Guess? Inc (GES) 2011 Q4 法說會逐字稿

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

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

Please go ahead, Maili.

Good afternoon, and thank you for joining us.

On the call today are Paul Marciano, Vice Chairman and Chief Executive Officer; Maurice Marciano, Chairman of the Board; Dennis Secor, Chief Financial Officer; Michael Prince, Chief Operating 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 our future plans and financial 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 I would like to turn the call over to Paul Marciano.

Paul?

Thank you, Maili.

Good afternoon, and thank you for joining us.

We are pleased to report solid financial results today for Q4 that highlight our brand's worldwide momentum.

For the fourth quarter, we posted record revenues and record earnings, delivering earnings per share of $1.11, an increase of 19% over last year's fourth quarter.

Our strength was once again driven by our international businesses, with Europe and Asia delivering almost 75% of our topline growth.

While the business in North America did not perform as strongly as we expected, our overall results demonstrate the benefit of our global diversified business model.

We reached Q4 results because of very successful year.

For fiscal 2011, we made excellent progress in many important initiatives, including expanding all our retail presence, growing international businesses, and building a global infrastructure platform.

We ended the year posting record revenues with $2.5 billion as well as record earning per shares of $3.11, a 19% increase over last year.

For the fourth quarter, our North America same-store sales declined 1% - short of our expectations.

We saw a strong response to our key item and outerwear programs as well as our watche and handbag business, but the traffic increase we had anticipated did not happen, and promotions started early and were very aggressive in the malls.

Also, severe cold weather impacted our business as well, especially with early spring product.

For the year, we succeeded in growing our business and improving overall productivity in our stores.

Revenues increased by 9% and we delivered a positive comp of 2.9%.

Overall, fiscal 2011 was an exciting year for expansion and innovation in North America.

We opened 59 stores and launched new store designs for G by GUESS, Guess by Marciano, and GUESS Accessories.

I'm also very excited about our new flagship store on Fifth Avenue and 47th Street in New York which opened last month.

Fifth Avenue is our largest flagship in the world with over 13,000 square feet.

In North America, we feel that our performance does not currently reflect the true potential of our brand in this market.

As we move into the new year, our goal is to improve execution at many levels.

To accomplish this, we have appointed Nancy Shachtman as President of North America.

Nancy is an amazing merchant with 25 years history with GUESS and is well-respected both within our organization and throughout the industry.

She will join Michael Prince, our COO, and Jacques Levy also, who just ended seven years as a CEO of Sephora Worldwide.

Jacques joined us as a Special Advisor for both our retail operation and will work mainly with me and the Presidents of each region.

In Europe, the customer's response to the GUESS brand remains very strong and our momentum continues.

We achieved fourth-quarter sales growth of 43% in Europe, bolstered by early demand for our spring assortments.

For the full year, our business expanded by over 30% and did so in a very balanced way, with our retail and wholesale apparel, and accessories businesses all contributing significantly to expansion.

We will reach a $1 billion business in Europe this year, one year ahead of schedule.

We have gained substantial traction in new markets like France, Spain, and UK on top of our core base in Italy, which continues to be very strong.

We are also expanding in new markets, such as Belgium and Holland, where we believe the brand has very good potential.

GUESS is well-known and very visible in Europe, with a total of 474 GUESS stores throughout the region versus 71 stores just five years ago.

Our goal is to have a total of 900 stores in Europe and Middle East in the next five years, with an average store size between 1,200 to 2,000 square feet.

It will be driven by continued development of new markets such as north of Europe, and by expanding our recent success in western and southern Europe.

Next is Asia, where our long-term strategy for growth is supported by innovation of our brand and refinements we are making in our merchandising strategies.

This fiscal year, revenues increased 36%, and GUESS opened 43 stores and 80 concessions in all of Asia.

We are in the process of building a world-class organization and infrastructure between Hong Kong and Shanghai to support our retail and wholesale network.

This structure will be instrumental in achieving a goal of 650 stores and reaching sales of $0.5 billion in five years or sooner.

About China, we have opened our own retail stores in key cities, and have made very good progress in penetrating secondary cities, where we have opened over 100 stores and concessions in the last three years.

So, as we look forward for fiscal 2012, of course, cost of goods and labor are at the center stage for all Company discussions.

We have entered a period of historical volatility in the commodity markets and rising production costs that will make this year challenging.

We have been very proactive in these two areas, with targeted price increases and many supply chain initiatives that we believe can mitigate most of the inflationary pressure.

It's certainly difficult to predict how market conditions will evolve during the year, and we are monitoring these events on a weekly basis to adapt to new measures if necessary.

Today, above all, it is our GUESS brand that is represented through an amazing lifestyle line of products, from denim to apparel to handbags to watches to footwear, that resonates and inspires customers around the world.

We have a strong management team with a history of solid execution.

We have an outstanding network of partners from licensees to suppliers.

We are backed by a strong financial position and capital structure to take advantage of the tremendous growth opportunities in front of us.

Our strategy will remain consistent with a long-term view, never compromising our quality or our brand equity.

Our goal is to leverage our presence globally and execute on our strategies in each region of the world.

As always, we will focus on the things we can control and navigate the current year with our eyes always on the future.

To close, I would like to thank our team and associates, managers, and partners around the world.

