Guess? Inc (GES) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the GUESS first-quarter fiscal 2013 earnings conference call.

On the call are Michael Prince, Chief Operating Officer; Dennis Secor, Chief Financial Officer; and Russell Bowers, Chief Financial Officer North American Retail.

During today's call, the Company will be making forward-looking statements including comments regarding 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, annual, and current reports filed with the SEC, including economic conditions, business strategies, results of litigation, tax and other similar proceedings, and currency fluctuation.

Now, I would like to turn the call over to Michael Prince.

Please proceed.

Thank you, and good afternoon.

Before I begin our review, those of you on our last quarterly call will remember that Paul is working on our global three-day conference of licensees and partners that kicks off here in LA tomorrow.

It's a celebration of the GUESS brand and our 30-year history with well over 1,000 people in attendance.

Now, moving to the first quarter.

We are pleased to deliver revenues that exceeded the top end of our guidance range, and margins that were stronger than we had anticipated on our last earnings call.

Overall, our performance resulted in earnings of $0.30 per share.

In North America Retail, the progress we made last year in our women's apparel business continued as it is still the best performing category in the GUESS stores.

Sales of woven tops have been very strong, and both dresses and denim continued to perform well.

We've seen an excellent response to our thirtieth anniversary capsule and to the events that we held in our stores as well as the global coverage we received from bloggers, fashion magazines, and online media.

We also continue to gain traction in social media.

In the last year, our Facebook likes have more than doubled, and on Twitter, we've doubled our followers in just about six months.

G by GUESS performed very well in the first quarter, once again posting positive comps.

We are continuing to secure attractive real estate for expansion of this concept.

Our GUESS by Marciano business was challenging in the quarter, and we're working to make improvements there.

Overall in retail, we continue to manage with lower markdowns, our best Q1 performance in six years, and that led to higher product margins compared to a year ago despite the overhang of increased costs related to cotton.

Our biggest challenge in retail remains traffic which continued to be down just as we had expected.

This led to a comp decline in the quarter and put pressure on our overall retail segment profitability.

In Europe, our business remains stable and overall performed consistently with our expectations.

We experienced declines in our more mature markets given economic challenges in the south while we grew our business in newer growth markets like Germany and Russia.

Both of which -- these markets posted double-digit top-line increases.

We grew our own retail business in Europe where our top-line performance was stronger than we had anticipated as comp store headwinds were less severe than we had planned.

As expected, sales in our wholesale business were down compared to last year as the impact of the weak economy, particularly in Italy and France, impacted our shipments.

In Asia, we effectively met our earnings expectations for the quarter though on slightly lower revenues than we had planned.

Our business in Korea was softer than we had expected with a more competitive marketplace and with cooler temperatures that were not conducive to our assortment.

Comp trends in Korea were negative at the beginning of the quarter, but we saw a significant improvement in April.

In the quarter, our China business exceeded our plans offsetting some of the softness in Korea, and we continue to be encouraged by the opportunity in this market.

And finally, our licensees who faced many of the same economic challenges as we did.

They experienced a stronger quarter than we had anticipated with royalties that grew slightly in the quarter.

While it has only been a couple months since we last spoke, our major priorities for this year remain unchanged, and we made excellent progress during the first quarter.

One of our primary areas of focus for this year is expanding our marketing efforts to drive traffic, acquire new customers, and support our brand positioning.

We're working especially hard on our man's accessories categories to match last year's improvements in women's.

We plan to deliver a consistent message across all channels and support that with clearly defined product stories that reinforce our fashion authority.

We are putting those key items into our windows, onto our drive aisles, onto our homepage, as well as external marketing.

We also want to reinforce GUESS as a denim authority and plan to introduce new washes and fits and provide an even higher level of service in this critical category.

CRM remains another top priority with continued emphasis on customer segmentation and loyalty building.

We plan to invest more in social media and digital advertising this year including collaborations with bloggers and entertainment personalities.

We continue to be excited about our opportunities in new markets like Brazil, India, and Japan, and we are working hard on establishing the right relationships to build our brand in those key countries.

For the first quarter, we made excellent progress towards the goals that we set for ourselves.

For the full year, we feel that we are very much on course and are maintaining our full-year EPS guidance.

