Guess? Inc (GES) 2013 Q2 法說會逐字稿

Good day everyone, and welcome to the GUESS Second-Quarter Fiscal 2013 Earnings Conference Call.

On the call are Paul Marciano, Chief Executive Officer; 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 Mr. Paul Marciano.

Please proceed.

Thank you.

Good afternoon and thank you for joining us today.

The second quarter was both rewarding and challenging at the same time.

With international businesses offsetting North America, we delivered revenue at the top end of our guidance we gave three months ago, and posted earning per share of $0.49.

In our international businesses, our performance was solid.

Both Europe and Asia exceeded our top-line expectation, despite stronger currency headwinds that we had planned, which also put additional pressure in our product margin.

Our licensing business also out-performed expectation, giving us continued confidence in the strength of our brand worldwide.

North America was our most challenging business, where traffic was down, specifically in tourist locations.

In Europe, we exceeded our revenue objective even as the micro economic environment remained uncertain there, especially in the south, where fall-off in consumer confidence has certainly affected store traffic.

We continue to make strides in growing our business outside of our more developed market of Italy and France.

Excluding these two markets, revenue increased roughly 8%, and both Germany and Russia posted double-digit gain in the quarter.

We were pleased with our retail store performance in Europe, where overall comp improved from the first quarter, and we experienced an increase throughout July.

We continue to see Europe with significant white space in the region, and we plan to optimize on multi-channel distribution capability and pursue growth in many markets where our brand is under-distributed.

In Asia our brand continued to gain traction, and we exceeded both the top and bottom-line expectations for the quarter.

In South Korea, both new-door expansion and positive comp helped to drive double-digit top-line growth in the quarter, a big improvement from the first quarter.

So far this year, we have opened 47 stores and concessions in that region.

Our team executed well in that period, and we continue to be optimistic about the potential for G by GUESS in South Korea, where we have already opened 60 stores and concessions.

In China, our business grew by 40% in the quarter, fueled by strong positive comp.

We ended the quarter with 161 stores in concession in this very important market for us.

Our goal is to expand another 45 locations by the end of this year.

Now, North America retail was clearly a disappointment for us.

We did not experience the result that we expected.

The environment continued to be very promotional and with less traffic, especially during the second half of the quarter.

The summer months brought a sharp decrease in visitors from Europe in these stores.

Business in our tourist locations and especially in accessory stores were the least-performing in the chain.

These contributed to a comp-store sale that fell short of expectation.

Regardless of traffic or tourist, the most challenging category continued to be accessories.

We believe that the product line lacked variety, key volume drivers, and did not reflect the improvement we have made in our product line.

We are committed to making the necessary change to reverse this trend, and are working with our partner's licensees to improve the product offering in our stores.

In fact, the current handbag assortment in our stores is strong in my opinion, and should improve the trend in that category from early this season, and I'm confident of that.

Our women apparel line continues to be the best-performing category in our full-price stores.

The customer has responded very well to the woven top assortment that has been featured prominently on our floors, while our mixed-top business was soft and did not meet our expectation.

We are addressing that with a basic needs program at entry price.

Our denim line also continued to be successful in all our businesses, thus we believe we have new opportunities in denim with new fit and printed denim.

Our core customers is responding to strategic decision to improve and elevate the product quality and position in the market place.

Other international places, large markets like Japan, Latin America, India, and Eastern Europe, remain key markets for Guess, where we have light presence to address by either joint venture or direct operation.

Our goal is to carefully invest in these new markets where we see tremendous potential for growth.

As we move forward, we feel that we are well-positioned to carry out our strategic initiatives.

We have an experienced Management team, and we have been adding to that with two senior executives in e-comm and President of Licensing Worldwide.

As a team, we're focused on growing our business and making investments that optimize our return, with plans to develop and invest in great products that will resonate to our customers and solidify our position as a global lifestyle brand leader with high-quality products and a long-term strategy, with discipline of what is under our control.

The first quarter we invested $140 million to re-purchase more than 5 million shares, and the last quarter, a new $0.5 billion re-purchase program was put in place.

With that, I will pass now to Dennis to walk through the Q2 numbers.

Dennis?

Thank you, Paul, and good afternoon.

Let me start with a reminder that in last year's second quarter, we recorded a $19 million, or $0.19 per share, European logistics settlement charge.

During this call, all of our analysis will be on an adjusted basis, excluding the settlement charge to provide relevant period-to-period comparisons and better operational visibility.

