we've opportunities all over Europe, all over Asia right now, and we don't have a firm number to give but clearly, it will be in line of what we did this fiscal year.

Okay, so it sounds like you're not necessarily accelerating growth but maintaining growth?

Compared to last year, we did accelerate growth and which is a substantial number, it's 241 stores.

We cannot quantify to say whether we accelerating from 240 to 300 or 400.

We cannot do that, but we will hope that the 240 from next year is a good possibility, on all concepts combined.

Wonderful, thank you, good luck.

Thank you.

Thank you.

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

Please proceed.

Thank you and congratulations on yet another great quarter.

Thank you.

I wanted to see if you could talk a little bit about product categories that worked for you in the third quarter and categories that might have been a little more challenging.

And then I also wanted to clarify, when you talked about North American inventories being up a certain amount, you're referring to both the North American retail and wholesale business combined, correct?

Correct.

But I'll start off, I'll answer the product question.

As Dennis said in his prepared remarks shoes and accessories performed very well for us, specifically watches, dress shoes did well as did boots and booties.

Non-denim bottoms were the biggest volume driver within women's, particularly skirts and dress shorts.

So we also did a good business in our faux leather jackets both for women and for men.

Men's basic denim was strong lead by our premium basic denim which continues to be very successful for us.

Men's woven tops were also strong.

Misses-- women's denim was still down, but it was down less than what it was in Q2 so it's starting to improve.

The initiatives we took to refresh the denim wall with new styles and new washes paid off for us as the quarter progressed.

Also within women's, woven tops were up against some really challenging numbers from last year so that was a tough comp.

With inventory within North American retail, we were up 9% to last year and that compares to up 12% going into the quarter.

The current inventories in line with our square footage growth and it's certainly enough to make us succeed with our revenue expectations for the fourth quarter.

Great, and then with respect to the bottoms business, if you were to look at it combined, can I assume that your total bottoms business is up?

Total bottoms business is up, yes.

Okay, great.

And then silhouette changes that you might care to comment on?

We've heard from some companies that there's a fashion shift going on.

I don't know if you could maybe elaborate on that a little bit?

Yes, this is Maurice and you're absolutely right.

In the silhouette business, silhouette style, we have-- the skinny is still very strong, but now we have the, and I mentioned that the last time, we have the trouser which is starting to really sell for women and so that's real encouraging again because it's opening a lot of opportunities for us, so I'm very happy with that.

Great.

Thank you and good luck for the holidays.

Thank you.

You too.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Please proceed.

Good afternoon, everyone and congratulations.

Can you talk a little bit about the vendor consolidation efforts and the impact that that's had on product costs and IMU on what you're seeing?

Thank you.

Yes, I mean the-- we've got a number of initiatives that have been going on in supply chain that have all been geared towards helping manage costs and reduce IMU.

In North America, our IMU so far for the quarter are, I'm sorry, for the year are up about 30 basis points and we don't see any headwinds in the fourth quarter and we're working on consolidation of the vendor base.

So far since we've started that progress, we've reduced by about 40%, long way to go but that still gives us opportunities to put more buys through fewer top quality suppliers and help leverage costs.

We're also working with new mill partners.

We're balancing production into new markets into Vietnam and Cambodia to take advantage of other markets.

Thank you.

Thank you.

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

Please proceed.

Thank you.

Congratulations on a great quarter.

I was wondering if you can speak a little bit to the domestic market here in North America?

Any additional color you can give us by brand in terms of performance between the GUESS brand or Guess by Marciano, also accessories or G by GUESS, and any sort of areas where you feel like might be opportunities year-over-year especially as we go into the holiday season?

Thank you.

Okay, first of all by concept, our best performing concept was accessory stores with double-digit comps.

G by GUESS also performed very well with mid single-digit positive comps.

We were really pleased by G by GUESS because it progressed and got better and better each month during the quarter.

There's some things that really helped G for us.

Number one is we had strong traffic and we've developed some really compelling windows for G by GUESS that are drawing the customer in and we saw business improve in mid-August when we put our new shoe launch in the window.

Second, the women's business for G by GUESS has been good.

Fashion denim is strong in G by GUESS, where its been tough in other categories and we think we have a unique position in that space.

The other thing we did for women's in G by GUESS is we invested in the team with the beginning of the year, merchandising and design.

And so the product that they developed starting at the beginning of the year is just starting to hit the stores.

Guess by Marciano the rebranding is still progressing very well.

We have a new store design that we're going to introduced with some new stores that we're going to open in the fourth quarter and we're very excited about that.

Any updates you can give us regarding too the search for the President of North America?

Yes, this is Paul, (inaudible) next to me.

We continue to do our due diligence and to interview and this is such an important position that we will take whatever time it takes to have the right candidate.

But definitely we have been doing extensive interviews, some candidates have been seen already two or three times.

And we should have that position in the next 90 days, I'm confident in the next 90 days it should be done.