There is a lot to accomplish this year.

We have a strong team that remains focused and a great brand with much opportunity.

With that, Dennis will now walk us through Q1 numbers and provide some visibility into the second quarter and the full year.

Dennis?

Thank you, Michael, and good afternoon.

Before I move into my report, we reclassified our prior-year numbers, moving some European distribution costs from SG&A to Cost Of Goods Sold.

That standardized our financial reporting and had no impact on operating margin, earnings, or EPS.

Moving now to the numbers.

First quarter diluted earnings per share exceeded our expectations, reaching $0.30 per share down 35% compared to last year's $0.46.

Last year's EPS included a net $0.08 in nonoperating charges primarily related to currency contracts and balances.

Net earnings for the first quarter of fiscal 2013 declined 38% to $27 million.

First quarter revenues declined 2% to $579 million.

Growth in Asia and retail expansion in North America and Europe drove the growth which was offset by negative retail comps, lower wholesale shipments, and currency headwinds.

In constant dollars, revenues increased slightly.

Total company gross profit declined 5% to $235 million, and gross margin declined 130 basis points to 40.6%.

Product margins improved due to continued improvements in North American markdowns as well as higher Asian retail mix.

Our occupancy rate increased due to the negative comp and retail mix, and that more than offset the product margin gain.

SG&A increased 11% to $196 million, and our SG&A rate increased 390 basis points to 33.8%.

The increase resulted from higher legal fees along with increases in selling and distribution expenses.

We also increased advertising and marketing investments around the world.

Lower North American stores selling expenses partially offset these increases.

As planned, operating profit declined 45% to $39 million which includes a $1 million unfavorable currency translation impact.

Operating margin declined 520 basis points to 6.8%.

Our effective first-quarter tax rate was 32% compared to 29.5% in the prior year.

The increase resulted primarily from a different earnings distribution among tax jurisdictions.

We are planning the full-year with the 32% rate.

Moving to segment performance.

In North America Retail, first-quarter revenues increased 2% to $252 million with store expansion offsetting the impact of a 5.5% comp store sales decline.

Operating income declined 9% to $17 million, and operating margin decreased 80 basis points to 6.7%.

We expanded product margins with a lower markdown rate and higher prices which offset the impact of cost inflation.

Our occupancy rate increased, however, given the negative comps.

Our SG&A rate was higher compared to a year ago as higher overhead and advertising offset the impact of store expense leverage.

During the quarter, we opened six new stores and closed seven, ending the quarter with 503 stores in the US and Canada.

In Europe, revenues declined 10% to $190 million.

In local currencies, the decline was 5%.

Revenues from our own retail stores increased as new store expansion more than offset the impact of a high single-digit cost decline.

At the end of the first quarter, we operated with 191 owned retail stores.

Wholesale revenues declined in the quarter with jewelry posting the biggest percentage decline given the distribution changes we made a year ago.

Shipments declined in most of our other wholesale businesses given economic conditions in the south which offset growth in newer markets.

Operating income decreased by 62% to $12 million.

Operating margin declined 920 basis point to 6.6%.

The lower jewelry sales, expensed deleverage caused by the wholesale decline, and the higher occupancy rate given the negative comps and retail mix all weighed significantly on the operating margin.

It was also impacted by additional comps to restructure our business, redeploy resources, and consolidate our logistics operations.

In Asia, first-quarter revenues increased by 8% to $65 million.

The growth was driven by a substantial increase in our greater China business as well as by higher shipments to our southeast Asia distributors.

Revenues in South Korea increased slightly in local currency though the weaker Korean won more than offset that increase.

Operating profit decreased 17% to $6 million, and operating margin declined 270 basis points to 9.1%.

Gross margins were stronger, but this was more than offset by a higher SG&A rate given store expansion and infrastructure investments.

In North America Wholesale, first-quarter revenues declined 4% to $44 million.

Operating profit decreased 16% to $9 million, and operating margin declined 300 basis points to 21.3%.

In licensing, revenues grew slightly to $29 million, and operating profit declined 3% to $25 million.

Now, turning our attention to the balance sheet.

We ended the quarter with cash and short-term investments of $490 million, up $48 million compared to last year's $442 million.

This comparison includes the impact of last fourth quarter's $92 million repurchase of our own stock.