Now getting to this quarter's results.

Second-quarter diluted earnings per share reached $0.49, within our expectations and down 42% compared to last year's adjusted earnings per share of $0.84.

Net earnings for the second quarter of fiscal 2013 declined 45% to $43 million.

Second-quarter revenues declined 6% to $635 million.

In constant dollars, revenues were up slightly to last year, with growth in Asia and retail expansion in North America and Europe offsetting negative retail comps and lower European wholesale shipments.

Total Company gross profit declined 15% to $252 million, and gross margin decline 430 basis points to 39.6%.

Product margins declined mainly due to the unfavorable impact of currencies, primarily in Europe, along with Canadian pricing changes and product cost in North America.

Our occupancy rate increased, given the negative retail comps and retail mix.

SG&A increased 5% to $194 million, compared to last year's adjusted SG&A, and our SG&A rate increased 340 basis points to 30.6%.

The increase resulted from planned higher advertising and marketing investments, along with higher store selling expenses given our larger store base, offsetting the favorable impact of the weaker euro.

In Europe, we also increased our bad dept provision, mainly related to our Greek distributor, which impacted the quarter's EPS by $0.04.

Adjusted operating profit declined 49% to $57 million, which includes a $5-million unfavorable currency translation impact.

Operating margin declined 770 basis points to 9%.

Other net income was $6 million and mostly represents net re-valuation gains on foreign-currency contract and balances resulting from the weakening of the euro during the second quarter.

Our effective second-quarter tax rate was 32%, compared to our adjusted tax rate of 31.4% in the prior year.

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

Moving to segment performance, in North America retail second-quarter revenues decreased 3% to $253 million.

Traffic declines and a softer accessory business drove an 8.5% comp-store sales decline that more than offset the 6% square footage expansion from last year's second quarter.

Operating income declined 49% to $17 million, and operating margin decreased 600 basis points to 6.6%.

Gross margins were negatively impacted by Canadian pricing changes and product costs, along with a higher occupancy rate given the comps.

Our SG&A rate increased due to the de-leveraging of our store expenses, as well as increased advertising and marketing investment.

During the quarter we opened 13 new stores and closed five, ending the quarter with 511 stores in the US and Canada.

In Europe, revenues declined 15% to $247 million, while in local currency the top-line performance exceeded our expectations, with revenues declining 2%.

We grew our business in newer markets, including Germany and Russia, so this growth was more than offset by declines in Italy and France.

Our comp-store sales results, which were down in the mid-single-digits range, were better than expected, and a sequential improvement from the first quarter.

In addition, the anticipated timing shift of wholesale shipments into the third quarter did not materialize to the level we had anticipated.

New store expansion continued to drive retail revenue growth compared to a year ago.

At the end of the second quarter, we directly operated 227 retail stores, which include 26 stores that we acquired from one of our licensees during the second quarter.

Overall, wholesale revenues were consistent with our expectations, declining in the quarter, as our customers continue be impacted by the weak economic conditions in our more mature markets.

Operating income decreased by 61% to $25 million.

Operating margin declined 1200 basis points to 10%.

Gross margins declined mainly due to the weaker euro and the occupancy rate increase due to retail expansion.

The SG&A rate increased due to higher store-selling expenses, given the retail expansion, higher advertising and marketing investments, and the Greek bad debt provision.

In Asia, second-quarter revenue growth exceeded our expectations, increasing by 21% to $67 million.

We posted positive comp and double-digit revenue increases in both our greater China and South Korea markets.

Operating profit decreased 17% to $4 million, and operating margin declined 280 basis points to 6%.

Gross margins decreased slightly, as product margin improvements were more than offset by an occupancy rate increase.

Our SG&A rate increased, given additional investments in advertising/marketing and new door expansion.

In North America wholesale, second-quarter revenues declined 5% to $42 million.

Operating profit decreased 27% to $8 million, and operating margin declined 550 basis points to 18.5%.

The expected decrease in operating margin was driven primarily by product cost inflation, Canadian pricing changes, and the impact of unfavorable currency fluctuation.

In licensing, revenues declined 4% to $27 million, and operating profit declined 9% to $23 million.

Now turning our attention to the balance sheet.

We ended the quarter with cash and short-term investments of $282 million, down $148 million compared to last year's $430 million.

This year-over-year decline was impacted significantly by $232 million in share re-purchases during that time, including our $140 million re-purchase of 5 million shares in the second quarter.

