Guess? Inc (GES) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to the Guess?

fourth-quarter fiscal 2013 earnings conference call.

On the call are Paul Marciano, Chief Executive Officer, Nigel Kershaw, Interim Chief Financial Officer, and Russell Bowers, Financial Officer of 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 and annual reports filed with the SEC.

Now, I would like to turn the call over to Paul Marciano.

You may proceed.

Thank you.

Good afternoon and thank you for joining us today.

For total company in the fourth quarter we delivered adjusted earnings per share of $0.95 which was at the high end of expectations, despite a very fragile Europe economic environment and the challenging North American retail market.

Before we get into the details of the call, I want to address a few important issues up front.

I've been very disappointed with the performance in retail North America over the past year.

We have taken a hard look at this business and we are in the process of making some strategic management changes.

Our top priority is to continue to focus on building an executive team with a combination of new and existing talents.

We are bringing on board two new top executives.

One to handle design who will work directly with me and has a strong background of a young female customer for the past 15 years and another executive for all merchandising retail North America.

They will start within 60 days and I'm very excited to work with these new team members.

Also, we resumed the search for a corporate COO.

These changes will position us better to execute our long-term strategies.

In North America in the first quarter, comp sales per week or North America were down 6% which was within the range of expectation however, traffic trend decline at the end of January and the softness continued into March.

We believe that the recent tax change and adverse weather have all contributed to this decline in a certain degrees as a recent slowdown was most significant in the cold-weather states.

But clearly, product played the biggest fall in this decline.

I'm convinced about that.

For me, everything starts with the product and ends with the product.

We have developed a three-point strategy to drive the growth in our business.

Increase our denimoffering and iconic style at entry price points.

Shorten our supply chain calendar and enhance our denim heritage.

I strongly believe that the heritage of Guess?

is rooted in denim.

The Guess?

Girl, who issexy and young, looks to us for iconic and sexy styles.

We must be more innovative than ever in our denim design always pushing for the best fit, the newest washes, and the most inspiring prints at affordable prices.

In the past 18 months, the strategy was focused on driving more sales in higher priced product categories.

Today, as a result, we realize that we have excluded the young, aspirational Guess?

girl who is more price conscious than ever.

This aspirational girl is very important to us and we will be increasing our denim offering at $75 to $95 price points, versus the majority of what we have now from $108 to $148 is the bulk of the offering.

A few months ago, I took steps to address this and with the design team we created a return to iconic jeanswear roots of Guess?

for Fall 13.

It has received the best reception I've seen in a long time.

Our fall advertising campaign which I just finished will translate that that loud and clear.

We also recognize that there are fashionable opportunities in the marketplace that we can better capitalize on.

To accomplish this, we are shortening our supply chain calendar and we'll keep a portion of our future buys open to allow us to react to the latest trend in as short as five weeks.

In Europe, France, Italy, and Spain represent 65% of our total business in Europe and as we look back on the fourth quarter, one of the biggest challenge was Southern Europe.

We expected our retail business to be soft in November and December.

However, due to macroeconomic conditions and government austerity measures, retail sales did not improve as expected and traffic continued to be down in these three countries.

We expect the difficult retail environment to continue throughout the summer and also impact our fall-winter wholesale orders.

In North and Eastern Europe, that region had very encouraging signs in the quarter.

We were very pleased with the progress we're making in growing Guess?

in two key growth markets, Russia and Germany.

Revenues in the quarter, we are up 105% in Russia for the second quarter in a row.

Revenue in Germany grew up 40% during Q4.

Our key long-term strategy is to continue to grow in these two regions and reduce reliance on Southern Europe.

Over the next five years, we see the potential to triple our business in Russia and double our business in Germany.

In Asia, our Asian business grew by almost 20% in the quarter led by the Greater China where revenue increased by almost 30%.

Over the past two years, we have grown our Greater China business by almost 75%, while South Korea business has grown 25% compounded annually over the past five years.

This region continues to be a priority for us and we will continue to invest capital there.

Japan will be our next step to open business there before Christmas, and we will operate directly as we do in Korea and China.

Mexico.

In Mexico, our business also had an excellent fourth quarter where we increased our revenue by 38%.

we've been operating directly in that country with a jv partner since 2005.

And have grown our revenue every single year including 65% over the last two years.

We are excited with this momentum and hope to expand in more Latin American countries in coming years.

About marketing and eCommerce, direct marketing continues to be my priority going forward mainly through in-store events, C.R.M, and social media.