First-quarter operating cash flow was $37 million compared to $48 million last year.

Accounts Receivable declined 11% versus last year to $336 million.

In constant dollars, the decrease was 3%.

DSOs, both consolidated and European, were roughly flat compared to a year ago.

At the end of the quarter, about one-half of our total receivables and about two-thirds of our European receivables were supported by insurance coverage, bank guarantees, and letters of credit.

Inventories increased 11% to $334 million.

Our inventory growth comes mainly from our international operations.

Asia inventories are up given new store growth and the rollout of our new Korean G by Guess business.

In Europe, we have more stores and are carrying leftover products from last year which we plan to sell mainly through our outlets.

Our North America inventories continue to align with anticipated sales growth.

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 22, 2012 to shareholders of record at the close of business on June 6, 2012.

So, now moving to the second quarter.

In North American Retail, store traffic continues to be down, and while we are optimistic about the potential of our marketing initiatives, we expect it will take some time to realize the benefits from those investments.

Therefore, we do not anticipate a significant impact on the business in the second quarter.

Also, the improvements we are driving in our men's and accessories businesses are expected to yield result, but later in the year.

Thus far in the quarter, comps have been down in the mid-single-digits, and we are planning the second quarter assuming comps stay down in the mid-single-digits.

With the largest store base, this would translate into a revenue increase in the low- to mid-single-digits.

For the full year, we are now expecting comps that are down in the low-single-digits, and for revenues to grow in the mid-single-digits.

In Europe, we feel that the commercial climate has generally become more stable with economic conditions continuing to be challenging, particularly in the south.

In our owned retail stores, quarter-to-date comps are down in the mid-single-digits, but we will come up against increasingly stronger comparisons as we progress through the quarter.

Therefore, we are expecting second-quarter comps will decline in the high single-digits similar to the first quarter.

With the largest store base, this should result in overall retail sales growth for the quarter.

We are not assuming positive European retail comps for the remainder of this year.

In the Wholesale business, we shipped spring-summer reorders early in Q2 and will begin to deliver fall-winter product later in the quarter.

For the full season, fall-winter orders were down in the mid-single-digits, and we therefore expect Q2 shipments will be down with declines in mature markets offsetting growth in newer markets.

There are also some factors that may affect the timing of deliveries.

This year, the fall-winter accessories collection includes a larger winter component which will naturally move some selling later in the season.

In addition, given overall economic conditions and increasing penetration in newer growth markets, we are anticipating some modest timing changes as we secure ourselves with tighter credit or prepayment.

We estimate these combined changes could shift roughly $20 million of revenues and $0.06 of earnings per share from the second quarter into the third.

Overall in Europe, we are expecting second-quarter euro revenues to decline in the high single digits, and for US dollar revenues to decline in the high teens.

For the full year, we continue to expect euro revenues will grow in the low-single-digits, and that US dollar revenues will now decline in the mid-single-digits.

We do expect the European operating margin pressure to continue into the second quarter further impacted by the sales shift.

Margin headwinds should reduce in the third quarter as we anniversary last year's downturn with the potential for fourth quarter expansion if we can achieve our top-line objectives.

Moving to Asia, in greater China, we are continuing to pursue partnerships to expand into new cities.

In Korea, April's improvement in trend has continued so far in the second quarter.

We are working on initiatives to enhance our GUESS product offering and are working with department stores to expand our footprint in existing doors.

We also continue to focus on growing our new G by GUESS business in this important market.

With the softness we did experience in Korea in the first quarter, however, we are now expecting full-year revenues to grow in the low to mid-teens range.

For the second quarter, we are planning revenues to grow in the low teens range.

In North America Wholesale, we are planning second-quarter revenues to be down in the high single-digits and continue to expect full-year revenues to be roughly flat.

In licensing, we expect second-quarter royalties will decline in the mid-single-digits, and for the full year, we also expect royalties to decline in the mid-single digits.

As for gross margin, in the second quarter, we will have anniversaried the markdown changes that we made a year ago.

However, we will not have fully anniversaried last year's cotton cost increases, and the euro is much weaker now compared to a year ago, which impacts European margins where we [source] a significant amount of product in US dollars.