Second-quarter operating cash flow was $8 million, compared to $41 million last year.

The second-quarter re-purchases favorably impacted Q2 EPS by $0.01.

Accounts receivable declined 15% versus last year to $335 million.

In constant dollars the decrease was 4%.

Consolidated DSO's declined slightly compared to a year ago, as improvements in North America and mix offset a modest DSO increase in Europe of roughly a week.

At the end of the quarter, about 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 $381 million.

Most of the increase supports our international store growth, expansion of our G by GUESS businesses in the US and South Korea, as well as early receipt of current-season product in Europe.

We have carry-over product in Europe that we plan to sell through our outlets, and in North America, our inventories are higher than planned, given the shortfall we experienced in comps.

During the quarter, we invested $42 million in CapEx net of tenant allowances, primarily for new stores and remodels, as well as the stores we acquired in Europe.

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 September 21, 2012, to shareholders of record at the close of business on September 5, 2012.

We are also currently working with our global banking partners to exercise the accordion feature of our existing credit facility to increase its capacity.

With that, I will pass now to Michael to give an overview of our recent business trends, and provide outlook for the third quarter, and an update for the full fiscal year.

Michael?

Thank you Dennis, and good afternoon.

As we look forward to the rest of the year, our general expectations for our international businesses remain very similar to what we laid out a quarter ago, but we are now planning with a weaker euro.

In Europe, retail comp trends have been slightly better than we expected.

In our wholesale business, final fall-winter orders were very consistent with our plans, and both cancellation and re-order rates have been trending at expected levels.

We do expect slightly weaker product margins versus our previous expectations, due primarily to the current weaker euro.

For the full year, we continue to expect euro revenues will grow in the low single digits.

Assuming the euro remains at prevailing rates, we now expect US dollar revenues will decline in the high single digits.

For the third quarter, we continue to plan with wholesale headwinds and negative retail comps, so not as severe as in the recent past, as we will have finally anniversaried last year's significant downturn in consumer spending.

With those factors, along with a larger retail store base, we are expecting third-quarter euro revenues to grow in the low single digits, and for US dollar revenues to decline around 10%.

In Asia, our business trended slightly stronger than we had anticipated for the second quarter.

For the full year, we continue to expect revenues to grow in the low to mid teens range.

For the third quarter, we expect revenues to grow in the mid to high teens range.

Now moving to North America retail.

We have made progress in our women's apparel, and we are working hard to improve the product and trends in our accessories business.

We will also continue to invest in marketing initiatives to connect with our consumers and invite them into our stores.

We feel these investments in marketing and product may take longer than we had originally expected to pay back.

So far for the third quarter, our comps have been trending down in the high single digits, and we our planning third-quarter comps to continue in that range.

Given that assumption, we are planning third-quarter revenues to be down in the low single digits.

For the full year, we are now assuming comps will decline in the mid- to high-single digits, and that revenues will range from low-single-digit growth to a low-single-digit decline.

In North America wholesale, we continue to expect full-year revenues to be roughly flat, and for third-quarter revenues to decline in the low single digits.

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

In the third quarter we expect modest consolidated product margin declines, as the benefit from the relief of cotton prices is offset by currency headwinds, along with targeted promotional activity in North America.

Further impacting gross margins, we our planning with a higher occupancy rate, mainly due to the North American retail comps and overall retail mix.

For the full year, we expect to see a similar gross margin pattern.

With respect to SG&A, we expect the SG&A rate to increase in the third quarter, due primarily to the additional investment in advertising and marketing, along with the impact of the negative comps and lower wholesale shipments on our fixed-cost structure.

Considering those factors, for the third quarter, we expect consolidated revenues in the range between $620 million and $630 million; operating margin between 9% and 9.5%; and EPS in a range between $0.42 and $0.46 per share.

For the full year, we are now expecting revenues to range between $2.62 billion and $2.65 billion; operating margin between 10.5% and 11%; and for EPS in a range between $2.15 and $2.30 per share.

The vast majority of the change in our guidance, which now also includes the impact of last quarter's share re-purchases, relates to our North America retail performance.

Our quarterly and full-year guidance assumes foreign currencies remain roughly at prevailing rates and assumes no further share re-purchases.

Lastly, for the full year, we've reduced our CapEx plans, and now expect to invest between $110 million and $120 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)

Erinn Murphy, Piper Jaffray.

