Guess? Inc (GES) 2013 Q3 法說會逐字稿

Good day everyone, and welcome to the GUESS?

third-quarter fiscal 2013 earnings conference call.

On the call today are Paul Marciano, Chief Executive Officer; Dennis Secor, Chief Financial Officer; Nigel Kershaw, VP Finance and Treasurer; and Russell Bowers, Chief Financial Officer of North America 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 and annual reports filed with the SEC.

And now I would like to turn the call over to Mr. Paul Marciano.

Thank you.

Good afternoon and thank you for joining us today.

Our third quarter earning were consistent with our guidance.

However, we did experience some pressure on our product margin during the quarter.

Even as we continue to face uncertainty in the macroeconomic environment around the globe, we were able to offset much of that with lower expenses than expected and delivered earning per share of $0.43 for the quarter.

In our North American business, our comp trends have improved since the second quarter.

We saw strong performance in the third quarter from our men apparel line, which was the best performing category in our stores.

Women came short in knit top and outerwear due to warm weather.

Accessories improved during the quarter but continued to slightly underperform.

However, we have seen a strong recovery in our accessory business during November, specifically in the back half of the month, including Thanksgiving weekend.

I believe that this momentum, together with the improvement to our product assortment, will carry on to the holiday.

Going forward, we'll continue to improve the performance of our stores.

To deliver this, we are shortening our development cycle and a large portion of our next year buy has been left open to quickly react to trends.

Our strategy is to be a fashion leader in product categories where we have a competitive advantage such as denim and dresses.

Finally, we're evaluating our real estate carefully and plan to close some underperforming stores during the fiscal year and next year.

We continue to make significant marketing investment to engage and connect to our existing and potential customers.

This quarter we have increased our marketing and advertising by approximately 50%.

We have seen tremendous growth in social media where we almost doubled our fan base from 2.3 million, 4.3 million, year-to-date.

We are also very pleased with the result of our global collaboration with Tiesto, a top world-known DJ.

We see such effort contributing to the progress.

In our e-commerce sales which were up double-digit in the quarter and up 33% over Black Friday weekend.

In Europe, we made progress in our retail business even as the overall economic environment has worsened.

The wholesale channel in Europe and Italy specifically is generally more fragmented and the customer base is more vulnerable to contraction in this economic environment.

We are seeing signs of this contraction with our Italian multi-brand and wholesale customers in our next season booking.

On the other hand, in our stores in Europe we continue to build on the comp momentum for the second quarter and achieved flat comp for the third quarter.

We were also very pleased with the growing business in Russia and Germany, two major markets in Europe.

Russia specifically was up more than 100% in the third quarter and next season orders are up 50% and 18% also in Germany.

In Asia, we grew revenues by 16% and opened 21 stores and 45 concessions during the quarter.

Our South Korean and Greater China business both posted growth rates in the double digits.

During the quarter we signed with a strategic licensing partner in China.

They are well-established retail operator with more than 2,400 stores across China.

And they will help accelerate an expansion in the north.

I'm confident about the expansion and we are accelerating new markets for the GUESS?

brand in India, Russia, Poland and as just recently a joint venture in Brazil.

We plan to open our first JV store in Sao Paulo, Brazil in June 2013.

Japan, which I was last week, will also be a new direct market for us.

We plan to enter in fall 2013.

Our job is to run the Company well, to think strategically and act tactically, to generate growth without sacrificing return on invested capital and by doing all these things create value for our shareholders.

In conclusion, as always, protecting the brand is our most important asset and remains above all fact and consideration, even if it's painful from time to time.

We have confidence in our brand.

We have confidence in our ability to continue generating above average return on our invested capital and we have confidence in our Company's future.

Thank you.

Dennis?

Thank you, Paul, and good afternoon.

Third-quarter net earnings declined 45% to $37 million, and diluted earnings per share were $0.43, down 39%, compared to $0.71 per share in last year's third quarter.

Third-quarter revenue declined 2% to $629 million, and in constant dollars, revenue increased 1%.

Total Company gross profit declined 10% to $248 million, and gross margin declined 350 basis points to 39.4%, which was below expectations.

Consolidated product margins declined and our occupancy rate increased compared to a year ago.

SG&A increased 6% to $189 million, including a favorable currency translation impact and our SG&A rate increased by 240 basis points to 30.2%.