Wonderful.

Thank you so much and best of luck for the holidays.

Thank you.

Thank you.

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

Please proceed.

Good afternoon.

Let me add my congratulations.

Thank you, Eric.

We spent a lot of time last quarter talking about these non-denim shift and I'm curious how that is playing out and when you look at going forward with next year, what is your think process on how that's going to flow?

Yes we're starting to see improvements in the non-denim so that business is building for us, and we see that as even a bigger opportunity to build business for us in the spring.

A lot of the silhouettes we think are going to translate better to spring than they have now, so we think we can do even better.

As far as denim, it trended better for us in Q3 than it did in Q2, so it's not certainly a category that we're giving up on and we think that next year we can build incremental business in that category as well.

Okay, thank you.

It's going to be a lot of incremental business, and this is Maurice.

And as I said before, we will see this cycle continue for another probably three to four years where we are going to see the non-denim building up and building up season after season, so we're very pleased with that.

Okay?

Great.

Thank you.

Great quarter.

Thank you, Eric.

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

Please proceed.

Yes, thank you.

Good afternoon.

Dennis, I was wondering if you could give us some sense of the degree of product cost increases you're seeing in the first half of next year and some early sense of second half?

And as you contemplate that, and obviously it's early to give specific guidance for next year, I understand that, but as you think about your income statement for next year, can you give us some sense of how you, your ability to perhaps hold gross margins, you had some companies think that that's possible, how you think about sales versus SG&A growth, not specifically but relative to each other, and how do you manage the uncertainty you're facing on the product costs for next year?

Yes, I think, let me step back I mean fundamentally I think the core of your question is at the product cost which is getting a lot of attention.

I think it's important to understand that in the context of our business and important to recall that approaching 40% of our penetration in North America is driven by accessories and footwear and that number climbs to 50% when I move to Europe and I add the jewelry business.

So the very nature of the diversity of our product assortment protects us a lot from cotton increases and any increase in any one commodity.

I talked about a lot of the initiatives that we have underway, a couple of minutes ago that are all designed to continue to protect our margins and drive IMU, but one I didn't mention was pricing.

We're looking at that.

We have an advantage, we don't operate in a moderate market.

We've done a lot of customer research and that tells us there are categories where our customer is not that price sensitive and we can increase pricing and we're looking at that right now for next year.

Okay, I mean in that environment do you think it's reasonable that you can protect the gross margin?

Well, it's certainly the goal.

We are not yet guiding to next year so I'm not going to quantify that at this stage but certainly our goal is to improve margin.

And basically it should be mentioned also, this is Maurice, it should be mentioned that to-- for the first part of your question, for the first season which means the first two quarters, there's not going to be an impact because all these were placed a long time ago.

Okay.

And then quickly, Dennis, the impairment charges in US versus Europe, is it mainly US?

Could you break that down for us?

It's mainly US, Russ do you--?

Yes, the majority of the charge was in the US and Canada, it impacted the retail segment operating margins by 110 basis points.

Okay, great.

But out across multiple store concepts and really just unique real estate issues out there, be it land, store or local traffic or economic challenges in certain markets.

Okay, great.

Thanks for that color and good luck for the fourth quarter.

Thank you.

Thank you.

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

Please proceed.

Thanks very much and congratulations on your progress in the third quarter.

Thank you.

People have been talking about a new fashion cycle, apart from the denim, non-denim issue, perhaps revolving around a silhouette shift away from maybe big tops and skinny bottoms to something else and I'm wondering if you guys are seeing anything along those lines and what you think that might mean for the future?

Yes, this is Maurice.

I've mentioned earlier that we see the trouser for women coming back and as Russ mentioned also, not only the trouser pant but also the dressy shorts also which are pretty strong.

And so we see that as the continuing it's just the beginning, beginning of this cycle.

So we're going to have all of these, and that's why I'm so happy about this non-denim, because it gives us the opportunity to have much more drapey bottoms for women and dressy and we can make it-- it's going to translate even in the very casual bottoms.

Okay?

Sounds like more also thinner tops, wider more let's say or shaped bottoms, is that a type of-- is that a significant fashion shift do you think or cycle that we could be moving into?

Which one, I'm sorry?

Well maybe instead of the big over skinny, maybe now we're tops over more shaped bottoms.

Yes, that's what I'm talking about, yes.

Yes.

Great.

Thanks very much and best of luck.

Take care, Todd.

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

Please proceed.

Hi, good afternoon, everybody.

Just a few clarifications on Europe.

It sounds like fourth quarter there's somewhat of a pre-collection shift that's going on.

Can you quantify what that impact is going to be in Q4?

And also how much of the inventory build in the quarter for Europe is really allocated to that pre-collection shift?

The pre-collection is Guess by Marciano.

It's not that significant and it's not crossing much of a quarter line.

With respect-- where the shift in sales is happening is really within the fourth quarter and our existing businesses, if you look at the shipment that'll take place in November, December, and the existing wholesale business, they're going to be up upwards of 90% in those two months alone.