Great.

Thank you for taking my question.

Paul, I was hoping you could maybe talk a little bit more about your comments on Europe just being a little bit more stable.

If you could maybe just help us understand some of the key country trends, maybe -- you talked about Italy and France being still weak, but maybe focus on Spain and just some of the other markets there?

Perhaps just share your perspective on both spring and summer bookings in those key markets?

How are they trending right now, and can you remind us how at this time last year the spring-summer bookings were?

Thank you.

Yes, thank you.

I think what's happening in Europe, it's positive in one hand and negative in another, is mainly accessories.

In Europe the accessories, especially bags and footwear, has been doing well -- in fact, better than what we expected.

It's the opposite here, on a sense that we feel that the line became too, I would say monoline, and very clean, very -- I mean elegant.

We have a base of bags that always has included a good portion of fashion.

The result is what we see now, and I think that Europe accessories total has really been doing well compared to US.

Now if you go to the stores right now you will see a change of the line, and continue to change even more at the end of September, beginning of October for holiday.

That's one.

What was the other part of your question?

She had asked some color on some of the country performance, and I can help you with that.

With the exception of Italy and France, and you heard Paul say on the prepared remarks that everything else was up 8%.

If I exclude those on a year-to-date basis, the rest of the countries are up 6%.

We had strong double-digit growth in Spain, which has been a really good market for us.

We've opened stores there and those stores are among the most profitable stores that we have in the chain in Europe.

As we said Germany has been growing.

Russia grew, the Netherlands grew.

UK, we saw growth in there.

The business has been performing as we had expected.

The fall-winter orders came in as we expected.

We're not fully through spring-summer, but we're expecting to see an un-easing of the headwinds, and so far about three-quarters of the way into the shipments we are seeing the headwinds lighten on the spring-summer 2013 orders.

Again, the headline for us on Europe is it's performing at or even slightly better than we had expected thus far this year.

Randy Konik, Jefferies.

This is [Vishar Agarwal], filling in for Randy.

How are you?

I was just wondering about your strategy to improve traffic in North America.

We had expected the higher marketing spend that you have budgeted for this year to help bring that metric up, so can you just remind us when the higher marketing campaign kicked in, where you think it's falling short, given the weaker traffic trends, and also what kind of changes you expect to make here with the traffic?

We really just got started with the marketing in North American retail in Q2.

The big campaign we did was centered around the 30th anniversary, and that took place in May which is when we had clearly the best traffic of the entire quarter.

It's really going to be ramped up in Q3 and Q4.

We've got a Denim Authority campaign going in our stores.

We've got our affiliations with Tiesto and Elin Kling that we're going to be bringing to life, and you'll see that in the windows.

We're going to also have a lot more in-store events.

Mailers is something we're going to push a lot more in the back half of the year than we did in Q2 for both fall and for holiday.

Also to add to that -- this is Paul.

Definitely because of the presence is so strong in Europe during the years that when the euro was very strong, we had a huge disproportionate numbers of customers coming from Europe to shop in our stores in tourist locations, what we call tourist locations is really New York, Florida, and California, and Las Vegas.

We saw through credit [comps performed] that the European has been really in the last two months, declining a lot compared to the year before and the year before, for two reasons -- obviously one is a weaker euro, but also because their own problems in Italy and France.

Clearly that was -- but you combine that with a line of accessories who has been not exactly complete as we wish it would have been complete, that gives you the real slow traffic we have experienced.

We are definitely focusing on that, and we have definitely seeing some change even in the last two weeks.

Great.

Thank you.

Thank you.

Robby Ohmes, Bank of America/Merrill Lynch.

Thanks, good afternoon, guys.

Actually two quick questions.

The first question, I was wondering if you could give any color in North America on your -- the breakout, a little more detail on how the factory stores were doing versus the full-line non-tourist retail, and an update on the G by GUESS stores, and in Marciano?

The second question maybe a question for you, Paul is just on the accessories business, could you remind us the structure and how much of that business and which parts our done in-house versus with a licensed partner, and if you're thinking about maybe changing the structure so that you don't get in a situation like this again?

Yes, so by concept, G by GUESS was the best-performing concept right there with the factory stores, which they did soften, because they're very reliant on international tourists during the summer.

GUESS was kind of in line with the entire chain, a little bit softer.

The accessory stores and the Marciano stores were the weakest.