The increase supported international store expansion, and higher advertising and marketing investments, though not to the levels we had initially anticipated, and these investments affected margins in most of our segments.

These cost increases were partially offset by lower overall corporate expenses.

Operating profit decreased 40% totaling $58 million, which includes a $2 million unfavorable currency translation impact.

As expected, operating margin declined 590 basis points to 9.2%.

Our effective third-quarter tax rate was 34.8% compared the to 32.3% in the prior-year third quarter.

The increase reflects a higher anticipated full-year effective income tax rate due to a different distribution of projected earnings among tax jurisdictions.

Moving to segment performance.

In North America Retail, third quarter revenues decreased 1% to $262 million.

Lower traffic and a soft accessory business drove a 6% comp store sales decrease that more than offset the 5% square footage expansion from last year's third quarter and growth in our e-commerce business.

Operating income declined 67% to $9 million, and operating margin declined 700 basis points to 3.4%, which was lower than expected, mainly driven by a higher level of promotions.

Compared to last year, gross margins were lower due to higher markdowns, Canadian pricing changes, and a higher occupancy rate as a result of negative comps.

Our SG&A rate increased mainly due to the deleveraging of store expenses.

In Europe, local currency revenues increased 2%, so the impact of the weaker euro resulted in an 8% US dollar revenue decline to $203 million.

Italy was our most challenged market, where we saw a decline in shipment into the wholesale channel.

This was partially offset by growth in newer markets like Russia.

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

As we had anticipated, our comp store sales headwinds improved and we delivered nearly flat comps in the quarter.

Comps were strongest in the early part of the quarter during the discount period, but we're still showing signs of improvement in the remainder of the period compared to the second quarter.

Operating income decreased by 57% to $15 million, declining 51% in local currency.

Operating margin declined 830 basis points to 7.2%.

Product margins were lower including the impact of currencies along with greater promotions and discounts than we had planned.

The higher occupancy cost and store selling expenses negatively impacted the operating margin as we expand our store base, while the lower wholesale revenues negatively impacted our SG&A rate.

In Asia, revenues grew by 16% to $75 million, with both South Korea and Greater China posting double-digit top-line increases.

Operating profit declined 5% to $8 million and operating margin declined 230 basis points to 10.4%.

Our SG&A rate improved compared to a year ago, as we leverage expenses with the higher revenues.

However, lower gross margins more than offset this improvement with both channel mix in Korea and higher occupancy costs to support more stores in Greater China, contributing to the gross margin decline.

In North America Wholesale, revenues increased 1% to $58 million.

Operating profit declined by 7% to $15 million, and operating margin declined 220 basis points to 25.7%.

Royalties generated from sales for our licensing partners were lower than expected, resulting in an 8% decline in licensing revenues to $31 million.

Operating profit declined 12% to $27 million.

We ended the quarter with cash and equivalents and short-term investments of $295 million, down $136 million compared to last year's $431 million.

This year-over-year decline was impacted significantly by $232 million in share repurchases during the past 12 months.

Third-quarter operating cash flow was $51 million, compared to $62 million last year.

We did not repurchase any of our shares during the third quarter.

Accounts receivable decreased 12% versus last year to $332 million, and decreased 6% in constant dollars.

Overall, DSOs were flat compared to last year, although we continued to see slower payments in Italy.

At the end of the quarter, about half of our total receivables and 70% of the European receivables were insured.

Quarter-end inventory increased 10% to $422 million, and finished good units increased 12%.

Most of the increase supports our international store growth and expansion of our G by GUESS businesses in the US and South Korea.

Board of Directors has approved a quarterly cash dividend of $0.20 per share and also approved a special cash dividend of $1.20 per share on the Company's common stock.

Combined dividends will be payable on December 28, 2012 to shareholders of record at the close of business on December 12, 2012.

But now, Nigel will give an overview of our recent business trends and provide outlook for the fourth quarter and an update for the full fiscal year.

Nigel?

Thank you, Dennis.

As we look forward to the rest of the year, we have adjusted our guidance to reflect the most current trends both in Europe and in North America.

In Europe, similar to the third quarter, we are expecting retail comps to remain negative during the full price selling period and expect to see an improvement when we enter the sales period in January.

In Europe Wholesale we had anticipated an easing of headwinds as we anniversary the downturn last year.

While early spring/summer orders performed within those expectations, final orders did not materialize as planned and declined in the high-single digits.