Overall therefore, we could experience modest product margin headwinds in Q2.

We are also planning with a higher occupancy rate given our expectations for comps and the overall retail mix.

For SG&A, just as with the first quarter, we expect to operate with a higher SG&A rate in the second quarter given the investments we are making in advertising and marketing and the impact of negative comps.

On currencies, our guidance assumes that currencies remain roughly at prevailing rates for the remainder of this year.

This assumption should result in a modest Q2 mark-to-market gain that should also be offset by additional second-half margin headwinds.

So, considering those factors, for the full year, as Michael mentioned, we are maintaining our EPS guidance in the range between $2.50 and $2.65 per share.

We now expect revenues in the range between $2.7 billion and $2.74 billion and anticipate operating margins in the range between 12.5% and 13%.

For the second quarter, we expect revenues to range between $625 million and $635 million.

We expect an operating margin between 10% and 10.5%, and EPS in the range between $0.48 and $0.52 per share.

This includes the unfavorable $0.06 per share impact of the expected European sales shift that I mentioned earlier.

Looking past the second quarter, we continue to expect that our earnings headwinds will diminish as we move through the year.

Given our euro assumptions, we would experience a substantial currency translation headwind in Q3, and we expect that the largest quarterly dollar increase in advertising and marketing investments would take place in the third quarter in anticipation of the holiday season.

We see the fourth quarter as our next opportunity for earnings growth and operating margin expansion.

Lastly, we now expect to invest between $115 million and $130 million in capital net of tenant allowances primarily for new stores and remodels.

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.

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

Operator?

(Operator Instructions) Randy Konik, Jefferies.

Hello.

This is Shreya Jawalkar filling in for Randy.

How are you?

Good, thanks.

Good job on the first quarter.

Those are pretty good numbers.

Can you provide more color on what you're seeing within the European countries?

Has the consumer sentiment changed since last quarter?

And also, you mentioned that Europe is stable.

Do you think this is sustainable for the rest of the year?

Yes, the way we would characterize what we are seeing in Europe is stable.

It is a mix among different markets.

The south is certainly the most challenging.

But, in our business, what we are seeing is some decline in those markets offsetting, for the moment, improvements that we are seeing in some of our growth markets.

Germany was a market for us in the quarter that was up in the teens.

Russia was up I think almost 30%.

We're getting a strong performance there, but we are not fully anniversaried against the changes that we saw in the south.

That hopefully starts to impact us later in the year.

This is Michael.

As Dennis mentioned, Europe performed as expected, or as planned, but obviously, you've got again certain US -- the French elections, Greece, and the overall macroeconomic environment.

That's something we're watching very closely knowing that things could change depending on any given news on a given day.

For the rest of the year, the way we are looking at it is we are assuming things don't improve significantly nor do they deteriorate significantly.

Thank you.

Jeff Klinefelter, Piper Jaffray.

Thank you.

Just first a follow-up on Europe, Dennis and Michael.

Give us a sense for coming out of Q1 going into the second half of the year on a run rate basis, where is that mix shaking out between Italy and Spain in the south and the north given how north and Russia -- given how quickly you are growing those non-mature markets?

And, then also on the bookings, it sounds like fall-winter down mid-single digits.

Could you just remind us what your bookings were going into the second half last year?

And, just share some perspective on what visibility you feel you have at this point with what behavior you are experiencing with some of your wholesale customers in the southern markets?

You're right.

Just in terms of the trajectory of the fall-winter bookings.

They were down.

Italy, as expected, also declined.

France was down as well.

But, remember the fall-winter bookings are up against an environment that wasn't fully recessionary a year ago.

But, we are seeing that the fall-winter -- just to answer your question on the fall-winter, it was up 7%.

So, if you combine the two and look at on a two-year basis, they're sort of neutral.

Jeff, on the cancellations in reorders, they performed as we had expected so we haven't seen cancellations go way up or reorders come way down so they had performed in the backlog as we had planned.

What about the mix?

How is Europe mixing at this point?

Or, where would you anticipate it maybe on a run rate basis as we get into the second half of the year?

Italy has been a stand out in terms of the percent of total it represents.

Where do you see that?

And, where is that growth specifically coming from?

Is it direct doors?

Is it distribution gains in Germany and Russia?