We have accomplished a great deal this past year because of the hard work and full commitment of all of you.

So I just want to say thank you.

With that, I will pass that to Dennis.

Thank you, Paul, and good afternoon.

We're pleased with today's results.

Fourth-quarter earnings reached a record of $103 million, 19% higher than last year's fourth quarter.

Diluted earnings per share also increased 19% to $1.11 compared to $0.93 in the prior-year quarter.

The quarter's results include a one-time $7 million increase to revenues related to loyalty breakage or $0.05 per share, which was slightly higher than we had expected.

Total fourth-quarter net revenues reached $757 million, an 18% increase over last year.

In constant dollars, the growth was about 21%.

International drove our growth, with Europe and Asia both exceeding expectations and combining to deliver 72% of the quarter's revenue increase.

North America retail grew 9%, though our expectations for comps did not materialize.

Total Company gross profit increased 14% to $336 million, and our gross margin declined 160 basis points to 44.4%.

Lower markups in Europe, including the negative effect of currency, along with higher markdowns in North America retail, were the main drivers of the margin change.

We leveraged our operating expenses, posting an SG&A rate of 25.3%, an improvement of 190 basis points over last year's fourth quarter.

The lower rate was primarily driven by lower performance-based compensation, fewer store impairments, and the leveraging of expenses from earlier shipments in Europe.

Overall, SG&A expenses increased 10% to $192 million.

The majority of the increase supported the expansion of our global retail operations and higher European wholesale revenues.

These were partially offset by the lower performance-based compensation and fewer store impairments.

For the period, operating profit increased 20% to $144 million, which includes the loyalty program breakage adjustments and a $5 million unfavorable currency translation impact.

Operating margin increased 30 basis points to 19.1%.

For the fourth quarter, we reported other net income of $7 million, which primarily represents net revaluation gains on currency balances and contracts, along with gains on non-operating assets.

Our effective fourth-quarter tax rate was 30.3% compared to 29.9% in the prior-year quarter.

We closed the full year with a tax rate of 30.1% versus 31.9% last year.

And now we'll review our segments, starting with North America.

The North America retail fourth-quarter revenues increased 9% to $339 million, including the $7 million loyalty breakage adjustment.

Same-store sales declined 1.1% in US dollars and 2.1% in local currency.

As we had expected, consumers shopped late during the holiday season and focused on events, but the improvements in traffic that we had anticipated did not materialize.

Weather was a major challenge, while competitive pressures started early and were very strong.

We responded with unplanned promotions that mitigated some traffic challenges would impact our margins.

Operating income increased 3% to $53 million and operating margin declined 100 basis points to 15.5%.

Gross margins declined in the quarter, primarily due to higher markdowns.

Excluding the loyalty breakage adjustment, operating earnings would have decreased 10% and operating margin would have declined 290 basis points.

During the quarter, we opened 11 new stores and closed three, ending the period with 481 stores in the US and Canada.

For the full year, North America retail revenues increased 9% to $1,070,000,000 and operating earnings decreased 7% to $123 million.

In North America wholesale, revenues decreased 5% to $38 million.

As we reported on our last call, we accelerated shipments into the third quarter this year to support our customer's holiday business.

Operating profit in the wholesale segment declined 12% to $9 million, and operating margin declined 170 basis points to 22.6%, with lower gross margins more than offsetting SG&A leverage.

For the full year, North America wholesale revenue increased 19% to $181 million, and operating earnings increased 31% to $46 million.

European sales remained strong, with a 43% local currency increase compared to a year ago.

The increase in US dollars was 32%, reaching $295 million in the quarter.

Our retail business posted positive comps, though the majority of the growth came from our wholesale businesses, which all grew significantly, with very strong performances in our GUESS Apparels and our Guess by Marciano businesses.

In our Accessories business, we were encouraged by the customer demand for early spring deliveries, which was much stronger than we had anticipated.

Compared to last fourth quarter overall, we shipped $24 million more in spring product this quarter, which benefited the current quarter by $0.07 per share.

We had anticipated a shift that was less than half of that.

Operating earnings increased 25% in local currency and increased 16% in US dollars, reaching $66 million for the quarter.

Operating margin declined 320 basis points to 22.4%.

We leveraged our SG&A expenses while gross margins declined, given lower product markups, including the impact of the weaker euro.

For the year, our European business grew revenue by 31% and operating earnings by 19%, both of those in local currency.

In US dollars, our revenues grew 23% to $920 million, and operating earnings increased 12% to $193 million.

In Asia, revenues for the fourth quarter increased by 23% to $55 million.

The growth in the region was driven by new door expansion and positive comps in South Korea, as well as by a double-digit increase in our wholesale export business.

Operating profit increased 19% to $8 million.

Operating margin declined 40 basis points to 13.6%, driven by slightly higher gross margins offset by higher occupancy operating expenses, as we develop our infrastructure to support future growth.

For the full year, Asia revenues increased 36% to $201 million and operating earnings increased 81% to $29 million.

China reached an important milestone, delivering its first full-year profits, driven by strong double-digit topline growth.

Our licensing business continued to perform well, with revenues increasing 20% to $30 million for the quarter.

Operating earnings increased 12%, reaching $28 million.

Operating margin declined to 91% from 97.5%, due to greater comparative advertising spending this year.

