Guess? Inc (GES) 2012 Q1 法說會逐字稿

Good day everyone and welcome to the Guess?, Inc.

first-quarter fiscal 2012 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.

Good afternoon and thank you for joining us today.

On the call are Paul Marciano, our Chief Executive Officer; Maurice Marciano, Chairman of the Board; Dennis Secor, Chief Financial Officer; Michael Prince, Chief Operating Officer and Russell Bowers, our 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 current expectations based on current 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 joining us.

I'm pleased to report today our positive performance and results for this quarter.

We executed well with each of our businesses generating topline growth in the quarter and delivering earnings within or better than the level that we guided two months ago.

Overall, we grew our business by 10% quarter to almost $600 million with our international businesses driving our growth.

Revenue in Europe and Asia were higher than we anticipated and together represent twofold of a revenue increase.

Our North American wholesale business also exceeded our expectation as did our licensing business.

Retail North America performed as we had expected.

Our team performed very well, managing our business tightly and focusing on solid execution.

We delivered an operating margin that was two full points ahead of our previous expectation and we posted earnings of $0.46 per share.

In North America, our retail business met expectation with comp sales down 3%.

The women's apparel business remained challenging as we dealt with slow-moving product from the fourth quarter.

Mall traffic remained soft in the US and particularly in Canada where consumer spending continued to be tight.

Our goal is to improve our performance with initiatives to enhance our product and visual merchandising.

We have gained traction in our denim business compared to just a quarter ago and we have a significantly improved the inventory position and are experiencing healthy sales flow in denim.

The initial customer response has been positive and we will see the full impact of these initiatives in our fall holiday season.

We ended the quarter with clean inventories but at a level below our projected sales growth.

As we stated previously we are buying more focused and intend to reduce markdowns and focus on full price selling.

Our 5th Ave flagship store in New York is exceeding our expectations, confirming the strength of the Guess?

brand and drawing customers from all over the world.

It is our broad product assortment of apparel and accessories that continue to define our brand and present opportunities across all of our concepts.

In Europe, we experienced steady growth and we continue to benefit from significant brand recognition in the region and the strong response our customers have shown to our products.

The strength of our business this quarter came from our retail stores given the shift of wholesale shipment that occurred last quarter.

Our retail business increased by more than 50% driven by new stores and positive overall comps.

Our strategy has been to expand the presence of our business outside of our core base of Italy.

In the first quarter we made excellent progress against that objective.

Germany, Austria and Russia combined drove 40% of our European growth this quarter.

We ended the quarter with 508 GUESS stores and now are on track to open an additional 81 to 86 stores this fiscal year in Europe.

Next is Asia which delivered 24% sales growth, opening 14 stores and 12 concessions during the quarter.

The sales growth in this region has been driven by our retail stores in South Korea which continued to deliver positive comp.

In China we're expanding our distribution to open stores in secondary cities.

We are on track to open an additional 56 stores in Asia this year.

Our licensing business also exceeded our plan in the quarter as several categories such as watches, eyewear, shoes and fragrance posted strong sales with a total increase of 14%.

In the last two years, we have acquired back the right of our baby and kids license in Asia as well as the one in Europe.

Our plan is to consolidate this business under the same strategic initiative as we develop a world of baby and kids with development of freestanding stores, department store concessions and partnerships with strategic retail partners.

North America is currently under license agreement for kids.

In the near term, we're actively monitoring rising commodity and input costs and have a clear plan to manage our business for supply chain, inventory control and pricing strategies.

Our industry has been subjected to some tough challenges made by the real commodity increases but also by some speculation.

And we see the future of cotton price dropping in the last three weeks.

But despite that, we have all the confidence in our team to manage our business in the near term and allow our long-term strategies to guide us.

In North America, we have already conducted selected price increases in certain product categories.

And so far our customer is responding well.

The initial feedback gives us confidence in our planning for the second half of the year.

We are managing with a realistic view of our environment and the global economy.