Almost all of the decline came from our Italian multi-brand customers with the rest of our market performing consistent with expectations.

Considering these factors, and the timing of wholesale deliveries, along with the larger retail base, we expect fourth-quarter revenues to grow in the low to mid-single digits in local currency.

Assuming the euro remains at prevailing rates, these would result in US dollar revenues that are relatively flat.

For the full year, we are now expecting revenues to be roughly flat in euros and down in the high-single digits in US dollars.

In North America Retail, November comps were down in the mid-single digits.

For the fourth quarter, we are planning comps to be down in the mid- to high-single digits.

Given the larger store base and the impact of the 53rd week, we expect revenues to be flat to up in the low-single digits.

For the full year, we expect comps to decline in the mid- to high-single digits, and revenues to be flat to down in the low-single digits.

In Asia, while economic conditions are not as strong as we had hoped, our business trended roughly in line with expectations in the third quarter.

For the fourth quarter, we expect revenues to grow in the high-single digits to low teens range and continue to expect full-year revenues to grow in the low- to mid-teens range.

In our North America Wholesale business, with the extra week of shipments this year, we expect fourth-quarter revenues to grow in the high-single digits, resulting in full-year revenues that are roughly flat.

In Licensing, we're expecting fourth quarter royalties to decline in the mid-teens range, which includes the impact of some favorable one-time adjustments a year ago.

Excluding the impact of the one-time items, the decline is in the high-single digits.

For the full year, we are expecting the revenues to be down in the high-single digits.

In the fourth quarter, we expect consolidated product margins to decline as a result of continued targeted promotional activity in North America along with currency headwinds and a lower mix of royalties.

We also are planning with a higher occupancy rate, mainly due to the North American Retail comps and overall retail mix.

This would result in a similar full-year gross margin pattern.

With respect to operating expenses, we're planning the fourth quarter with a flat to slightly higher SG&A rate compared to last year.

We're now planning the full year with a 33% tax rate, which we anticipate will negatively impact earnings per share by $0.03 compared to our previous full-year expectations.

Considering all these factors, for the fourth quarter, we expect revenues in the range between $780 million and $800 million.

We are planning an operating margin between 4.5% (sic - see further down transcript in Q&A section "14.5%") and 15.5% and for the EPS in the range between $0.85 and $0.95 per share.

These expectations would result in full-year revenues between $2.62 billion and $2.64 billion, operating margin between 10% and 10.5%, and EPS in the range between $2.05 and $2.15 per share.

Our quarterly guidance assumes foreign currencies remain roughly at prevailing rates and assumes no further share repurchases.

For the full year, we are now expecting to invest between $105 million and $115 million in capital expenditures, 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.

Paul, I had question for you just on the domestic market and some of your comments you made.

The improvement in the comp, very encouraging in the third quarter.

Maybe if you could help us in two ways.

One, just parse out what you saw in terms of the tourist market domestically versus the non-tourist market, recognizing that the tourist market was a significant drag last quarter.

Did you see any improvement in that?

And then secondly, as it relates to some of the newer promotional strategies that you've engaged upon, how have you seen that translate through on the conversion side, maybe if you could just help us understand that?

Hello, Erinn, this is Russ.

We did see an improvement in our tourist markets and it got progressively better as the quarter went along.

So especially in October, our tourist business was very close to that of the domestic business.

So we were pleased with that.

But it was what we anticipated, because we rely less on that people traveling for recreation in October and even in September.

And then regards to conversion, yes, a lot of the promotions have worked and have helped us improve our conversion rate.

It was definitely -- we definitely converted better than we did a year ago during the third quarter, though we do have programs in place to make that even better going forward.

Okay.

Thanks, Russ.

And then just a quick follow-up.

On the accessory trend, if you think about the improvement specifically over the Black Friday period, can you talk about that by channel versus -- mall versus off-mall, the outlets piece of that, where are you finding the consumer respond from a price-point perspective, is there a specific sweet spot there and then also from a product category perspective, where are you seeing the incremental improvement there?

Thank you.

Yes.

This is Paul.

We saw definitely a turnaround in handbags.

The handbag represents such a large category of our business and clearly November has shown with the new delivery and we see the customer response to it, so we are very, very encouraged by that.

The December, even January delivery, we believe will be even stronger.

So that's for one.