We are opening doors.

We've opened some stores, but the strategy going into Germany is more of a wholesale department store strategy.

We see that skewing much more toward the wholesale business.

Jeff, when we look at the business, you are seeing Russia and Germany perform fairly well for us, and we just continue to see opportunity in Northern Europe and Eastern Europe as well.

You're starting with obviously, a much smaller base, but growing those markets has been critical.

We're seeing good growth come out of some of those markets.

Okay.

Thank you.

Robby Ohmes, Bank of America.

Thanks.

Good afternoon.

I was hoping you could tell us for the first quarter comps and the second quarter to date comps the AUR versus traffic components for both US and Europe?

Thanks.

Yes.

For the US business first, AUR was up in the mid-singles overall, but if you look at the full-price stores, it was up over 10% in the US.

Traffic was our biggest issue.

Traffic was down in the high singles, and that's something we're really working to improve through our marketing efforts.

We've got a slight increase in conversion so far.

And, so far in May, the traffic is a little bit better, and the full-price stores have improved a little bit.

But overall, the trend is relatively the same, maybe moving slightly in the right direction.

In Europe, traffic is also very difficult.

That's the biggest driver of their negative comps, and AUR there is relatively flat.

The comps overall for Europe, the comps trends was pretty similar as a group to what we saw coming out of the fourth quarter.

Italy actually improved the trajectory.

It was still down, but it was a better performance than we saw in the fourth quarter.

France actually was the opposite.

So, it's a mixture, but we are seeing some markets perform a little bit better and some a little bit weaker than they had compared to the fourth quarter.

But on balance, it was very similar to what it was the previous quarter.

Great.

Thanks very much.

Omar Saad with ISI Group.

Thanks.

Good afternoon.

Wanted to ask a question about the North American trends.

What you are seeing with the consumer there in the retail business?

Has there been a weather impact going through the spring?

What are you seeing on the color side?

I've been hearing about the color theme a lot, and how you have been able to incorporate that into your offering.

What's really working more -- what's working in your retail business and what's not?

Just your general thoughts around that retail business.

And, it looks like your CapEx number, too, might be coming down a little bit.

Have you changed your store opening plans as part of that business?

Thanks.

This is Russ.

Related to weather, we haven't seen a really big impact from weather.

Our comps are relatively consistent throughout the first quarter.

Now from a product trend, there's a lot going on with color that we think has really benefited from us.

We went after a lot of business in the color denim, and almost everything we did in that area was very successful for us.

And, we've also seen some great trends with our woven tops.

We really went after that business at the beginning of the quarter, and there's a lot of that product we've really blown out really quickly.

So, we're happy with what we've seen with that.

On the CapEx side, a lot of it's coming from remodels.

We're pushing back some of the remodels, and a lot of that is related to us just trying to find the right spaces.

So, we'll probably be doing a lot of remodels in January which will fall into next year's CapEx.

Russ, do you mind commenting on the accessories?

How the accessories are performing in the stores?

Accessories is a difficult category for us.

It started in the fourth quarter, and it has still been pretty tough.

It's our softest category.

We are really addressing that with our licensee partners and really working on the design and the quality with the offerings they're going to have the back half of the year to improve that trend.

Omar, this is Michael.

Just as a reminder, when Nancy came in, she really focused on YC apparel because that was a big category for us which we felt like needed the most improvement.

So, she went after that.

It's been performing well, and her focus over the last few months has really been focused on accessories and men's.

All right, great.

Thanks, Michael.

Thanks, Russ.

Betty Chen, Wedbush Securities.

Thank you.

Good afternoon, everyone.

I was wondering if we can talk a little bit about G by GUESS?

It sounds like it once again did very well in the quarter.

Could you share with us maybe some of the better selling categories or products at that brand?

And, I was curious in terms of store openings, what we should expect for G by GUESS this year?

And also, what you are seeing for that brand in Korea?

And related to that, I was just curious, what do you think happened in South Korea during the Q1 time frame?

I know that we have since strengthened, but do we think it was just a temporary pullback?

Was it weather?

Any insights would be really helpful.

Thanks.

Okay.

This is Russ.

G by GUESS was comping really well in the first quarter.

We really think we're really resonating well with that customer.