Our brand continues to enjoy significant momentum worldwide.

Guess?

being a true global company, we're committed to the following three initiatives.

One is international expansion which remains our number one priority especially Europe.

There are many European markets like Germany, Benelux, Spain and France where the brand enjoys strong consumer awareness that where our business is under-penetrated today.

We are well on track this year to pass the $1 billion mark for revenues in Europe- one full year ahead of schedule.

The number two initiative is Asia which we believe will be the most significant of all opportunities for many years to come, and this year we are investing in infrastructure to develop the operational capability to meet the needs our brand in that region.

China of course is the most important strategic initiative in our Company's history where the possibilities of development seems to me to be endless if properly funded, structured, strategized and executed.

For that we have seen a dramatic result when we did exactly that in Europe in the last six years.

We strongly believe that these goals are clearly achievable for our future in China.

And initiative number three, lastly will be to concentrate in new markets like India, Latin America and specifically Brazil.

We already know how the Latin customers respond to our brand, so expanding these new markets will be also my focus in the next 18 months.

With that, I'll pass back to Dennis.

Thank you, Paul, and good afternoon.

First-quarter earnings totaled $43 million, a 15% decrease from last year's first quarter but ahead of our expectations.

Diluted earnings per share declined similarly reaching $0.46 compared to last year's $0.54.

First quarter revenues increased 10% reaching $592 million.

In constant dollars, our revenue growth was 8%.

Total Company gross profit increased to 6% to $249 million while gross margin declined 150 basis points to 42.1%.

Overall product margins increased slightly with higher product margins in Europe including the impact of channel mix offsetting the effect of higher markdowns in North American retail.

Our occupancy rate increased due to the negative North American comps and our global retail businesses becoming a larger part of the revenue mix.

Our total operating expenses increased 13% to $178 million.

The increase supported our sales growth including higher retail store expenses and variable selling costs.

General and administrative costs increased as we compare now to the additional infrastructure investments we made in Europe throughout last year and as we develop our organization in Asia.

Our SG&A rate increased 80 basis points to 30.1%.

This rate was significantly impacted by the European revenue shift that took place in the fourth quarter of last year.

Without this shift, our SG&A rate would've been comparable to last year's.

In addition to our recurring SG&A expenses, last year we recorded a $6 million accelerated pension cost amortization charge which impacted last year's EPS negatively by $0.04.

This did not repeat in the current quarter.

For the period, operating profit declined slightly totaling $71 million which includes a $1 million favorable currency translation impact.

Operating margin decreased 120 basis points to 12%.

For the first quarter, we reported other net expense of $10 million.

This amount includes $12 million or $0.09 per share in net unrealized revaluation losses on foreign currency contracts and balances partially offset by net unrealized gains on non-operating assets.

This compares to other net income of $3 million in the prior year quarter.

Our effective first-quarter tax rate was 29.5% compared to 31% in the prior year quarter.

We continue to plan the full year at 29.5%.

Now I'll review our segments starting with North America.

In North America retail first quarter revenues increased 5% to $247 million.

Consistent with our expectations, same-store sales declined 3.1% in US dollars and 4.1% in local currency.

This comp follows last year's first-quarter comp growth of 9.7%, our highest in any quarter last year.

Operating income declined 24% to $19 million and operating margin decreased 280 basis points to 7.5%.

This operating margin decline resulted from deleverage from negative comps, lower product margins and higher store opening costs which had a 110 basis point impact due to a larger number of remodels during the quarter compared to a year ago.

Markdowns were higher than a year ago in the beginning of the quarter as we cleaned our year-end inventory.

So the year-over-year comparisons turned favorable during the latter part of the quarter.

During the quarter we opened six new stores and closed three, ending the period with 484 stores in the US and Canada.

In North America wholesale, revenues increased 7% to $46 million with each of our businesses posting top-line revenue increases in the period.

We had expected a small portion of these shipments to be made in the second quarter.