For me, for the licensees we have all the categories basically the most important which represent I would say 90% of the licensing product, which is handbags, footwear, watches and jewelry -- they're all licensees.

The majority are more than 20 years.

It's not that the situation was or is a bad situation is a direction that we as a licensor give them as direction to say we want the line may be a little bit more higher-end because we want to follow what we are doing in apparel.

Maybe we went a little bit too far on making the line monoline maybe just too much.

I would not blame them, I would take 50% of that blame from my direction.

The footwear is doing well.

The watches, we have been also, I think, mainly suffering about the lack of traffic from Europe.

I think that this is -- we don't see -- unless something exceptional comes up that we decide to make a merger by one of our licensees, but we don't see anything like that happening in the near future.

Got it.

Thanks very much, Paul.

Thank you.

Omar Saad, ISI Group.

Thanks, good afternoon.

Paul, I wanted you to talk about what you're seeing in the marketplace in North America?

You're seeing some of the apparel fashion companies are doing better than others.

There seems to be a little bit more of a shift towards faster more contemporary fashions, I don't know if you have a view on that.

Are there things you can do in your supply chain to maybe make the stores a little bit more responsive and reflective of the latest trends, or how you think about where the business fits in throughout all that?

I think you're right on.

You're right on because I think you have visited the operations in Europe, and we run operations a little bit differently in Europe than we run in US.

It means that we have much more of immediate -- what we call immediate delivery, like a short-term delivery.

Definitely we see a tick up on Europe performance because of the latest fashion we put at the last minute that we planned just eight weeks before, and not like six months before.

We are definitely going to address that, and we are doing that right now in US.

It's exactly the right comment right now is that consumers are looking for more fashion, more last-minute thing instead to just the basic classic expected line.

That's one.

Two, I think what is also clearly -- I don't have to tell you that, you know that -- is the malls are becoming more and more aggressive, and more and more promotional -- but which also, the factory malls.

It used to be just the malls, now the factory malls are becoming extremely aggressive, and this is new.

On my view this is new, maybe I'm not aware about the whole market, but it's new for me.

I'm not talking about low-end brand, I'm talking higher brand getting really aggressive in factory malls.

We have to continue to adapt to seize the surrounding environment and the competition and adjust to that.

That's what we're seeing right now, and trust me, we're working on that every single day.

Omar, this is Michael.

To Paul's point, we in our supply chain have set up what we call an Immediates group, and they are working on what we consider more trend-right fashion items that you can get in the store in a much timelier manner than we have in the past.

Even some of that production's done locally, or done in North America, so you can hit those stores in a kind of four to six weeks and hit those trends where you need to.

Thanks, guys, that's really helpful.

Good luck.

Betty Chen, Wedbush.

Thank you, good afternoon.

I was wondering if you could talk a little bit about the Canadian pricing changes you mentioned?

Forgive us if we didn't have it in our notes earlier, were there some changes that happened the second quarter?

Are there any additional changes that we should think about for the second half or next year?

Dennis, I think you also mentioned something regarding your Greek distributor?

Was it just something related to the macro environment over there that there was this kind of one-time issue with them?

Lastly, in terms of accessories, Paul, appreciate the color you gave earlier.

How would you think about it by category or by classification?

When you have to think about shoes versus bags versus jewelry or watches, are some of those maybe going to be evident in terms of improvements faster than others when we think about the upcoming deliveries?

Thanks.

Hi Betty, this is Russ.

In relation to the Canadian pricing, this is something we started at the beginning of the year, but the impact has become more significant in the second quarter.

We are now pricing a lot of our product up there at parity with the US.

Those exchange rates have been at parity for about three years now, and the customer is very educated, and we felt that the old model was just not sustainable for the long term.

Our prices are still a little bit higher in general, but instead of that 15% gap we've got maybe a 5% gap as we look at the whole store in total.

We do see trends up there starting to improve on the sales.

It's trending in Canada now a little bit better than the US this month, and we haven't seen that in a while.

Hi Betty, it's Michael.

On the Greece distributor, it was a one-time event.

As you guys know, Greece has been in a very tough economic environment, and we had a long-term partner who came to us and said I can't make my payments, I can't pay.

We're trying to work through a solution, but we felt like it was a prudent thing to do to go ahead and take the charge and see it as a one-time event.

For me, Betty, about accessories, I will see -- I will go by the one you will see the improvement right away right now.

In fact, if you go to our stores, any of our stores, our key doors, you will see the handbags trending to what I was mentioning, but I think the real big change will be end of October.