For the full year, licensing revenues grew 18% and earnings increased 20%, reaching $115 million and $104 million, respectively.

To summarize then for the full fiscal year, consolidated revenues grew 17%, reaching just under $2.5 billion, an all time record for our Company.

Operating earnings increased 13%, reaching $405 million, also a record, and we delivered an operating margin of 16.3%, down 60 basis points from last year.

For the fiscal year, we increased net earnings by 19% to $290 million and increased EPS by 19% to $3.11.

For the full year, the negative currency translation impact on EPS was about $0.05 per share.

Now turning our attention to the balance sheet.

Our cash flow this year was very strong.

For the full year, we generated operating cash flow of $346 million.

We invested $124 million back into our business and capital expenditures net of tenant allowances, to support our global store growth and infrastructure improvements.

We increased our quarterly dividend and paid a special dividend, distributing a total of $247 million to our shareholders.

We ended the quarter with a strong financial position, with cash and short-term investments of $442 million, and are virtually debt-free except for the lease for our Italian facilities.

Accounts receivable increased 26% over last year to $358 million.

Overall, DSOs were roughly flat for last year.

At the end of the quarter, about 48% of our receivables were supported by insurance coverage, bank guarantees, or letters of credit.

We ended the quarter with inventory levels at $295 million, about 16% higher than a year ago.

About half of our inventory growth supports our European business, where we now operate 57 more retail stores compared to the same time a year ago.

Roughly one-third of the growth supports our North American business, where retail inventories are aligned with sales expectations.

The remaining inventory growth supports our expansion in Asia.

Our Board of Directors has approved a quarterly cash dividend of $0.20 per share on the Company's common stock.

The dividend will be payable on April 15, 2011 to shareholders of record at the close of business on March 30, 2011.

Our Board of Directors also operates a new $250 million share repurchase program.

The new program includes $85 million remaining under the Company's previously authorized repurchase program.

The share repurchase does not have an expiration date, and allows the Company to repurchase from time to time in the open markets or in private transactions, including structured transactions.

So now we'll move into more recent business trends and our outlook for both the first quarter and the full fiscal year 2012.

On a global basis, our brand enjoys significant momentum.

Our business is growing and we are executing well on our strategies to develop new markets.

Our international business has been particularly strong, but as Paul mentioned, we are not satisfied with our performance in North America.

North America retail, so far in the first quarter, has experienced a comp decline in the low single digits.

We expect this trend to continue for the balance of the quarter, which also was our strongest quarter last year when comps reached 9.7%.

In the quarter, we plan to reinvigorate our women's business and invest more in faster-moving categories.

For the full fiscal year, we are planning on assuming comps are roughly flat to up in the low single digits.

We expect our comps to improve as we progress throughout the year, particularly as we approach the second half, when we expect to benefit from our new product initiatives, and when we will be up against progressively easier comparisons.

We intend to capitalize on demand for denim, outerwear, and key items, while enhancing our dress collection and our complementary accessory categories as well.

We will invest in our brand through our marketing programs, including direct marketing to our loyalty customers as well as social networking opportunities.

Our store opening plans for this year will be to open between 40 and 45 stores.

Based on these assumptions, we expect first-quarter revenues to increase in the mid-single digits for the full year, and for full-year revenues to increase from 10% to the low-teens.

In our North America wholesale business, our business performed well last year, as department stores restocked their inventories.

For fiscal 2012, we do expect that department stores will manage inventories more tightly, looking to improve their turns.

Based on our current order position, which is down slightly compared to a year ago, and expectations for future orders, we're planning first-quarter revenues to decline in the low-teens.

For the full year, we expect revenues to decline in the mid's to high-single digits.

In Europe, we plan to continue to grow.

We have gained share in the markets where we already operate, and we are addressing new markets, particularly in northern and western Europe.

Our strategy to develop Europe will continue to be well-balanced across different distribution channels.

We plan to continue to open our own stores, as well as work with licensees to open GUESS-branded stores.

Overall this year, we plan to open between 125 and 130 stores in Europe, about a quarter of which will be owned and operated directly by us.

We also expect that our retail stores will continue to operate with positive comps.

In our traditional wholesale channels, we also see continued organic growth.

The strength of our spring collection and the early demand we experienced from customers is very encouraging.

Backlog is currently up around 10%, which includes our remaining spring deliveries and new fall orders, which are pacing in the high single digits.

For the year, we expect wholesale orders to increase around 10%, though fiscal 2012 shipments will be slightly less than that, given the significant volume of orders that shipped last fourth quarter.

Considering the impact of that $24 million revenue shift, we are expecting first-quarter euro and US dollar revenues to increase in the high single digits, driven primarily by retail store expansion and positive retail comps.

For the full year, we're planning both euro and US dollar revenues to increase in the mid to high teens.

We are planning assuming the euro weakens modestly throughout the year from its current level.

If this occurs, we would expect no material currency translation impact on our European business in either the first quarter or the full year.

In Asia, our fiscal 2012 growth will be driven by our continued expansion and improved productivity in South Korea and in China, where we are developing partnerships in secondary cities to open more stores.

Overall, we plan on opening 70 stores in Asia this year, nine of which will be owned by us.

Given the timing of new door openings, the growth will be concentrated in the latter part of the year.