The watches also, the watches in the last two weeks have shown very strong turnaround comparing to what it was in Q2 and Q3.

And shoes remain a little bit weak.

Jewelry is stable and eye wear is stable.

So that's.

But the three big categories is really watches, footwear, and handbags.

Another thing we did, Erinn, in the middle of the month, we started adding fixturing in our windows so that we could feature the accessories and we think that's really paying off.

Yes.

Okay.

That's helpful.

And just in terms of the breakout, outlet versus mall, was it similar in terms of the pick-ups for accessories?

Yes.

It picked up a lot more in the full price malls.

It picked up just a little bit in outlets.

In the full price malls, our handbag business was up by double-digits during the back half of the month.

We were really, really pleased in that.

And outlet we believe we were a little bit missing product.

It means we had a bigger demand than what we had expected.

Okay.

Thank you guys.

I'll hop back in the queue.

Let me just clarify.

In my prepared remarks when I was talking about the fourth-quarter operating margin, the range is 14.5% and 15.5%.

Omar Saad, ISI Group.

Can you guys talk a little bit more about the opportunity to shorten the lead times, the product cycle, where you stand at this point, how much improvement you've been able to generate so far, keeping the open-to-buys open later to respond quicker to fashion trends.

Where are you on the spectrum?

Where have you been?

And where can you go?

There seems to be certainly a big theme in the marketplace in where the consumer is going.

If you could just elaborate on some of those issues that would be great?

Omar, this is Paul.

This is not -- the shortened cycle we are talking about here is about 30% of our product going forward that we shortened the cycle of development and production by 50%.

And of course, mainly in women's apparel.

We don't plan to do anything like that in men's apparel.

And that has been put in place in the last six months and it would be effective starting in January delivery, that we are changing the calendar to that.

Before we were in a calendar of around 40 weeks and now we will plan to cut some of them 20 weeks and even shorter than that, even half of that, depending where we produce the product and what product we are talking about, if it's knit, if it's denim, we can really impact that.

And clearly, we have seen a change of consumer habits.

I would say is buy now, wear now, and we don't see that habit changing going forward.

We see that people are just buying very close to what they need today and the best example for that of course, around the world I just traveled around the world the last three weeks, it was warm weather in China, warm weather in Japan, warm weather in Italy, warm weather everywhere and of course the outerwear suffered a lot on that on every country I went because nobody was buying any outerwear.

So this is definitely we are going to that direction of that on a short cycle for 30% of total apparel of women.

Thanks, Paul.

That's helpful.

While I have you, can I ask you how you're thinking about the strategies to fill some of the key senior Management positions, are you looking internal, external, any thoughts there would be helpful, too?

Yes.

We -- and since the last time that we announced Dennis Secor move, we plan to have a candidate announcement within the next 60 to 90 days at the most.

We have already some very substantial lead and meetings and we are very confident about that.

About the position of the COO, we don't plan to replace that position at the moment.

And when it come to product and merchant, we are also looking on that to continue to improve the team for merchandisers and design.

Thank you.

Betty Chen, Wedbush Securities.

This is Alex Pham on for Betty.

I just had a quick question on the men's apparel.

I know that in the past you guys have mentioned trying to elevate the men's assortment and I was wondering if you guys could give us any additional color on reads on that thus far?

Thanks.

Yes, that's a big part of our business that improved for us, the blazers, the jackets, the premium denim did very well and some of the outerwear categories for men's actually performed well, despite the weather, because we really improved the quality there too.

And in G by GUESS also, the same -- men's category has been really a strong performer, consistently.

Yes.

Across all concepts.

All concepts.

Next question?

Joseph Parkhill, Morgan Stanley.

Good afternoon.

Just on the November comp, you said it was down mid single-digit and also probably had some impacts from Sandy, yet you're guiding for it down mid single-digit to down high single-digit.

Is there anything that you're seeing that makes you worried or is this just a little bit of conservatism, if you could give any color around that, that would be helpful?

Yes.

The first two weeks of December have been really tough for everyone out there -- no, the first two weeks of December we've been tough for the last two years for people.

So we're concerned that it's going to be difficult for the next couple weeks and then hopefully pick up as we get closer into Christmas.

But for November, we saw -- we were impacted by the hurricane, so we were down but we saw a marked improvement in the back half of November and we had a very strong Black Friday weekend.

Okay.

Great.