I'm sorry end of September, beginning of October, which is early delivery of holiday.

On the shoes, also you will see a great assortment of boots.

We're going to do major windows of boots right now in the next week or two.

Watches, the cycle is a little bit longer because it is a cycle of eight months.

Holiday will be in full speed, which I'm talking now Thanksgiving, not before.

I don't see that before that.

Definitely these are the three largest category.

Two categories I just mentioned, handbags and shoes in Europe, are the opposite right now.

They're doing really well.

Very helpful.

Thank you, Betty.

Diana Katz, Lazard Capital Markets.

Hi, thank you for taking my questions.

My first question was again on the North America comps.

Can you help me understand what's getting worse in 3Q versus 2Q if you expect a slightly weaker comp in 3Q at down high-single digits?

Maybe you can go into some of the comp components in 2Q between traffic and conversion, as well as the differences between men's, women's and accessories?

Finally, of the $20 million planned shift you had in Europe, how much of that did not materialize in the quarter?

Hi Diana, this is Russ.

As far as the comps, we're not expecting Q3 to get worse than what Q2 was.

Our guidance was for it to be relatively in line.

The way it broke down during the quarter as far -- traffic was the biggest issue we had.

It was down 10%.

Again, it was improving in May from where we were in Q1, but it deteriorated pretty sharply once we got into the summer months.

Conversion was up in the quarter, particularly in July.

Our AUR overall, it was flat in the US.

It was up slightly in the GUESS brand, and it was down slightly in the moderate brand.

With respect to the timing shift in Europe, we had said that we expected about $20 million, or roughly $0.06 a share, that might shift out of Q2 into Q3, because we were anticipating maybe some slowdown on credit.

We didn't see that, which is good.

We did -- that $0.06 became $0.02, so we were about $0.04 stronger than we had anticipated going in.

Great.

Thanks very much.

David Glick, Buckingham Research Group.

Hi.

Good afternoon, this is Jonathan Art in for David Glick.

A follow-up question on marketing expense.

Can you remind us where you expect marketing expense to represent as a percentage of sales this year?

Also, how should we think about marketing expense next year?

I believe you were initially planning for a multi-year ramp starting this year?

Should next year still look like another catch up year?

Thanks.

No, what we -- if you go back and look at the history, we were much lower than a lot of our peer group.

This year we'll probably spend somewhere in the neighborhood of 2.5%, maybe a little bit less than that.

Of course, don't forget that our licensees are also investing in marketing for the brand, so the impact that's actually spent is larger than what hits our P&L.

Going forward, what we've said, and what we haven't specifically talked about next year is that we want to go through and see what works, and what's the appropriate level of spending, what are the initiatives that work, and what are the things that we want to modify going in.

We're going to look at it based on what kind of returns that we think we're getting, and set next year and talk about that when we talk about the full year.

It's still fluid for us.

Great.

Thank you very much.

Margaret Whitfield, Sterne Agee.

Good afternoon, everyone.

I'd also appreciate some color on how the comps broke out in quarter two between the women's business, which you said was the best, the men's, and the accessories, and if it changed at all thus far in August, including what the traffic trends look like here in August.

Maybe Paul, if you can elaborate on anything new in terms of your plans to develop a joint venture in Brazil, or going into Japan or India?

Finally for Michael, any update on average unit cost and sourcing?

I'll start off with the performance by category.

In our full-price stores, women's was our best-performing category.

It was down low-single digits still, but much better than the traffic base that we had coming into the stores.

Men's and accessories was the weakest.

Men's was still soft in the quarter, however if you look into what we've seen so far this quarter, men's is really the big change and we saw men's start to turn around.

We are encouraged by that.

Overall traffic for August so far is better than last quarter, and that's after a particularly rough first week.

Margaret, for Brazil and Japan, Brazil we have the final stage -- I'm talking like a matter of days -- to close a joint venture in Brazil.

We have a large company there, and the announcement should be on in the next two weeks.

Japan, I will be there in the next four weeks to do the final tour, and we will most likely, 90% sure, we will go direct in Japan, like we did with Korea, and like we did in China, which were both of them before that licensee.

Then you have India.

We have a distributor right now with an option to become a joint venture in the next two to three years.

We will evaluate that in next two years, if we go joint venture or not.

Finally, I think we don't talk about that, but there is another continent existing somewhere that we have not expanded, and that we have a big demand because we are such a strong brand in South Africa, is the rest of Africa.