For the first quarter, we're planning revenue growth in the low-teens range, and for the full year, we expect revenues to increase in the mid to high-teens range.

This year, we plan to continue to invest in our infrastructure in Asia, particularly in China.

We want to replicate the success that has fueled our growth in Europe by developing many of the same operational capabilities that have supported our business there.

In our licensing business for both the first quarter and the full year, we are planning assuming that royalties increase in the low to mid single digits.

Turning now to gross margins.

Inflationary pressures in raw materials as well as rising manufacturing costs are affecting our entire industry.

This will present the most significant headwind in gross margin this year.

As we shared last November, our diverse product offering insulates us to some degree from certain commodity increases.

We are certainly not immune from these pressures, and since November, they have intensified.

Thus far for the current year, we are seeing double-digit comp increases in apparels, primarily affecting the latter part of this year.

Our goal is to mitigate cost increases with targeted price increases.

Our customer research tells us that because of our brand strength, there are many categories where customers will accept price increases because of the high quality and design of our products.

Our price increases will be more focused on our higher-end brands and in select categories.

Our strategy will also vary regionally, as there may be more opportunity to take pricing up in our international markets.

Overall, though, we do expect to experience some moderate decline in our IMU.

Our plans also assume that we will see some impact on product volumes.

Pricing is just one tool we will employ to offset cost pressures.

We have been proactive with other initiatives that we feel can also help mitigate.

Our efforts to consolidate our supplier base, take positions in raw materials, and diversify our supply capabilities regionally, are all ongoing and we are making progress.

We also plan to improve our inventory buys in units, creating a sense of urgency with our customers, which should lead to year-over-year improvement in markdowns.

Our goal for this year, therefore, is to mostly offset cost pressures through a combination of price increases, supply chain initiatives, improved markdowns, and mix.

We also expect to operate with a higher occupancy rate, given the larger global retail mix.

Overall, therefore, we are expecting full-year gross margins to decline slightly for the year.

For the first quarter, we expect gross margin also to decline, further impacted by a higher occupancy rate, given our expectations for comps in the quarter.

Moving on to operating expenses, our plan this year is to leverage expenses, taking advantage of the investments that we have made over the last few years and leveraging our top line.

The leverage that we expect to achieve from these investments will be partially offset by investments in marketing and other demand-creation programs, as well as investments in our Asia infrastructure.

For the full year, we are planning with a decrease in our SG&A rates.

In the first quarter, given the shift in sales in Europe and the negative retail comps in North America, we expect that our SG&A rate will increase.

Therefore, our expectations for the first quarter are for revenues to increase to a range between $555 million and $570 million.

We expect operating margin around 10% and EPS in the range between $0.41 and $0.44.

We expect the change in operating margin to be impacted about equally between gross margin and SG&A.

For the full year, we are planning for revenues to grow to a range between $2,720,000,000 and $2,820,000,000; operating margin in the range between 16.5% and 17%; and EPS in the range between $3.30 and $3.50 per share.

Our annual guidance includes a wider range than we have traditionally provided, given the uncertainties around product costs and margins, the competitive landscape, and how the ultimate consumer will respond to price increases.

The guidance also reflects our expectation of the modestly weakening euro during the year.

We are planning with an effective tax rate of 29.5% and expect capital expenditures net of tenant allowances will be about $140 million.

With respect to the timing of earnings, we expect that the second quarter will represent our first opportunity for earnings growth this year, so we expect operating margin will remain under pressure until we reach the second half of the year.

And with that, I will conclude the Company's remarks and open up 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).

Jeff Klinefelter, Piper Jaffray.

Yes, thank you, everyone, for the detail tonight.

Dennis, first, can you just clarify what you said about the shifts into Q4 in terms of earnings impact?

You said $0.05 for the gift card break and then you said a portion of the $0.07 from early shipments.

I just missed that and if you could clarify that.

And then my question is really on Asia.

If you could talk a little bit more, Dennis and/or Paul, about the Asian growth rates -- understanding it's back-end loaded this year, but what is resulting in the growth rates decelerating down, at least at this point, to that targeted range you detailed, versus the growth rates last year?

What's happening to the core organic business in the Asia region?

Thank you.

Okay.

So, first with the two items, the loyalty breakage was $7 million and that was roughly in line with what we had anticipated in the quarter.

The shift in Europe was larger.

It was $0.07 -- $24 million and $0.07 per share.

And our expectation had been much lower than that, less than half of that.

So that's the first to the fourth.

With respect to China -- I mean, with respect to Asia, the impact that you're seeing -- the fourth quarter was up 23%; the year up 36%.

As we move into next year, if you've -- we have said for awhile that we're investing in our infrastructure.

And this year, you're seeing the impact of that.

The operating margins were down slightly, and we see the growth trajectories a little slower in the first part of next year because that's the period in which we're building those capabilities.

They start accelerating into the back part of next year.

I think when you step away, and if you go back to what Paul said in his comments, our goal is to reach $500 million in five years, so we need to invest.

If you look at Europe, at the model, it took -- it wasn't until we really developed the infrastructure that we saw the explosive growth in Europe.

And we want to replicate that in Asia.

So, when you look at that $500 million target, that represents about a 20%, a little more than that CAGR, between -- over that five-year period.