And then just also just from a category perspective, you talked a little about the improvement in men's but the weakness in women's.

Do you see any product missteps there or any competitive pressures or -- and what's your confidence in turning that part of the business around?

The knit top category was difficult for us and that's a competitive space.

So looking forward with that, we're looking to put out some basic knit tops at sharper price points that -- where we can be more competitive.

Okay.

Thanks and good luck.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone.

As you look at the accessories category, can you give any color in terms of where you're seeing the improving trends there?

And then you touched on product margins.

What should we see going forward on product margins and also pricing initiatives?

And just lastly, Dennis, anything on the tax rate and what we should expect go-forward?

Thank you.

Okay.

On the accessories, really the thing that's moving that, like Paul said, was handbags.

And it's going back to our roots with fashion handbags and introducing them back into the stores.

And if you're looking at shoes, we've been doing a really good business with the casual athletic footwear and the men's footwear has been picking up for us too.

So that's been great.

Trends on product margins, we were down during the third quarter and one of the things we did, if you remember, is the parity pricing in Canada, which is impacting our product margins but it is paying off for us with sales in Canada, which have picked up quite a bit.

And the markdowns have been higher than they were a year ago and we do expect that to continue in the fourth quarter.

With respect to the tax rate, Dana, if you could go back a handful of years, we were -- we had a tax rate of almost 40% and we've been able to get that down into the low 30%s, 33% is our guidance this year, largely because of the expansion that we've had into new markets and international markets.

So what you will -- it varies based on what legal jurisdiction we happen to have the earnings in, but by and large, as we've been able to grow our international business, that's really helped substantially on the tax rate.

Got it.

And Paul, just anything on pricing on the apparel that you're seeing that we should look forward to in the spring and how you're going to drive the retail prices?

Well, especially denim.

Denim continued to be really a core of part of our business and dresses, which I mentioned, to continue to protect that edge that we believe we have.

If you visit our stores you will see the presence we have in dress and how we perform in dresses.

We think the weakness we had and we are addressing that, has been really is women knit top and -- which used to be a big category for us years ago -- and as Russ just mentioned before, the competition in that space has been really aggressive across the board on every area that you look in anymore.

So we are going to concentrate our effort on that and that's what we plan to do for the spring for women.

Thank you.

Eric Beder, Brean Capital.

Could you talk a little bit -- when we look at the business here, could you talk a little about how for spring we should see in terms of inventories, that what should we think about inventories in terms of year-end?

Hello, Eric, this is Nigel.

So when you look at where we are now, at the end of the third quarter, inventories are a bit higher than planned but that's largely due to the retail expansion that we're seeing in both Europe and Asia and partly here in the US.

There's also the expansion of G by GUESS, both here and in Korea.

So that's driving a lot of it.

When you look at the model that we have, it's designed to be able to -- if there is any excess product, to be able to clear that and do that at healthy margins.

So overall when you look at our inventory position, we're comfortable with that.

When you look to the end of the year, I don't believe that we'll fully be able to align the inventory position with sales but we are comfortable that with our model in place that we'll be able to work through the inventory.

Okay.

And could you talk a little bit about G by GUESS.

You -- this was supposed to be a big year for G by GUESS in terms of profitability and taking the next step, how is that going through?

Yes.

The comps in the quarter for G were down in the mid single-digits.

We were up against some strong comps from last year but it was still a disappointing result for us.

We did a great business in men's, like Paul said, in G by GUESS, but we were challenged in women's and we think we have a product mix issue within women's there that we need to address.

So we still have work to do there but overall we're very happy with the brand.

Okay.

Good luck for the holidays.

Diana Katz, Lazard Capital Markets.

Hello.

I apologize if I missed it but what was the European retail comp in the quarter?

And would you still describe the European business as having stabilized, are the southern markets getting any worse?

Hi, Diana.

It's Nigel.

So let me start on the retail business in Europe.

So when you look at the comps for the third quarter, they were nearly -- they were almost flat.

But it was really two parts.

The first part, we still had the discount period and the comps were stronger.

When we went back into the full-priced selling they dropped off a bit but even in the full-priced selling, they were still better than what we had seen trending in the prior quarter.

So our initial read is that the customers are responding to promotion and so when you look at it on a regional basis, we had some highlights there.

Italy comped positively for the quarter.

So did Spain.

So did Germany.

UK was down a bit.