Operating profit in the wholesale segment increased 9% to $11 million and operating margin expanded 40 basis points to 24.3% driven by slightly stronger product margins and modest expense leverage.

European sales increased 12% in the quarter reaching $210 million.

In local currency the increase was 10%.

The growth was driven by our own retail stores which posted positive comps in the quarter.

Shipments in our wholesale business declined due the $24 million of spring deliveries that benefit last year's fourth quarter in order to satisfy earlier season demand.

European gross margins declined in the quarter with improvements in product margins being more than offset by higher occupancy costs as a result of our retail expansion.

SG&A expenses increased to support our new store growth, variable selling expenses and infrastructure investments.

Operating earnings declined 4% to $33 million and operating margin declined 260 basis points to 15.8%.

The comparative operating margin was significantly impacted by last quarter's earlier spring deliveries.

Had that shift not occurred, operating margin would have increased slightly over last year's first quarter.

In Asia revenues for the first quarter increased by 24% to $60 million with all of our Asian businesses posting double-digit revenue increases in the quarter.

Operating profit was flat at $7 million and operating margin declined 290 basis points to 11.8%.

Gross margins declined slightly mainly due to channel mix.

Our SG&A increased both in dollars and as a rate given our higher sales and also due to the infrastructure investments that we're making to support our future growth in the region.

In our licensing segment, revenues increased 14% to $29 million and operating profit increased 16% to $25 million.

Now we'll turn our attention to the balance sheet.

We ended the quarter with cash and short-term investments of $442 million, down from $518 million a year ago.

This year-over-year comparison is significantly impacted by last year's $184 million special dividend.

First quarter operating cash flow was essentially flat to last year's first quarter at $48 million.

Accounts receivable increased 34% over last year to $377 million.

In constant dollars the increase was 23%.

Overall DSOs increased in the quarter mainly due to timing of fiscal month-end collections.

At the end of the quarter about 47% of our receivables were supported by insurance coverage, bank guarantees and letters of credit.

We ended the quarter with $301 million in inventory, about 22% higher than a year ago.

The majority of this increase supports our European business where we are operating 58 more owned retail stores now versus a year ago.

The balance of the growth is split between our North American and Asian businesses.

The carrying value of our inventory at the end of the first quarter is significantly affected by the relatively strong value of the euro at the end of the period.

When measured in terms of finished goods units, inventory volumes are up about 18% compared to the same period a year ago.

During the quarter, we invested $29 million in net capital expenditures, mainly to support retail store expansion and remodels.

We continue to plan full-year CapEx at $140 million.

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 June 24, 2011 to shareholders of record at the close of business on June 8, 2011.

Now we'll move into our outlook.

In North America retail, so far in the second quarter comps are down slightly.

The trend has improved from the first quarter as full priced selling has accelerated.

We also anticipate that the trend could further improve later in the quarter as we begin to anniversary last year's weaker comps.

Overall, we're planning second-quarter comps to be roughly flat to down in the low single digits and for total revenues to increase in the high single digits to over 10%.

For the full year we're now planning with roughly flat comps, reflecting our strategy to focus on full priced selling.

We're now planning to open about 42 new stores this year and for full-year revenues to now increase in the high single digits to about 10%.

In our North America wholesale business, our business performed well with our major customers exceeding our expectations along with a small level of shipments which we delivered earlier than planned.

Backlog in this business which includes orders into the fourth quarter is currently down in the mid-single digits and we are planning second-quarter revenues to be down in the mid-teens.

For the full year we now expect revenues to decline in the low to mid-single digits.

Moving to Europe, in our wholesale business, second-quarter shipments relate primarily to our fall/winter season where orders have increased in the upper single digits though lower than we anticipated.

Given this plus our expectations for our retail stores, we're planning second-quarter local currency revenues to increase from about 10% to the low teens.

We are planning that the year will be stronger than it was a year ago.

Based on this, we expect European second-quarter US dollar revenues to increase in the low to mid-20% range.