So it takes some time for us to first invest to get that capability in so that we can drive that growth.

Thank you.

Christine Chen, Needham & Company.

Thank you and congrats on a good quarter.

Wondering if you could maybe talk a little bit about the fashion shift that everybody seems to be talking about -- denim in particular, silhouette changes that are happening.

And then if you could maybe talk about the performance of the Marciano and G by GUESS concepts.

Thank you.

Yes, this is Maurice.

For the shift in denim is basically in line with what I was talking about before, where we see both in terms of style in the denim and in the trend of denim versus non-denim.

Meaning that we see the skinny jeans being still strong, but now with the resurgence of the straight leg and bootleg jeans coming back very strong, which we didn't have for a long time.

And we experienced even some great success with wide leg jeans.

So, all that is very good.

And then the non-denim that I was talking about before, we see that strengthening more and more going forward.

So that's about the trend in the bottom.

Yes, just to add a little bit -- for denim, our business was down again in Q4, but we saw the sell-throughs improve, based on inventories that we had.

So that makes us see demand returning for denim overall, and we think we can improve the performance next year by both increasing our inventory levels, and increasing the exposure within the stores, particularly for basic and premium basic denim.

For non-denim, the penetration increased during the quarter, so that was good for us.

And as far as it translates into the spring, we do see a lot of styles performing well.

We have a women's style performing well and we also have a cropped cargo that just arrived that's doing very well.

So we're still optimistic about that for the year.

G By GUESS -- G by GUESS, we're very pleased.

G By GUESS comped positively during the quarter in mid-single digits.

We did strong business in outerwear, dresses, and even fashion denim, which hasn't performed in the other concepts.

The other great thing about G is the product margins were up during the quarter, despite all the promotional activities out there in the mall.

So we operated with less markdowns.

And traffic was up for G by GUESS significantly; that tells us we're starting to develop a customer base that's returning to our store over and over again.

Guess By Marciano comps were challenging in the quarter, especially in Canada, where business was tough for us overall.

We were up against double-digit comps from last year, so there was a lot of headwind for Guess by Marciano.

Going forward for this year, we see a lot of opportunity to improve the dress business, which is one of the things that Marciano is all about; develop structured wovens and a leather handbag program; and improve the merchandising within the store to develop both the dressy section and the casual section.

And you left off accessory stores, which is our other new concept.

Our comps were up in the double digits and we're very pleased with the performance there.

The new stores did very well in the fourth quarter as well.

And then with respect to those denim trends, I mean, are you seeing it be a stronger trend, the shift, the silhouette shift in Europe or Asia versus the US?

Is it about the same?

I would say it's about the same.

And -- but because -- mainly Europe and US now and North America, they are so much in line.

And we see with the boyfriend jeans and all that, we see -- and the straight leg -- you know, they're -- it's the beginning of the cycle for these again, for the straight leg versus the skinny.

The skinny stayed very strong and it's going to stay very strong, I think, throughout the year, but with the other ones really gaining momentum.

So that [which is] that we're experiencing right now.

And is non-denim offsetting the decrease in denim, so your bottoms is overall up?

The bottoms are overall up, yes.

Great.

Thank you and good luck.

Randy Konik, Jefferies.

Can you hear me?

There you are.

Dennis, can you give us a little sense on how you're planning inventories from a unit versus dollar perspective?

Maybe for the latter part of the year and any breakdown you can give on by region?

And then, secondly, I guess -- was it fair to say you said that the comps thus far in the first quarter are down low-single -- against a more difficult comparison, we're getting better on a two-year basis?

What is -- is there something specifically you're seeing that's making it a little bit better on a two-year basis?

Just give us a little color there.

Thanks.

Yes, just to talk about the comps first.

You know, one interesting thing what we've seen so far in the quarter is it's better than January.

January was the toughest months during Q4, we were down almost 4% in January.

So the trend has improved.

And as the deliveries are continuing to hit the stores, the deliveries for February and then the delivery for March that just hit last week, have been better.

So that's some signs we have for optimism going forward.

With that --?

Yes.

With respect to the inventory planning, there's two things that we're focused on in terms of the play between the price increases and the unit volumes.

First of all, we did not execute as well as we would have liked to.

We came out of the first quarter this year on the heels of almost a 10% comp.

And we bought a lot against that.

Those trends didn't materialize.

So we marked down a lot this year -- or last year, rather.

This year, we're going to buy a much tighter -- really want to keep it special, really wanted to create that sense of urgency with that customer, so that when they come into the store, they buy now rather than expecting that they can wait and it's going to be on sale.

So that's one.

The second thing is that we are expecting that there is a portion -- there is some customers who shop with a markdown, and that customer may be more impacted by the price increases.

So we're expecting that we may see lower volumes because of that.

So we're looking to really tighten up, and those are really the two drivers that are going to get us there.

Great.

Thanks, guys.

Dana Telsey, Telsey Advisory Group.

Can you talk -- as you think about the business trends lately, is the weakness related to the environment or to the fashion?

And is it different on the guy's side versus the girl's side?

And obviously, in the new stores you're opening, what are you seeing in new store productivity metrics?

Thank you.

Yes.

First on the trend, it's been more impacted on the women's side.

That business was slow.

And it was the women's business where we really brought in the spring transitional product in a big way early.