France was down a bit but that was primarily in the southern region.

When you look at the rest of Europe, and you look at your question of stabilization, for the most part we've just completed the orders for the spring/summer season and in almost all of our markets we have achieved our expectation.

So for example when you look at the development markets, as Paul mentioned earlier, Germany was up 18%, Russia was up 50% Really the thing that surprised us was really Italy and specifically the multi-channel business.

When you look even within Italy, our property stores, as I said, comped positively, and our licensee stores were in with expectations.

France was a bit -- was down.

But when you exclude those two markets, Italy and France, we were up 5% for the season.

So we're definitely pleased with that result.

And Dana, to complete that, this is Paul, in fact I will be in Italy next week.

It's difficult to predict what's happening now still on these two countries which are a major market for us which is Italy and France.

The new government of France is quite unpredictable about the new laws they are passing right now which have a huge pushback by all the businesses and so I think they might revise the laws that they want to pass about the new taxes in next month.

And Italy, it's just unstable.

We need to see what's happening again with the current government, whether [in to do], because the austerity has not played well at all with the consumer.

They are not used to that.

And so we want to see some stabilization there.

As of just now, Nigel was mentioning, where we can control is our stores and our stores have been doing well relatively to the rest of the market and that we have a good presence in Italy for that.

Where we are weaker is multi-brand channel where we have issues of credit and payment and banking and we are very cautious about that.

So that's why we prefer to take limited cautious risk than to just ship anybody about anything.

We don't do that at all.

Okay.

And then if I just -- one other quick question, can you discuss how many underperforming stores you plan to close this year and next year and if possible, what the comp and potentially EBIT generation spread are between those that are deemed underperforming and those that are performing?

Yes.

As far as the closures go, we've closed 15 stores so far this year.

We plan for that to be over 20 for next -- by the time we get to the end of the year and next year will be possibly in a similar range, maybe a little bit less.

And as far as the spread of contribution, that's a difficult one to ask.

But one of the things we always look for when we close a store is what the four-wall EBITDA is and if it's contributing money we'll typically keep those stores open.

Thank you very much.

Best of luck.

David Glick, Buckingham Research Group.

I just had a follow-up question on Asia, a pretty good quarter on the top line in Q3 and it looks like, based on your guidance, somewhat of a deceleration in growth.

I just wanted to get a sense for what is happening there, why it may be slowing a bit?

And I was also surprised to hear you talk positively about Korea which has been a challenging market for a number of brands, if you can give us some color on what's happening in Korea, specifically, that's helpful?

This is Paul.

Hello.

For Korea, you have two major impact there.

If you remember in August, which was Q3 for us, there was a massive typhoon there and we have quite a lot of stores closed.

That was one.

Economic environment has been also challenging.

But because we launch only 1.5 years ago the G by GUESS, that has been really a brand of expansion for us there.

We have a very good position in GUESS?

already and -- but we see a little bit of a lower margin on Q4, because so many other brands as you mentioned before have been so promotional and so aggressive on that.

And I'm not talking about local brand.

I'm talking international brand.

The third thing is if you have been or if you're familiar what has been the winter in Korea this year, as late at two weeks ago it was 60 degrees, 55 degrees, when normally it's way below that and we sell tons of outerwear there.

Same story as what I mentioned before.

The outerwear is a big part of the business in South Korea.

It did not materialize this year and it most likely will materialize in December and January.

But January, you get the summer goods.

So we see the outerwear is a big piece missing there.

Okay, great.

Thank you very much.

Good luck.

Janet Kloppenburg, JJK Research.

I'm a little bit confused about your guidance on operating margin for the fourth quarter.

I think it's 14.5% to 15.5%, it's versus 17.5% last year and so the rate of decline is much improved over where it's been, yet I think I'm hearing that the promotional environment continues to be tough and I think Nigel said that inventories were a little bit ahead of plan.

So I was just wondering where we should be expecting to see the improvement in profitability compared to where it's been trending now.

That's my first question.

Thanks, Janet.

So when you compare the trend that we're expecting the fourth quarter to the earlier trends in the first, second, and third quarters, the biggest difference there is that we don't have the same advertising headwinds that we had in the prior quarters.

The fourth quarter is not a huge advertising quarter.

So that is going to benefit us.

Also, the other thing that we have in the fourth quarter is the 53rd week, so we'll benefit, we're going to get that.