We plan to continue our successful global collaboration with Tiesto, number one DJ in the world, with a jeans capsule to include watches, sunglass, and footwear as well.

Our partnership allows us to capitalize on this global appeal and expose us to 14 million fans on Facebook as well as Guess?

concerts all over the world in cities like Moscow, Mexico City, Dubai, and Singapore coming up.

We have made significant strides in social media over the last year as well especially Facebook.

In February, 2012, we had 1.7 million fans.

Today we have 4.7 million fans.

We are also focusing on accelerating growth online by building on a world-class omni-channel retail strategy that connects online platform with in-store mobile and social experience.

We recently implemented new features that allow us to fulfill website orders from our stores as well as our customers online orders to be picked up in our stores.

Our goal is to continue to drive sales to our website and double our direct online business over the next three years.

Capital investment and cost structure, we will continue to protect our strong balance sheet position, as we have done in the last eight years and manage our expenses tightly.

In the first quarter, we executed on our plan to streamline our cost structure in both Europe and North America.

We are also reducing our store openings in North America and Southern Europe this year, and will focus on improving this performance in our existing stores.

While I recognize that there are many challenges ahead of us, I'm very confident on the future growth of the Company and I'm very confident in our brand.

Guess?

is a well diversified brand that has deep presence around the world with over 600 stores in The Americas, 600 stores in Europe, and almost 500 stores in Asia.

We have a unique combination of product in our stores with denim, women, men product, and a range of accessories, some of the most recognized in the world with our watches and handbags.

In closing, I would like to summarize the four key strategies that we believe will drive shareholder value going forward.

One, aggressively execute the product strategy with the consumer need in mind.

Two, continue to hire key new talent for North America to help execute strategy and drive growth in the coming years.

Three, review our organizational structure across all regions and globally to streamline and improve productivity in all divisions.

And four, restore operating profit growth to protect our strong financial position.

Thank you.

With that, I will hand over to Nigel to discuss financial performance.

Thank you, Paul, and good afternoon.

During this conference call, all of our comments about the fourth quarter and the full fiscal year are on an adjusted basis which excludes the impact of certain settlement charges.

You can find more details of these charges and a full GAAP reconciliation in today's earnings release.

Moving on to the results.

Fourth-quarter adjusted net earnings declined 15% to $81 million, and adjusted diluted earnings per share were $0.95, which was down 10% compared to $1.05 per share in last year's fourth quarter.

Fourth-quarter revenues increased 5% to $815 million.

In constant dollars, revenues increased 4%.

This includes the impact of the extra week.

Total company gross profit for the fourth quarter declined 1% to $333 million and gross margin declined 240 basis points to 40.8% in line with our expectations.

SG&A increased 7% to $213 million primarily due to new store expansion.

Our SG&A rate increased by 40 basis points to 26.1%.

Operating profit for the fourth quarter decreased 12% to $120 million.

As expected, operating margin declined 280 basis points to 14.7%.

In January 2013, we recorded a charge related to the settlement of a tax audit with the Italian tax office.

This settlement was partially offset by unrelated tax benefits resulting in a net tax charge of $0.10 per share.

If you exclude the net tax charge, our adjusted effective fourth-quarter tax rate was 31.1% slightly upcompared to 30.9% in the prior year fourth quarter.

Moving to segment performance.

In North America retail, fourth quarter revenues increased 2% to $350 million, a slightly higher square footage, the extra week and growth in our eCommerce business all drove the increase which more than offset the 6% decline in comp store sales in the US and Canada.

Operating income declined 34% to $36 million, and operating margin declined 560 basis points to 10.2% which was in line with our expectation.

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

Our SG&A rate increased mainly due to an increase in store payroll, the impact of the negative comp, and higher store asset impairment charges during the quarter.

In Europe, fourth-quarter revenues increased to $300 million representing a 3% increase in both US dollars and local currency.

Italy and France remain challenging markets for us where apparel shipments into the wholesale channel continue to decline.

This was partially offset by growth in newer markets such as Germany and Russia.

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

For the quarter, overall comp store sales declined in the high single digits as the sales during the discount period did not materialize to the level we expected in Italy, France, and Spain.

Operating income in Europe decreased by 6% to $52 million, and operating margin declined 170 basis points to 17.4%.

Productmargins were lower primarily due to a higher level of retail promotions and the unfavorable impact of currencies compared to the same quarter last year.

Prior occupancy and store selling expenses negatively impacted the operating margin as we expand our store base and continue investing for future growth while lower distribution costs in the current period positively impacted our SG&A rate.