We become -- a lot of people demand the product in African countries who are very strong financially, but just concerned about the stability politically of these countries.

That's your overview quickly about the rest of the world.

Hi Margaret, it's Michael.

If you look at the back half of the year -- and we've been consistently saying this -- we did, last year we felt like we did a really good job managing the cotton crisis, and average cost, we think we're going to see some benefit of that in North America this year, even though we had a good year last year.

We believe we're going to offset a lot of that, if not most of it, with some of the more targeted promotional activity you're going to see in North America for the back half of the year.

When you think about Europe, as the euro gets weaker, that actually works against us from a margin perspective, because you're buying in dollars.

You'll have a margin impact on your product in the back half of the year in Europe.

All that should offset.

You may see us be kind of flat to down a little bit, though.

One final question -- what percent of North American sales are to tourists?

If you look at it in the summer months, it's in the mid-30%s, it's really significant.

Yes, and if you look at it from a full-year perspective, it's still in the mid- to high- 20%s.

Thank you.

Thank you, Margaret.

(Operator Instructions)

John Kernan, Cowen.

Good afternoon, guys.

It seems like inventory is obviously a little bit higher than you'd like.

What's the -- Dennis, how are you planning that into the back half of the year?

Where do you think it will finish by the end of the year, and how aggressively will you use your outlets, both in North America and Europe to clear some of this inventory?

Yes, this is Michael.

On the inventory, if you think about it inventory is up, and I'll kind of walk you through the reasons why.

You've got the G by GUESS growth in North America and Korea, that's part of it.

You've got the European retail expansion, as well as China, that's part of it.

You've got the timing of some shipments that came in earlier than we anticipated for fall/winter product in Europe, and you've got a little bit of excess inventory in Europe.

In North America, as Dennis said, the comps didn't quite perform as we had expected.

We've got a great outlet program in North America and in Europe.

They're set up to help clear product, and as we also said, you'll see us probably get a little bit more on focused on targeted promotions, which should clear some of that product out as well.

You should start seeing the inventories trend down in Q3, and a little bit more back in line with sales.

Okay.

Given some of the operating margin declines, which are geographically both in Europe and North America and now Asia, would you ever consider, have you thought through slowing square footage growth in some of your own stores and focusing a little bit more on profitability or is the square footage growth story geographically going to continue into 2013?

Thanks.

I think the square footage growth -- you really need to look at it market by market, and then within markets like the US, concept by concept.

Where we see the opportunity here is with G by GUESS, which is a very young concept, it's done well in its history, and we see a lot of white space for that.

To a much lesser extent, there's still some opportunities in the other concepts in North America.

You'll see where we're opening our stores in Europe in the markets where we're getting really good returns, and where we see a lot of white space.

Germany is a country we're opening stores.

Spain, I believe I said earlier, that it's one of our most profitable in terms of the store portfolio.

We're really looking at it market by market and concept by concept where we see opportunity.

Okay, great.

One quick maintenance question.

Dennis, what's your cash cushion?

Obviously, there's a fairly aggressive share re-purchase plan in place.

What's the cash cushion you'd like to have on the balance sheet?

We've never particularly articulated that specific number.

We look at a number of things -- where we are in the cycle as we go through the rest of the year.

This is a part of the year where we will accumulate a substantial part of our cash flow in the year.

We look at where we are on the timing.

We look at what other peers are doing, and what other companies are doing, and we like to leave some cushion on the balance sheet, because we've operated that way historically.

We also have cash overseas, so not all cash is created equally in the total Company.

We haven't specifically said what the number is that we manage to.

We do like to keep dry powder both in terms of cash position and access to other credit for other initiatives.

Okay, thanks.

Good luck.

Thank you.

Dorothy Lakner, Caris and Company.

Thanks, good afternoon everyone.

To go back over a couple of things, on the inventory over-hang or carry-over you have in North America, are you kind of keeping that going to run through, run that through your full-price stores, or does some of that go to outlets?

How is that going to sort itself out?

On the accessories again, I think Paul, you were sounding as if things are -- you do see better product in the stores as we speak, but we'll see more impact in the fourth quarter or holiday relative to the third quarter.

Wondering if I'm reading that correctly?

Looking forward, you do have some diminished impact from the tourist stores as we move through the year.

Does that get bigger in the fourth quarter, or is it kind of -- does it continue at that lower rate in both the third quarter and the fourth quarter?