Denim did well across women's and men's, but overall within G by GUESS men's was the best category.

Just about anything we did in men's was successful during the quarter so we are happy with that.

And also, encouraging is the new stores that we've opened up for G by GUESS over the last six to nine months, which are actually outpacing the fleet as a whole which is really good news because there is typically a pretty long ramp-up time for new stores for G. With that, we're going to open up over 20 G by GUESS stores this year, and we're looking to keep expanding it next year as well.

This is Michael.

On the Korea question, for those of you who know that market for us, it's been a great business -- South Korea has been a great market.

We've got a very strong GM that knows that market extremely well.

What we saw happen in the first few months of the quarter, the weather didn't necessarily cooperate.

It was cooler than expected so that impacts our product assortment.

And also, it got very promotional with multiple brands and some of the local brands as well.

What we saw in April as the weather started turning and going into May, that selling improved.

We've actually had the opportunity to maybe take some additional market share.

We've got concession opportunities where we think we can expand some space.

We've adjusted our product assortment going forward to take a more layered approach to offset any risk in the weather.

Just feel good about the marketplace even though there is still risks there.

Still, the market softened up.

We feel like Korea is still a very good market, and the strength of the brand is holding up well there.

Dennis, could I just follow-up with a clarification question regarding the timing change in the deliveries in Europe?

Did you say that it is [related] to fall-winter merchandise?

Yes.

Last year, there was much more of a fall skew to the accessories mix for the fall-winter line compared to the apparel business.

This year, they have been aligned.

So, there is more -- compared to last year -- more of a winter component on the accessories business.

Between fall and winter, the winter product just naturally ships later on in the season.

Okay.

That's why we're going to see that $0.06 benefit Q3 versus Q2?

Just to be clear, the $0.06 includes both that and the expectation around a little bit of closer to the market sell-in because of credit.

Okay.

Okay.

That's very helpful.

Thank you.

Eric Beder, Brean Murray.

Hello.

Eric Beder, Brean Murray.

How are you doing today?

Hi, Eric.

Talk to us about -- let's look at Marciano by GUESS?

What are you seeing in the US markets there?

And, how are you seeing that in Europe [also impacting] and in Asia?

The Marciano stores in the US, it was a tough quarter for us.

The dresses we brought it didn't work that well.

But, we're bringing a lot of new products at the end of this month to reverse that trend, and we are also adjusting some of the opening price points that we might have taken up a little bit too far.

In Europe, the GUESS by Marciano product has been working pretty well in a lot of our stores.

So, it's has been great there.

What about using that -- I know you're doing that now in some of the US men's stores, you're rolling out some of that product there.

How is that working out?

That's doing well so far, and it's really something that we want to do directionally for the back half of the year to reinvigorate men's.

On the YC side, we did that dressy section which has been successful for us, but we want to replicate that on the men's side as well.

The Marciano product represents that.

Great.

Congratulations.

Diana Katz, Lazard.

Hello.

Thank you for taking my questions, and good afternoon.

Hi, Diana.

Wanted to know if you still expect to comp positively in the US in the fourth quarter this year?

And then also, just looking at guidance for the year, you took down your revenue guidance, maintained your operating margins.

I guess within the margin piece, where do you feel better right now?

Our goal is still to comp positively by the end of the year.

A lot of things that we are doing with products, we think is going to take us in that direction.

We're going to anniversary up against the price increases during the back half of the year last year, which we think is going to give us a great opportunity to improve our conversion trends.

Based on what we're seeing now, that projects very favorably towards the back half of the year, and traffic trends through the marketing that we are doing, we expect that to get better.

We are also up against easier compares as well.

With respect to the guidance, we brought the top line down and maintained the operating margin guidance.

Most of the -- or a big part of the change on the top line really relates to our assumptions around currencies, and the big drivers there were currencies.

We did recognize a little incremental risk in Korea.

Those are the largest components, actually.

Also, we took up the licensing business a little bit.

So, in terms of predicting that, I would tell you that currency is always the wild card on where that could land.

We've got pretty good visibility into the European business now.

We've got fall-winter booked, and that effectively takes us into the third quarter.

That is the biggest part of our wholesale bookings.

I think the big wild card for us is the comps, and as Russ just mentioned, we have got a lot of initiatives that are there to drive those comps.