For the full year, we are now planning for local currency revenues to increase from 10% to the low teens and for US dollar revenues to increase in the mid to high teens.

Given our expectations for the euro, we also expect a modest currency translation benefit compared to the prior year.

In Asia we expect second-quarter revenues to increase in the low to mid teens driven by expansion and productivity improvements in South Korea and China.

With the stronger performance from the first quarter, we now expect full-year revenues to increase over 20%.

In global licensing we expect second-quarter royalties to increase in the mid to high-single digits and now expect full-year royalties to also increase in the mid to high-single digits.

Now with respect to gross margins, inflationary pressures and rising costs continue.

We now have better visibility since our last call and conditions remain roughly consistent.

In our apparel business we are seeing cost increases in the mid-teens for the second half of the year.

Our primary strategy to offset these pressures will be targeted price increases and we have been encouraged by our initial price testing.

Overall we continue to plan with a moderate decline in our IMU and expect that our focus on full priced selling should lead to a year-over-year improvement in markdowns.

In addition in the first quarter we placed new forward currency contracts that should provide further offsets to the cost pressures.

We continue to expect to operate with a higher occupancy rate this year given a larger global retail mix.

And overall we now are expecting full-year gross margins to be roughly flat for the year.

For the second quarter, we expect gross margin to increase slightly mainly driven by the favorable impact of currency, partially offset by a higher occupancy rate given the overall retail mix.

With respect to operating expenses, we continue to plan assuming a slight decline in our full-year SG&A rate.

For the second quarter we expect the SG&A rates to increase.

Given all these factors, for the full year we now see revenues ranging between $2.740 billion and $2.800 billion, operating margin between 16.5 and 17% and our full-year EPS to range between $3.30 and $3.50 per share.

Our second-quarter revenue expectations are between $645 million and $660 million.

We're planning with operating margin between 15.5 and 16% and for EPS in the range between $0.77 and $0.83.

Our second-quarter EPS guidance assumes a favorable foreign currency marked to market benefit of about $0.04 based on our assumption that the euro ends the second quarter relatively weaker against the US dollar than it began.

With that, I will conclude the Company's remarks and open the call up for your questions.

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

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

Operator?

(Operator Instructions) Jeff Klinefelter, Piper Jaffray.

Congratulations everyone on a nice performance in the first quarter.

Hard to get this down to one single-point question, Dennis, so I'll try to make it as succinct as possible.

I guess focusing on Europe, it seems you are very encouraged by the trends particularly when you look at the Germany, Austria, Russia being I think, Paul, you'd mentioned 40% of the growth in the quarter.

And then you also said I think, Dennis, that the forward bookings were maybe a little lighter for Europe than you had expected.

Could you talk a little bit more about that, what you are seeing in the marketplace?

Clearly your own retail stores are driving a lot of that business, but help me understand those two points that you made during the call.

Yes, it's Paul.

First of all, I mean, if you look at the last 12 months trailing versus 12 months before, we have an increase of over 24%.

Looking forward, we continued -- I mean you know how we see some stability in general in Europe by the debt crisis that they are experiencing right now.

But that doesn't prevent us to continue to move forward with expansion including places like Spain, which we have a very good response; Portugal which we plan to in fact do a joint venture very shortly and operate in Portugal.

And also France which we believe has one of the biggest potential with Germany.

Germany is an [already up] business for us and we've been taking our time now for the last five years to really study and look at what will be the right move there in Germany.

And I think that we are ready to do that.

About the backlog, yes, it's kind of softer.

I think that you have different reasons for that.

One of them is -- don't forget now that we pre-collection and collection which is relatively new for Guess?

to do that.

In Europe we used to have two collections, fall/winter and spring/summer.

And now we decide to do pre-collection which is only two years old.

So we have the benefit to look forward to the next season and say that we're going to see what is the next trend in fashion so we can buy closer to the market.

That is what we see as a trend.

But in general, our business in denim across the world I think we are in double-digit increase across every region -- Americas, Europe, Asia.