So it was impacted more there.

The other things we saw in the quarter is that they really liked our key item gift giving program, which was for both women and guys, but we did run low on product in the middle of the quarter, so we'd didn't fail to capitalize on that completely.

Productivity measures up to the new stores, first of all, we're very encouraged with the comps overall in -- for accessories and G, as I said.

The G by GUESS stores, in particular, the six new stores that we opened with a new design, it's very open and inviting to the customers, that's outperformed the stores we opened up earlier in the year, and it's outperformed the G by GUESS chain as a whole as far as products.

On the accessories stores, that's a very high productivity concept, both due to the size and the quality of the malls that we're in.

And finally, the New York store, that's only been open about a month, but the productivity there is amazing.

So far, it's really outpaced our expectations.

Thank you.

Diana Katz, Lazard Capital Markets.

This is Diana Katz for Todd Slater.

Thanks for taking our questions.

I'm sorry if I missed it, but can you talk a little bit more about your recent hire of Nancy Shachtman as the Retail President -- what she's bringing -- like, bringing her back into the GUESS family and what she brings to the table?

And also, your competitors seem to be really stepping up their promotions to drive traffic in the mall.

Will you be shifting your markdown strategy within your stores to increase traffic at all?

Yes, this is Paul.

About Nancy Shachtman, she never really left the Company; she has been always present except the last 12 months, maybe where she stepped back a little bit, but she was here all the time.

She is, I would say, without any reserve, a really very focused and disciplined merchant.

And as we mentioned before, we think that in the last quarter or two, maybe it was not exactly that focus that we had.

So what she brings in it, she knows perfectly the market; she knows perfectly all the mixed channel and department store business.

And she has a whole full overview of the Company from day one.

So it's very easy for her to navigate through all the different formats and businesses we have, different models we have.

And as I mentioned also before, we are a complex company, very diversified.

And she is completely at ease on all this diversification, being product, being region, being contemporaries, being everything.

So she has an extreme loyal team around her -- well, been some of them 15, 18, 20 years working with her as of today.

So I think that is priceless for us.

And she has been working mainly with Maurice for, I don't know, what?

At least 20 years.

And that's what she is right now and we are super-excited about that.

As far as the markdown strategy goes, it's not our strategy to increase promotions to drive traffic.

Because really what that does it just pays off in a short-term basis.

A good example is Q4, we are more promotional than a year ago, but our traffic was flat as it was all year long.

So -- and what you end up sacrificing, you might gain in traffic, you lose it in [AUR].

So, our strategy for the year is to limit our markdowns and to do our promotions in a much more targeted way.

An example is the Members Only event we're going to do at the end of March.

Last year, during Q1, we did it for, I believe, five or six days and it was a little bit open to the public.

This year, we're going to limit it to a shorter period of time and we're going to do the existing loyalty members only, to really make them feel special.

So we're not going to give it away to all customers.

Okay, great.

Thanks very much.

Betty Chen, Wedbush Securities.

Thank you and congratulations on a great quarter.

I was wondering, Paul or Dennis, if you can shed a little bit more light around Europe?

It seems to remain very strong, and early indications are they're reacting well to the spring merchandise.

Can you give us a little bit more country-by-country color?

And I was curious whether the higher VAT tax in the UK -- has that had any impact on your business?

I think it would be difficult to give you country-by-country.

If you take the map of Europe where we have now between Middle East and Europe, we have 474 stores, once you break down these countries by concept -- if you take Italy or if you take France, basically, we have not even really started the penetration of Spain or UK or Germany or France; only Italy we have almost 110 stores altogether.

And that's not as much when you know that the breakdown goes maximum by 30 in one concept.

For the size of Italy, it's nothing.

So, that's where we are now that we see that the growth for us, clearly -- it took us almost 20 years to reach a $1 billion business in America.

It took us six years to get to business from $50 million for this year which will be in Europe.

So we see a much more strong potential in Europe.

I have not even touched seriously like Russia and Turkey and all the Eastern countries, and that we are addressing right now.

I think that you mentioned also the UK, if we have been affected by the VAT, you said?

We have not been affected by that.

No.

We continue to open stores.

I think we have like 20 stores now, 22 stores on a -- freestanding stores that we run directly.

And we plan to continue to open stores there.

Our wholesale business is not that big and -- but we concentrate to really -- to open our own stores, and I think at the end of the year, we should have like around 30 or 35.

So, we are continuing to push definitely to Europe.

Again, what Dennis was mentioning, this is happening only because we put a strong infrastructure in Europe.

And if anybody visits our headquarters in Lugano, you would understand what structure we have at every level to address this growth.

That's what we plan to do right now for Shanghai and Hong Kong -- to put the map clearly to open more stores directly on each category and each division.

That's very helpful, Paul.

I was also wondering as a follow-up to the earlier pricing commentary, I know you mentioned that, selectively, you could look at raising prices internationally or in the higher-end brands.

I was curious if you've tried testing that in any of the stores now?

Or when should we expect to see some of that price increase take place?

Thank you.

Yes.

First of all, the price increase will take place in a limited way in the second quarter, but for the most part, it's targeted towards the back half of the year.

We've done a lot of research with our customer going back to last year on what they would do with pricing.