We are investing a lot in marketing to bring that customer back into the store.

But, it remains to be seen how things play out.

And, it remains to be seen, too, what the environment is like and what the competition is doing.

That's probably a little bit -- the most difficult part of that business to predict.

Okay.

Thank you very much.

Thank you.

Margaret Whitfield, Sterne, Agee.

Good afternoon.

A couple of questions.

I wondered what the jewelry impact was in Q1 in terms of EPS?

And, whether or not that ends the situation there?

If you could give us an update on your focus on working with new partners in Japan, Brazil, and India -- that would be great.

Is the marketing budget going up any further from your last call?

Do you have any special events like you did in April with the thirtieth anniversary to kick off the fall season at GUESS retail?

And, when would Nancy's new lines for men's and accessories arrive in stores here?

Okay.

So, we're trying to keep track of all that, so bear with us.

The fourth cent was the answer to the first question on jewelry, and that should effectively -- there's probably a little bit left in the second quarter, but the second quarter is pretty small in comparison to the first and the third on the jewelry sell-in.

On the new market opportunities, we've talked about Brazil for a while, and Paul has been working with a team to identify a great partner.

We've gone through a list of names and feel like we've got someone that could be a great partner for us that we're excited about.

So, we're looking at what that opportunity might look like, but we just feel like that consumer and that marketplace could be a great opportunity for GUESS.

So far, so good.

Work in progress, but making great progress on it right now.

And then, as far as Japan, that's a market we're evaluating, but I know Paul and Maurice like it a lot.

It's a fashion market.

It's high-profile, and we're looking at our options there as well.

Most of the product initiatives are fall-holiday.

Though you will see some of the leather handbags that we brought in in our stores right now.

And, marketing plans?

The marketing plans aren't changed significantly overall from the last call.

What we'll do for fall, we'll certainly do some events.

We haven't finalized those plans yet though.

Thank you.

Janet Kloppenburg, JJK Research.

Hi, everybody.

Hi, Janet.

My first question involves inventory.

Dennis, I think it was up 11% at the end of the year, and it's up 11% now.

I'm just wondering given the top line weakness, should we expect it to be elevated this way going forward?

Or, how do you -- I know you broke it down.

I have the breakdown, but it still seems high relative to the revenue numbers.

When you think about revenue, and I mentioned this on the last quarter.

I said you'll probably see us up a little bit higher than we want to be for Q1 and Q2.

Part of that is because -- I'll break it down.

If you look at North America, we are in good shape in North America on inventory and feel good about that.

In Europe, we had the headwinds in the back half of the year so we've got a little bit of overhang regarding the European inventory.

But, we've got our outlet channel which is set up to absorb that inventory.

It clears through it very quickly.

Great margins in a brand-appropriate way.

That will start happening in Q2 and early Q3.

We also had some of our pre-fall line in Europe that came in a little bit earlier so we could service the marketplace.

And then, in Korea, same impact.

You're up a little bit because of weather conditions and some excess inventory.

We will treat that the same way as we did Europe and sell that through the outlet channel at a brand-appropriate way, good margins.

And then, don't forget, we are funding Asia with retail expansion and G by GUESS growth in Korea.

So, that's why those inventories are up.

But, I feel like our inventory position -- it's up a little bit.

But, very manageable, and you will see it normalize in Q2 and Q3.

So, at the end of 2Q we should see it come down a hair?

You may see it come down a little bit.

Q3 is where I really expect it to be where we want it to be because we still need the fall-winter Q2 timeline to clear through that product.

Just staying on Asia for a second, Michael.

I continue to be frustrated by the operating margin deterioration there, and I know you are investing in the business.

But, that infrastructure building has been going on now for several quarters.

I'm just wondering when you think that may stabilize, and there may be -- what the inflection point is on margins in Asia?

Janet, we talked about this on the last call.

That we will be continuing to invest in the infrastructure in China.

Our goal this year is by the time we get to the fourth quarter we could see some leverage on the SG&A rate in China.

And then move that forward into fiscal '14.

So, in other words, beginning in next year, we may start to see some improvement there?

What I'm saying is that this fourth quarter, not for the full year this year, in China we could see some SG&A leverage.