So we are comfortable with that and of course the number of stores we are planning to open which I mentioned in Europe which is between 81 and 86 stores remain to be opened.

I would just add one thing to that, Jeff.

In the fall/winter orders, this is the season in which we effected some price increases.

So that's now embedded in that backlog.

So it really remains to be seen how that may impact our reorders in the future.

Okay, just one other thing, Dennis, what is the leverage point of European retail at this point?

What comp is required?

In the retail business itself?

Yes.

By itself it would be I would imagine probably fairly low single digits.

So you're experiencing leverage out of your European direct retail at this point?

Yes, we're expecting the retail business itself in Europe is going to improve profitability.

That's the plan this year.

Thank you Jeff.

Christine Chen, Needham & Co.

Thank you and let me also offer my congratulations on a good quarter.

Thank you Christine.

Wanted to see if you could talk about your North American retail business.

It seems to have stabilized.

There's been some adjustments in product already in the spring.

Can you talk about what categories you're particularly happy with, what categories might be a little more challenging and what the opportunities are in the back half and maybe talk about regional performance throughout the quarter?

Sure, so this is Russ.

Products that are successful in the first quarter is number one, basic denim.

Especially premium blend denim, it's doing well for both men and women.

Were we also up in the wovens bottom business, accessories are strong including watches and jewelry.

And we also did a strong business in shoes.

The business, it's overall challenged.

Well, denim was down overall for the quarter because of the softness in fashion but we were better than we were in Q4.

And the overall business in denim got better and better as the quarter went along because we improved our stock position.

We also improved the visual merchandising.

So now looking into May, overall denim sales so far in our full priced business is now up.

Other things we've struggled with in the quarter is the leftover Q4 product.

That was difficult and the wovens tops business was slow as well as leggings.

We didn't do much business this year.

Last year it was a big trend.

Regionally the cold weather areas continued to be soft for us, so we struggled in the Northeast.

Canada was also difficult and our business was up in the West, also up in the Southeast.

And overall our tourist stores also comped out during the quarter.

Thank you and good luck.

Randy Konik, Jefferies.

Just want to follow up again on the North American business.

So can you just give us -- sort of repeat the color again?

Obviously we're seeing a better business sequentially on a one and two-year trend.

I think there was mention that the denim business picked up and did you also talk about just lower markdowns -- lower markdown pressure occurring in the North American market towards the end of the quarter?

Are we to expect some continued traction in the gross margin picture in the North American market throughout the balance of the year and especially in the back half of the year?

Thanks.

Okay, so more color.

The quarter we executed as we expected.

One of the first things we did is we cleared the leftover holiday product in February.

So once we got past February, we reduced our comparative markdowns in the March/April time period and that continues to trend positively for us so far in May.

The other thing we have is our full priced selling is doing better.

As each new delivery is hitting, we seem to get a little bit more traction on that.

So looking at May, if you look at the big picture, our overall full priced selling is up over last year.

We are down in markdown which is how we planned it.

We have the same initiatives for the back half of the year to continue to plan it with less markdowns.

So really looking at if following the way our business ran in fiscal 10 two years ago, we were really successful with managing our inventories throughout the year.

I guess lastly if you can hear me, Nancy's impact on the store look or the product, any update there?

She's starting to have an impact.

It's going to progress as time goes along and the product that's actually bought starts to arrive in the stores.

So right now you do see it.

We are merchandising.

We have the dressy and the casual sections separated within the stores.

And one thing that she's done that's been really great is in denim.

We've got a new merchandising strategy for denim where we have the fixtures and we have it on the table and that's certainly helped denim business pick up quite a bit.

I think the back-to-school which would be like in basically two months across the United States and Canada, you will see the impact of the new strategy with Nancy.

And of course holiday, but before that, back-to-school; visit any stores and you'll see a big change compared to last year, the last quarter of last year.

Dana Telsey, Telsey Advisory Group.

Can you talk about the impact of the price increases that you are seeing by category and channel?