We've also been able to reduce the cost base.

So we looked at a lot of the cost that we have and a lot of that was incurred in the fourth quarter.

And we've been able to recover that.

Some of that is in corporate expenses, some of that's in Europe.

Last year in Europe we had some store impairments.

We don't expect to repeat those.

So when you look at all of that, those are the things that are driving the higher -- the better trend in the fourth quarter.

Okay.

And then just to clarify a couple other things, I'm wondering, are you seeing -- are you expecting an improved rate of full-price selling in the fourth quarter?

It sounds like the men's business is healthier and the accessories business is healthier.

I'm not quite as sure about women's.

Maybe you could help me understand how we should be thinking about business this year versus last in terms of promotional activity and full-price selling?

Thank you.

Yes.

You're going to probably see a full-price selling being consistent with what we have in the third quarter, which was down in line with what the overall chain was down.

The promotions, they're going to be higher and what's happening in a lot of cases is the discounting needs to be a little bit deeper to get it out the door because of what a lot of the competitors are doing.

But Russ, is that related to product?

In other words, if your product was stronger, do you think that you could sell it at full price or do you think it's just that the environment is challenging and if that's the case, should we expect that to continue?

Yes.

It's a little bit of both.

If we had better product, yes, we would be able to sell more at full price and our best product we have in our stores, we're able to blow it all out at full price quickly but we have other stuff that doesn't sell as fast.

And we need more things that are selling quickly, why we're going to speed-to-market program going forward.

But at the same time especially during the holidays, the discounting out there is pretty aggressive, so when we're making our offers out there we need to keep that in mind so that we can enter our customers into our store.

But do you envision it being more promotional than last year?

I do.

You do.

Even in men's?

We saw that over the weekend.

Even in men's and accessories?

What we saw is a lot of overall store sales and discounting that was deeper than what it was a year ago.

And you see a lot more right now especially in outerwear and boots and things like that with a lot of discounting there too.

Okay.

Thank you very much.

Good luck.

(Operator Instructions)

Susan Sansbury, Miller Tabak.

Thanks.

Going back to the store closure to your closing underperforming stores, I haven't kept track of this, I admit.

Is this -- do you normally close a 15 to 20 stores a year or do you intend to accelerate the closure rate and I assume it's here in the United States?

Is it just the GUESS?

stores or are there other name plates involved?

Thanks.

This is Paul.

Hello.

The 20 doors is all concept combined.

It means, it can be a combination of GUESS?

Accessory stores or GUESS?

Marciano stores or factory stores or retail stores.

So it's in four different concepts.

That's one.

Two is don't forget, a lot of our stores after 30 years, some of them have been really either/or in a very old mall who have been not transitioning well to the new environment or not desirable location for us or a non-performing store and if it's non-performing consecutively two years, three years and but the lease is over we don't renew and we just move on.

So but of course you know very well that a lot of new malls have been opening in a lot of places, any region of the states.

And that's a normal -- when you have four different concepts and you have a base of 500 stores, 20 stores can be an average of 10 stores a year, 20 this year, maybe 12 next year, of the normal rotation of an inventory of stores.

Does a large percentage of your fleet, proportion of your fleet come up for renewal in the next couple of years?

Or what percent of your fleet comes up for renewal in the next couple of years?

Over the next couple of years, maybe 20% or so.

In addition to that, we have a lot of kick-outs in our leases that we can exercise if we're not happy with the progress of the store.

Okay, great.

Thanks so much.

Dorothy Lakner, Caris & Company.

Thanks and good afternoon everyone.

I wanted to come back to the product merchandising for a second and I know you talked earlier about the issue with knit tops and bringing in more basic tops at lower price points.

I'm just wondering what the time frame is around that, how soon can you get those in?

Is that something that you can get in by holiday or are we talking first quarter?

And then coming back to G by GUESS, you talked about product mix issues there.

I just wondered if you could go into a little bit more detail about overall what they are, so what I'm hearing is the men's business in general has been pretty strong.

The accessories business seems to be getting better but you do have these issues with women's.

So I just want to make sure I understand exactly where the issues are?

Thanks.

Yes.

So with the knit top program, we're going to launch that in February, which we think is the perfect time to do that because it's -- knit tops perform better in spring than they do in holiday.

Sure.