Then, the plan would be as we go into next year then we should have gotten to the size that we can grow the top line faster than the additional infrastructure investments that we would still need to make.

We won't be done, but we will start getting the benefits of some scale.

Yes, Janet.

That market is performing really well for us right now.

We had great growth in Q1, and we're seeing good momentum going into Q2.

I know we're investing in it, and it is probably taking a bit longer than you would like.

But, like Dennis said, Q4, we're feeling good about it and feel like we've got really good momentum in the greater China marketplace.

Just a little more clarification on trends in Europe.

Is it the accessory -- jewelry and accessory weakness that's really where you are seeing the sales declines?

And, what's happening in other categories in Europe?

This quarter -- because again, remember we are up against that last first quarter when Europe was still growing.

So, we saw declines in virtually all of the categories.

Jewelry was the largest because in addition just to the economic headwinds, we made the changes in the distribution there, and we haven't fully lapped that.

We don't see that turning until we start anniversarying that recessionary environment, which happens in the back half of this year.

In our stores in Europe, the accessory and footwear trends have actually been better than what we are seeing here in the US.

Is the product mix in different, Russ?

It's not significantly different.

It's just the taste of the customer there.

Okay, good.

Thanks so much.

Good luck.

Thank you.

(Operator Instructions) John Kernan, Cowen.

Hello.

Nice job managing through a very difficult environment.

Thanks, John.

I just wanted to go back to the licensing business is obviously a really high margin, great business for you.

It beat your expectations pretty handily in Q1.

It sounds like you're feeling better about that business for the rest of the year.

What makes you feel better about that business?

Is it inventory?

Do you feel better about the inventory that's in that channel?

Are you hearing something from your licensing partners?

What's going on there?

The increase -- we certainly were very pleased with what we saw in the first quarter.

Keeping something in mind that the licensing business is a business over which we have the least visibility because it's operated by a third party.

They were able to -- we were anticipating that we would see some headwinds given they are selling in the same environment, and we were very pleased with the results.

Handbags were much stronger than we anticipated.

They would be -- as were several other categories.

What you saw in the first quarter a big portion of the beat against our own guidance and taking up the year is flowing that, mainly flowing that through.

We do expect, based on what we're hearing from our licensees, that there are still some potential challenges.

They're selling into that environment.

So, we -- our guidance reflects the forecast that we're getting from our licensees.

Okay, great.

Going back to accessories real quick.

I know you are big in watches.

Have you heard anything about potentially this watch cycle slowing down?

Is that one of the categories you've seen a slowdown in within accessories?

Yes, our watch business wasn't that great in the first quarter.

As far as if it's a cycle, we think it's a lot to do with not having a lot of newness in our stores.

So, we are looking to really refresh the watch cases in the back half of the year to offer something different to our customers.

Okay, and then one last question.

Dennis, it looks like you got a little bit more aggressive in terms of share buyback in the most recent quarter.

What's the outlook for share count for the remainder of the year?

I'm not guiding assuming that there's any additional share repurchase.

I think what we are using on average for the year was a little bit -- assumes a little more dilution than we reported for the first quarter.

Dorothy Lakner, Caris & Company.

If we could go back to accessories for a second.

You said handbags were much stronger, but earlier, I think you'd said you were trying to address some issues with various licensing partners.

What are the other categories that you are looking to make improvements in, and when might we see that?

And then, secondly, just a general question on what you are seeing in terms of foreign tourist trends?

Both here in the US and also in Europe and Asia if you could just give us some color on that.

Thanks.

The most important accessory categories for us are our handbags, eyewear, footwear, and also watches.

It's all of those, especially the handbags and the footwear, that we are looking to make a lot of improvements with the design and the quality for the back half of the year.

In relation to the tourist trends, our tourist stores didn't get -- they softened a little bit during the first quarter.

It wasn't as great as we would have liked.

In Europe and Asia --.

I think in Europe they've been consistent.

I don't think we've seen an increase or decrease either way.

What we've heard is that the Europeans are [traveling] a little bit less through the States on their trips, and maybe they're staying local.

But, we haven't seen an impact in our stores materially one way or another.

The South American tourist is still strong.

Ladies and gentlemen, that does conclude the time that we have available for questions today.

Thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.