And as you go through the year, the expectations along with the promotional plans?

Thank you.

Okay, I'll start off.

I'll talk about the price increases that we have in our stores today.

We're really encouraged by what we see.

Two of the areas where we've raised prices the most right now are basic denim and dresses.

These are two of the most productive categories within our full priced stores.

So this gives us a lot of encouragement.

An example, dress prices are up in the mid-teens I believe right now.

So looking forward we definitely think the quality of our brand warrants price increases and our full priced customer has always shown us over time that they're willing to pay for the right product.

Promotional activity, you know it's our plan to limit the markdown driven promotional activity throughout the balance of the year.

Last year we had too much inventory and as a result we were forced to markdown things more than we wanted to and we don't want to repeat that this year and we bought accordingly.

What we see so far with our full priced selling where it's selling through quicker than a year ago certainly gives us encouragement because that's going to lead to having less new product to mark down going forward.

Betty Chen, Wedbush Securities.

Congratulations, everyone.

I was wondering if Russell or Dennis if one of you could talk to us a little bit more about the inventory.

I know, Dennis, you mentioned that a lot of this is to support the growth in Europe and then I think the balance was split between North America retail and Asia.

Maybe if we can focus a little bit around the North America retail portion.

I think -- I just want to make sure, Russ, that now we are pretty clean in terms of carryover inventory and that you're comfortable with the composition and how is the inventory in North America on a comp store basis or inventory per square foot basis?

Or something that you can give us some color around that would be helpful.

Thank you.

Yes, so North American retail inventory is up 3% over last year.

So we're very clean right now.

On a per square foot basis it's down 6 to 7% which is in line with our plans.

One of the good things is during the quarter like I mentioned with the denim, we reduced our overall inventory but we improved it in certain categories where we needed more such as denim.

Going forward we want to increase our inventory position in dresses which has also been selling through really well for us.

So that's our plan and we really expect to continue it for the rest of the year because that's how we bought it.

Yes, just to add then to talk about the total Company inventory, as we said on the prepared remarks, the majority of the investment is supporting Europe.

And because of the currencies, it impacted that comparison by about 4 points.

So on a constant dollar basis, we were up about 18%.

In Europe we're really doing two things and it's very similar to what we said over the last several quarters.

We've added more stores, so we need to invest in the inventory to fuel those stores and those stores' growth.

And then the clearance model is different.

And as the business grows because we clear for our own outlets and you have to pull the product out, hold it for half a year and then put it through the outlet channels where we sell it at very attractive margins, you will naturally see our consolidated turns being impacted by the growth of Europe.

Great, thank you.

That's very helpful.

Congratulations and best of luck.

Margaret Whitfield, Sterne Agee.

Good afternoon and congratulations.

I wondered if you could comment on the back half in terms of where you're planning to take these price increases and what are you planning for the unit buy?

I'm imagining you have greater pricing flexibility outside North America, if you could give us some commentary on the level of price increases planned for Europe as well as North America?

So in North America, our intention is to mitigate about two-thirds of the cost increases with price.

And we are doing it in a targeted way.

So we're not doing it across the board but we're certainly hitting a lot of the product categories, in particular things on fashion where the customer is going to see value for it.

Again I think the quality of our brand certainly warrants price increases when we have right product.

What was the other --?

The unit buy, the unit buy for the back half in North America?

The unit buys are down on a comp store basis to reflect the price increases.

About Europe and Asia, I would say that we are less sensitive of price increase specifically because of brand perception.

But also to the fact that it's not just a price increase because of commodity.

It's also a price increase that we will exercise discretely on the sense of increasing the quality, increasing the value of the product.

And so definitely we have been already doing some increasing in Europe and that has made absolutely no impact because we basically give a [product innovated with a fabric] who has increased of course but we give a better product for a higher price.

If I sneak in one more, could you talk about the kids business and what your intentions are in the kids business?

Yes.

It's in place right now.

In fact I'm supervising that.

It's based in Lugano in Switzerland.