And in regards to G by GUESS, what's done well for us on the men's side, it's the denim, especially basic denim, the woven tops have been really working in that business also and the blazers have done good too like they have in our full-price stores.

Under women's what done well, the denim is still doing well in women's, the casual active categories have also done well.

We've been more challenged there with, again, with some of the tops and a lot of the cold weather categories, outerwear was really tough, and we went after that business fairly aggressively.

Okay.

Great.

Thank you.

Jeff Black, Avondale Partners.

This is Paula Torch calling in for Jeff.

Looking ahead into next year, can you comment on the square footage growth in Europe?

We wanted to get your thoughts, given where -- that we've been seeing some contraction there.

Has that changed your outlook when looking in Europe for next year and how should we be thinking about square footage when compared with this year?

Thank you.

This is Paul.

I don't have by percentage in Europe about what we are going to grow.

What I know for sure for next year, our plan will be between our property stores and licensee stores, close to 70 free-standing stores.

On a percentage wise, I don't have that.

That, I don't.

But the number of stores, it's pretty much the number I give you, it's pretty much reliable.

It's between 65 stores to 70 stores opening next year.

And our plan for US will be around 50 and then Asia will be around 40.

I give you just rough number that we plan to open according to plan.

But on a percentage of square footage, I do not have that.

Okay.

Great.

Thank you.

Betty Chen, Wedbush Securities.

I had a few follow-ups.

Hello.

I was wondering, the Asian business continues to do well.

I believe you reported double-digit growth in both China and South Korea and I know that you've been making diligently investments in terms of setting a foundation as that business grows.

I was curious in terms of the investment in operating margin, where are we in terms of the investment phase and could we possibly see the segment operating margin in Asia turn positive in either Q4 or perhaps next year?

And then I was also curious, Paul, in terms of Brazil and Japan, how should we think about the product assortment in those markets and in terms of pricing?

I know we're still early but any sort of initial thinking would be really helpful?

It's Nigel.

So let me tackle the Asia question.

So when you look at the overall Asia segment for the fourth quarter, the goal there is for the operating margin to be flat to last year and obviously that depends on achieving the top line and the margins, particularly in Korea.

When you look at Greater China, right now we're expecting operating margin expansion in China.

For the most part we think a lot of those investments -- the infrastructure investments -- are in place and so we would expect to see some margin expansion, both in the fourth quarter in Greater China and for the full year and the goal for Greater China is to break even, possibly achieve a modest profit for the year.

And also if I can add on that, Betty, for -- I just returned from Shanghai.

We had our retail conference of Asia, 10 days ago in Shanghai.

As you know, like every other company, every other brand, it's really a long-term investment there and we are, from what I see from all the partners that I met, I'm very happy there and definitely we are making the right investment there.

From the structure to the marketing to the advertising to the organization we have there in Shanghai and Beijing, I'm very happy about what I see.

About Brazil and Japan, I would like to address that, too.

For the next fiscal year, we should not expect any impact because it will be the beginning of two major countries' business and we're going to go cautiously, carefully, to size up what is the potential there.

Our goal will be between 10 and 20 stores in Brazil for sure in the next three years, two to three years, and free-standing stores I'm talking, and Japan is much more complicated.

We are looking at -- to duplicate the format we did in Korea six years ago.

Korea and Japan are very similar market as far as the retail environment.

Very little shopping centers, almost none.

And a lot of department stores, I would say 90% of the business in department stores, so you look at concessions, you look at operating that directly and we plan to do that directly, which we never did in Japan.

It was always a licensee or a distributor and five years ago we decide that we will stop anything until we operate directly.

And that's what we are doing right now to start our structure in February.

So that's my best assessment for Brazil and Japan.

That's really helpful, Paul If I could have a follow-up for Russ.

In terms of the tourist stores, which sounds like they improved in the quarter, is there still a meaningful comp difference in terms of the tourist stores in the US versus, for a lack of a better word, maybe the more local stores and--?

[Don't forget] by the time we got to the end of the quarter, the gap was very narrow.

Okay.

Great.

Thank you so much and best of luck.

And we have no further questions at this time.

I would now like to pass the call back to Mr. Paul Marciano for any closing remarks.

Thank you very much.

We are all bracing for the next few weeks to close that year.

We want to wish you a great holiday.

With all the interesting event we had this year, we are ready for the next one.

So thank you and have a great holidays to all of you and good health to all your family.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect.

Have a great day.