And that research tells us exactly what we plan to do -- to raise prices on products where they see the value and they see the uniqueness for GUESS.

A couple of examples we see really support it so far.

We've seen strong business in our premium basic denim, which is obviously higher priced than the normal basic denim.

And secondly, kind of looking at our history, if you go back, the last time we did selective price increases about four years ago in fiscal '08.

And at that time, we did very well with our comps; we did double-digit comps, so the customers certainly accepted it at that time.

Eric Beder, Brean Murray.

Could you talk to us a little bit about what trends you are seeing in accessories?

What's really working there?

And are there any accessory licenses coming due in the next year or so?

I'm sorry, I didn't hear the last part of the question.

Are any of your key accessory licensees coming due in the next year or so?

Not really, no.

We have long-term contracts with a lot of our licensees.

Unless if you talk about maybe the small categories, it might be like a belt or something like that which has no impact on anyway.

But the big ones, like if you talk about handbags or footwear or watches, which has like 90% of our business, in licensee, no, none of them are up for renewal.

About the business in general, we have seen clearly as footwear being a major category for us this year.

And watches are being in a full cycle of growing also.

And in fact, I'm on my way now to Basel for the Watch Show -- World Watch Show in Switzerland.

And our GC line of watches, which is a Swiss-made watches, have been growing on double-digit every quarter.

So we continue to focus on that.

That license exists now for 26 years.

And our handbag has been existing for over 20 years.

So, definitely, all the licensees' business is crucial.

And as you know, jewelry has been internalized last year, I think it was, and the growth in Europe and Asia has been double-digit or so across the board.

So we have some categories we did not address, but we are not in a rush to just find any licensee on that just to have licensees.

We want to make sure that we have the right one, being like a lingerie, like underwear, or being home -- that's -- these two big categories could be a good potential.

The fragrance which is with Gucci has been performing well above expectation.

We just started exactly a year ago.

And we have a great partnership there.

Great.

Thank you.

Margaret Whitfield, Sterne, Agee.

Good afternoon and congratulations.

Regarding Nancy, I wonder if she's given you any observations, Paul, on what she thinks, whether the stores are too big; whether some of them should be converted to G by GUESS?

Or, in general, if you could give us some of the thoughts that she might have given you on the issues at retail.

I think if I can just give you a little bit of color on that is, the key change you will see in our stores, if you have been visiting our stores, we'll have much more clarity on the customer coming in our stores.

Maybe less product; smaller SKU plans; much more focused.

That's the big picture.

You know Nancy for many, many years; I think you know her as long as we do.

And she is a person of numbers, of focus of product and performance.

And she is extremely disciplined one way or another about that.

And she does not vary of that discipline of performance.

End of the day, it's bottom-line for her.

If a category is good, she is going to reinforce it; if a category is not good, she's going to deal with it.

So it's not like the spirit of just put more product and let's try to get lucky.

That's not the style; it's the opposite.

So that [where she] use a state of mind of where she comes from with -- to come to deal with the stores.

And definitely, you will see, I think, in the next 90 to 120 days, you will see the effect of it.

Are you going to still look for a President to focus on the South America area?

No.

We're done.

Okay.

That's done.

We have Michael Prince, who is right here.

We have -- plus Nancy, and Jacques Levy, he is going to be -- he is very active already with us on every continent, to assist us to establish and push the map on retail world.

And I think that's what we look for.

Latin America now will be most likely something we'll [do] directly or in joint venture or completely directly.

For Dennis, why did corporate overhead go down rather sharply in Q4?

In the fourth quarter, you heard me say in the prepared remarks that we changed our performance-based comp; last fourth quarter, it was going in the other direction.

So in the fourth quarter, you have the opposite effect hitting.

Okay.

And finally, where do you expect inventories to be at the end of Q1, Dennis?

And what percent of the fourth quarter inventories were carryover?

We don't specifically guide to inventory levels.

I mean, we're going to manage inventories tightly.

It varies market by market, based on a lot of different factors, but we think we're in good position with our inventories.

And carryover inventories?

How were they at the end of the year?

Inventory, when you stay carryover, you mean --?

Whole season.

We're -- as I said, we're in good shape in North America.

We're -- our inventories are well aligned with our sales trend.

And in Europe, we've got our -- it varies season by season.

We have fall/winter product now that we take out of the stores and we put in the outlets to clear in [our two] quarters.

Thank you.

Janet Kloppenburg, JJK Research.

Congratulations on a great year.

Dennis, I know you just talked about inventory, but it's up 16% and your first-quarter sales guidance is up 3% to 6%.

And that seems a little bit out of line.

You've usually been much tighter than that.

And you talked about the operating margin being down in the first and the second quarter, so I don't know what your second-quarter revenue outlook is, but is it going to accelerate enough to absorb this level of inventory?

And then, secondly -- well, I'll come back with my second question.

Okay.

So, with respect to the inventories -- and, certainly, the first quarter is depressed in terms of inventories because of the shift and because of the comps.

So, the first quarter should not be indicative of that trend that we would expect later on in the year.

(multiple speakers)

But isn't it seasonal product that you have and isn't it perishable?

I think -- let me just explain.

If you look at the componentry of inventory, about half of the growth is in Europe.

And there's two factors there.

It's all being driven by retail expansion.

Half of that is just increase in square footage.