We are consolidating all the business around the world except North America and we have already 14 freestanding stores lined up of kids and babies to be open in the next 12 months and I'm very excited about that.

We have a concession to open very shortly in Spain and in France and which we did not have before.

And basically we have a really great business owner now who is leading that effort in Europe and in fact he's here today.

And that is what I'm working on with the team.

So is it a huge business?

I don't know but the potential could be easily 100, $150 million in the future.

And when does that North American license expire?

I cannot tell you that.

(Operator Instructions) Susan Sansbury, Miller Tabak.

Very simple question.

Your margins in Asia were down 300 basis points after being up for four or more consecutive quarters.

Could you explain to me why that happened?

Sure, Susan, there's a mix issue between the wholesale and the retail business that varies.

And the other thing that we said for a while is the strategy in Asia particularly it will be impacting the front half of this year is that we're investing in the infrastructure to support our future growth.

It really wasn't until we built the support structure in Europe that we were able to see the explosive growth that we have.

And we think we need and we know that we need to develop that in Asia.

So that's what's going on in Asia right now to develop that muscle.

I forgot about the infrastructure.

You mentioned that very clearly last quarter, shame on me.

So this is going to continue for the next three quarters or more?

We're going to be investing in the infrastructure throughout this year.

We see more growth in the back half of the year but this is really a year where we are investing in that support.

And if I can add to that, Susan, if you have visited China, I'm sure you did, every time we visit, we completely underestimated what we thought we saw the time we visited before.

So each time we see bigger investment most likely coming up because as I mentioned in my opening remarks, it looks like it is endless possibilities that you can have because it's gigantic and the future there is we feel we are behind -- every time we progress, we feel we are behind.

And so we try to address that constantly and trust me, we are -- it's on our radar to invest whatever it takes but we will not fall behind there.

Trust me.

Thank you very much and good luck for the balance of the year.

John Kiernan, Cowen and Company.

Nice quarter across the board.

I wanted to ask a question on the licensing side.

Obviously saw a nice increase ahead of your expectations in Q1 off a fairly difficult comparison.

I guess one, what's driving kind of that business now?

Is it new agreements?

Is it new product categories?

And two, I guess why is it guided down to kind of decelerate throughout the rest of the year?

Thanks.

Thank you.

I think first of all to answer the first part of your question, we have double digits across all categories.

And you can see that on two different forms.

One is that we have new territory openings, but also that we open a lot of freestanding stores across the world every single quarter.

And of course that's a dedicated space for all our licensees.

To give you an idea about the split, if you take North America accessories which is unusual for any brand in the world -- any -- is representing almost 42% of total sales of our stores if you combine everything in North America.

If you go to Europe, it's almost 50-50.

So that gives you the scale of the importance and the power of the brand as an accessories company.

Being the eyewear was up like 30%, the jewelry being up, the watches which is already 26 years old and continued to deliver double-digit increase.

So clearly the brand has been established on its own on their own categories.

It means that watches (inaudible) as a brand on their own.

And if you take the handbag, it's maybe one of the biggest manufacturers of handbags today, of GUESS handbags.

So that's one of the explanations.

When you see that we see maybe a slowdown for the rest of the year, we as usual want to be conservative about what we see and what we see as the potential.

But we don't want to be overconfident to say -- oh, piece of cake, we have no competition.

We have competition everywhere on every category and we have to fight on that every day.

So we give what the licensee [fee where we are] but we will try our best to increase that.

I hope I answered you.

At this time there are no further questions in the queue.

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

Thank you.

Basically, what I just mentioned now at the end, we are always driven by core principles, by Guess?

rules, controlling the things we can control, but always keeping our eye on the future and of course protecting the Guess?

brand.

We feel very confident that we have many, many different opportunities ahead of us.

We have a great team and a clear strategic objective.

We will continue we think to deliver superior results.

That's what we will do.

So thank you and we will talk to you next quarter.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

All parties may now disconnect.

Good day.