Thanks.

Yes, first on the inventory levels, some of it's going to clear through the full-price stores, but I think you're going to look at more of it going through the outlet stores.

In particular, the accessory sales have been soft, so we've got that to deal with.

The good news is with accessories they tend to respond really quickly when you do choose to do mark-downs, and we do have the right to return some of those to our partners in some cases.

So you will have a considerable amount of new product in the stores, it won't just be the mark-down product that you're dealing with?

Yes, that's correct.

We'll still have new product for fall and for holiday hit, as we had originally planned, and in factory as well.

We had planned some of this.

We had planned to send more of the full-price product through the outlet channels this year more than we did a year ago.

Okay.

Now your question on the tourists.

The impact of the tourists as far as the penetration is highest in June through August, and then it becomes less through the balance of the year.

With that being said, it should impact us less.

One of the things we saw that was interesting with the Europeans is that traffic wasn't down a lot during the first half of the year until we hit the summer months being June, and it dropped off a lot, which is probably due to relying more on families and people traveling for pleasure than they did during the first half of the year.

So are you sort of seeing some transfer -- people who were coming here and shopping here from Europe are now just shopping in their local markets?

In fact, we have a large office in Florence and a large office in Lugano, which is at the Italian border, and all -- most of the associates and people working in offices in both of these places which is by hundreds -- none of them are traveling overseas, they are all staying in Italy.

I mean, that is significant.

That could be also that the fact that we are doing better locally there than what we expected on a sense of all the accessories and all that.

We see that on our own people who do not come to America on vacation, we used to see them coming here in the summer, and we don't.

Yes.

We're still seeing our traffic hold up with South American customers, which is an important component our base.

For your question about the accessories, Dorothy, is I think what I see now is much better, especially because handbag is such a large category for us.

I reviewed and approved of the line for holiday and spring, and I just finished to shoot the campaign, the spring campaign of accessories -- it's one of the best I've ever done, I think.

It will be in the magazine in December 10, but I think that the line will be very well received.

I'm confident in that.

Okay and just one more thing, a little color on the marketing, trying to bring the traffic up in North America.

What are the kinds of things we are going to be seeing going forward?

The big thing is to create a buzz around our stores, doing more in-store events.

Like I said earlier, we've got Tiesto, and we're going to feature a capsule of his product.

We're going to feature that in the windows, as well, and more mailers.

I think that they're better mailers before.

We're also sending out the mailers -- not just to our existing store base, but we're going to use it for prospecting for new customers.

Also for me on advertising, direct advertising, I stopped the last 12 months to really put a good portion in beside the print media to advertising digital media, which is I think a natural right now.

Do you think things kind of fell off after the big 30th anniversary campaign?

If you had to do it all over again, would you have kept up a more sustained marketing pace?

Do you think that would've made a difference?

I think we did.

The 30th anniversary was a big one, because we put from the windows to Claudia Schiffer to every magazine with the 30 Sexy Years was a big impact.

It was global, too.

It was global.

We did that all over the world.

I think really the question for us is two big factors -- if you tell me what are the two big factors we'd describe right now for North America, what went not in the right direction, is a very heavy unusual promotion on a back-to-school time, which is too short for me, and then the traffic of tourists.

I mean it's when the euro is at $1.50, and when it's at $1.22, $1.23, that's a big difference.

Sure.

Yes, and we saw the 30th campaign have an impact globally.

If you looked on all the regions of the world, we actually saw traffic in comps improve in the month of May when it was really going.

It had an immediate impact on that.

To Paul's point, we're now getting ramped up for Q3 on a lot of the other initiatives, as well.

Okay, great.

Thank you.

At this time I'm showing no further questions in queue.

I would like to turn the call back over to Mr. Paul Marciano for any closing remarks.

Yes, thank you for participating in our call today.

I want to just repeat what I continue to always say.

Brand is what drives our Company since day one day after day.

I think this time again the same time we have to adapt balance between competition, store performance, profit margin, cost; but always to keep in mind that the brand supersede everything.

We have to always think about that and that's why we want to be here in ten years from now to celebrate the 40 years, not to celebrate 31 or 32 years.

We want to celebrate 40 and maybe 50, and why not more?

That's what we are looking at, and that's why we are here every day for.

That's it, and we will see you next quarter.

Thank you very much.

Thank you.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation, you may now disconnect.

Have a great day.