And the other half in Europe is really just a function of how product is cleared.

Because it's regulated, it's very tightly there; versus in the US, you're clearing all the time.

So, in Europe, you can only clear at the end of the season.

So at the end of the season, you take the product out of the store; you hold it for six months; and then you put it in the outlets -- in this case, in the third and fourth quarter, where we clear it, is very healthy margins.

So the inventory there -- and that business is growing, so you would naturally expect our product to increase.

So we have to own inventory longer in Europe; it turns a little more slowly.

In North America, the inventories are aligned very closely with the business performance.

In the first quarter, wholesale is up a little bit here; it's really a function of last year being very low.

We're holding less than two months of inventory in the wholesale business.

The other thing that affected the first quarter to some extent kind of across the board was Chinese New Year.

We had an extra sailing on the water, so that impacted all the inventory.

Yes, Janet, in North America retail, our inventory is up 6% versus last year.

We took that down.

We were up 9% going into the quarter.

Okay.

Our inventory per square foot is less than what it was a year ago.

Okay, great.

And then thank you very much for that, for that information.

And then on the operating margins outlook, I think you're looking for it to be up 20 to 70 basis points on the year.

And I think you said it's going to be challenged in the first half, so I understand that that means you're expecting a strong second half.

But help me reconcile that with the gross margin pressure and the cost pressure you're expecting in the second half of the year.

Thanks so much.

I think what -- the way I would look at it is the pressures that we have in terms of IMU this year will coincide with the opportunities for markdown improvements.

This year, our markdowns were higher -- or last year, rather -- were higher in the back half of the year because we were clearing a lot of inventory because we bought to a much higher expectation.

So, in the back half of the year, you have those pressures offsetting, if you will.

We also, in the back half of the year last year, had a lot of pre-opening expenses.

We had all the costs associated with Fifth Avenue where it was not generating any revenue there.

So we're going to anniversary that.

And that's also -- the back half of the year is when the products initiatives kick in and where we should see some improvement on there.

We're also focusing very tight in North America and Europe on managing the costs; we've invested in infrastructure in both of those businesses, and our plan is to leverage a lot in the back half of next year.

(Operator Instructions).

Susan Sansbury, Miller and Tabak.

Thanks very much and congratulations.

A quickie -- I know we're running out of time, so my question basically is -- can you provide more color or specifics on the infrastructure spend in China this year as well as marketing?

Thanks very much.

Well, I think it would be pretty easy to review on that is that since we hired our President, which is only nine months ago, we're putting in place all levels necessary of expanding at every region of China, being the whole organization from the regionals to the district managers to the visual, to the construction, to -- at every level.

If we plan to be serious about China, you have to have a complete, complete organization.

And that's what we plan to do.

We are looking at three, five, seven, 10 years from now.

And as you can see the shift, you read in the papers and you understand, as I do, that China move more and more to -- from an export country to just develop more and more inside China.

And we think that the opportunity on retail directly or with partners as a joint venture can be really significant.

And this is where we are focusing completely from operation to finance, to construction, to everything.

And whatever it takes, we are going to do it.

I mean, it's not like, well, let's see what we are going to do the next quarter or the quarter after that; it doesn't have an impact for us.

The impact we want is to be a serious player here.

Like we said in Europe, we are going to focus to have a real business in Europe -- we do have a serious business in Europe, and we think we can do much better than that.

Asia or China, we don't have yet a substantial business.

It should be much, much larger than what it is.

And unless you invest in it, well, you don't have it.

So whatever it takes, we are going to do it.

And about the marketing and advertising, of course, we are increasing rapidly that.

But when you see the sheer size of the country, to have an impact, if you want to do all the airports -- I mean, you talk about hundreds of airports now.

It's staggering.

You have to be focused and just be clear on your strategy there.

And I will be there again in six weeks, and we continue to travel and see and learn more everyday there.

Thank you.

And your last question comes from the line of John Kiernan with Cowen.

Please proceed.

Thanks for taking my question.

Dennis, did you give guidance for share count?

I know you're accelerating share repurchases a bit and I'm just wondering if you gave that?

No, we didn't.

I would -- probably somewhere around 93 million on average for the year is what's embedded in our guidance.

93 million.

Okay.

And then one last quick question.

The wholesale business, the guidance for revenue declines there -- what's your assumption in terms of unit declines in that business?

Are you raising prices there?

Or is there just a -- is there some type of assumption that units or the shipments are going to decline?

Just a little more color there, please.

Yes.

Yes, there'll be some price increases within wholesale as well.

And, yes, similar to retail, we're forecasting to have a decrease in units.

Okay.

Thanks.

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

Well, thank you.

Thank you for being on the conference.

I will repeat what Dennis was mentioning -- I mean, our focus, especially going forward in the next few weeks, in next few months, is going to be just the change of commodities, the [labor] cost of oil has been a surprise to us in the last few weeks of what's happened in the Middle East.

And oil has a big impact in our products -- for example, all watches, accessories, handbags, watches and all that.

So, we are monitoring all that.

It's a time of challenges on different things that nobody foresee.

You wake up in the morning and say that's the news of today, and then you analyze and you work on it.

And you adapt to where it is.

So, thank you.

We will talk to you next quarter.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may now disconnect.

Good day.