So that's really the big driver for us bringing the inventory in earlier that we now own at the end of the third quarter so we can support the sales to bring that product into the market earlier.

Got it, okay.

And then the backlog growth for Europe, the up 22%, that is still inclusive to jewelry, correct?

Yes, that's correct.

Okay, got it.

And so if we look at just the trend line from the up 50% in backlog to the up 22%, how much of that is really just driven by timing shifting versus changes in really core category momentum?

I don't have that detail with me in the backlog.

Sorry, Chi.

Okay, I'll follow up with you off line.

Thank you very much and good luck.

Thank you.

Thank you.

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

Please proceed.

Hi, everybody.

Let me add my congratulations.

Really terrific quarter.

Dennis, I wanted to ask, if I look at your operating margin guidance for the fourth quarter, it looks like it should be up a little bit versus last year, so I'm wondering then if the markdown pressure that you saw in Europe and North America, you're expecting that to subside a bit?

No, we still see in the gross margins that we would still have some currency headwinds and some markdowns relative to last year.

So the way to think about the fourth quarter is that we'll be down a little bit on gross margin but we're expecting based on the plans right now that we'll get good leverage on the SG&A

Okay, and the markdown pressure, is that just coming from inventories being so tight last year and the markdowns being lower or is that because you're transitioning out of some of the denim sales that aren't working?

Yes, in the markdown pressure in North America we've ended the quarter with clean inventory so we feel confident going into the quarter and we plan to repeat last years' promotional events.

Okay, and what about in Europe, Russ?

Europe?

Yes.

The markdown pressure in Europe.

No, the issue-- we don't have quite the markup in Europe but the big factor that's driving impacting margins in Europe continues to be the euro.

Okay, I thought you'd said that was half of the pressure on operating income in the third quarter.

The third quarter.

But in the fourth quarter, it's more from currency?

It's currency, it's still-- currency is larger in both the third and the forth.

Okay, great.

And then my last question is I know you haven't yet detailed your expansion program for next year but is there any reason why we shouldn't think it should keep the pace that it was at in this fiscal year?

Yes, I think we should unless unforeseen changes that you don't know and we don't know about, we should keep the pace where we are currently.

Okay, lots of luck.

I hope you have a great holiday.

Thank you.

Thank you so much.

Your next question comes from the line of John Kernan with Cowen.

Please proceed.

Hi guys.

My questions been around your international retail business.

What's the split between owned and licensed stores in Europe and Asia going forward with the store openings this year?

And then Paul, I think you said you were in China recently.

I would imagine most of your unit growth there for now is going to be focused in Tier 1 cities.

What do you think the ultimate opportunity is in the Tier 2 and (inaudible) cities?

I think that the landscape of opening in Europe will be most likely the same as this year which is basically one-third, two-thirds, one-third property stores, two-third franchisee/licensee stores that's for Europe.

For Asia, the scale would be more on the 20%, 80%.

I think that 80% would be franchisee and licensee and 20%, maybe a little bit less, will be owned, operated by us.

About your question about the secondary cities, definitely.

I mean, I've been in China ten years ago, five years ago, four years ago, three years ago, two weeks ago, four weeks ago and the change that we see year after year, it's basically, I mean, unbelievable.

So we clearly continue with that strategy but we know what we know and we know as well what we don't know.

And that means we're having to focus on the big cities where we have a much stronger control and secondary markets will be allocated and on partnership with franchisee or licensees in China that we will support with product knowledge, training, visual merchandising but operated and run by them.

And when you know the number of cities on the secondary market, it's hundreds of opportunities of location.

How many stores do you have now in secondary markets?

On the secondary market, I can not tell you because I don't know off hand, but the total stores we have in Greater China today, we have 91 stores already open and we have a plan to do at least 40, 50 doors a year in going forward, on the balance, take-- give or take a few doors, okay?

So that's the pace we are looking at and of course you don't talk about the size of door we have in America which average around 5,000 square feet.

There, you talk about an average around 1200 square feet, 1500 square feet and when you have big cities, you will go to 2000 square feet, 2500 square feet.

But I don't know if you have been in China lately but I'm sure that you do agree with all that I told you.

I actually have and I do agree with you.

Thanks.

Thank you.

At this time there are no further questions.

I'll turn the call over to Mr.

Paul Marciano for closing remarks.

Thank you.

I wanted to just take one minute to thank our team and associates and Managers and Executives and partners around the world.

The passion we all have for our brand shows every day and everywhere I travel to.

We accomplished a great deal this past year because of the hard work and true committment to our team but also with your continued support we expect to carry the success well in the future.

We will not talk to you until March now of next year, so we want to wish everybody and all a great Thanksgiving and happy holidays to come and a lot of customers to go through the door.

Thank you very much and have a good holidays.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may now disconnect.

Enjoy your day.