In Asia, revenues in the fourth quarter grew by 19% to $84 million with both South Korea and Greater China continuing to post double-digit top line increases.

In Asia, operating profit increased 7% to $9 million operating margin declined 120 basis points to 10.5%.

Gross margins declined driven by product and channel mix in Korea, partially offset by more full price selling in Greater China.

The SG&A rate improved slightly due to lower advertising expenses in the quarter.

In North America wholesale, fourth-quarter revenues increased 26% to $51 million, which includes some timing of earlier shipments.

Operating profit increased by 37% to $13 million, and operating margin increased 220 basis points, 25.7%.

Royalties generated from sales by our licensing partners were better than we expected at $30 million which represents a 2% decline from the prior year.

Operating profit declined 3% to $27 million.

To summarize then for the full fiscal year.

Consolidated revenues were down 1% at $2.66 billion, but increased 2% in constant currency.

The increase in revenue from expansion of our retail stores in Europe and North America, and growth in our Asian operations, were mostly offset by negative comparable store sales in North America and Europe and lower European wholesale shipments.

Adjusted operating earnings decreased 34% to $275 million.

Overall operating margin of 10.3% was down 520 basis points from last year's adjusted operating margin, driven by the negative comp store sales, new store expansion, and investment in advertising and marketing.

For the fiscal year, adjusted earnings per share decreased by 30% to $2.15 per share.

Now turning our attention to the balance sheet.

During the second quarter we repurchased $140 million of our shares, and in the fourth quarter we paid a special dividend of $102 million.

We ended the quarter with cash and short-term investments of $336 million, compared to last year's $496 million.

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

Accounts receivable decreased 5% over last year to $325 million and decreased 7% in constant dollars.

Overall, DSO's has improved compared to last year.

However, slow payment continue to be a focus area and we are managing future shipments very carefully.

Inventories increased 13% to $370 million, while finished good units increased 8%.

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

Although we are not yet fully aligned with projected sales at year end, we have been able to reduce our inventory growth over the last two quarters.

But now, Russell will give an overview of our recent business trends of provide our outlook for the first quarter of fiscal 2014 and full year.

Thank you, Nigel, and good afternoon.

As Paul mentioned earlier, we recently witnessed some unfavorable retail trends, both in North America and in Southern Europe, that we have reflected in our guidance.

We've also implemented plans to streamline our operations to generate future savings that we expect to fully annualize in fiscal 2015.

Our outlook for the first quarter of fiscal 2014 and the full fiscal year exclude any restructuring costs.

In North American Retail, we will be opportunistic in store openings and plan to open only 17 stores in the US and Canada during the year.

In fiscal 2014, we plan to close 22 stores in the US and Canada as leases expire, all of which are underperforming.

So far in the first quarter, comp store sales have been down in the low teens and we expect this to continue for the rest of the first quarter.

Given the larger store base, we expect revenues to decline in the mid to high single digits.

We believe the changes to the product assortment as well as increased offerings at entry price points will drive the volume improvements in the back half of the year.

For the full year, we expect comps to be down in the mid to high single digits and revenues net to be down in the mid single digits.

In Europe, we are planning to continue to grow in Northern and Eastern Europe, while we expect Southern Europe to remain challenged.

So far in the first quarter, retail comps in Europe continue to be down, in line with the trend we saw in the fourth quarter, and we expect this to continue for the rest of the quarter.

For the year, we are planning comp store sales to be down in the mid to high single digits.

We are reducing our store openings, and we will be more strategic as we focus on expanding in key growth areas.

During the year, we and our partners plan to open 70 stores, of which one-third will be directly operated by us.

We plan to close 23 property stores during the year, mostly in Italy, as we redirect capital investments to our new growth markets.

In Europe Wholesale, we are planning the orders for our fall winter collection to be down in the high single digits.

We are not planning for any notable improvement in the back half of the year, as we expect growth in Northern and Eastern Europe to be more than offset by declines in Italy and France.

Considering these factors, as well as the timing of deliveries and a larger store base, we expect first quarter revenues to decline in the high single digits in local currency and in US dollars.

For the full year, we expect revenues to decline in the low to mid single digits, both in local currency and US dollars.

In Asia, we expect our growth to be fueled by store expansion as well as existing store productivity improvements.

In Greater China, we will continue to partner with licensees to open new stores in the second tier cities.

In Greater China, we plan to open 50 doors including concessions during fiscal 2014, half of which will be directly operated.

We continue to see opportunity in South Korea to open more doors, including our G by GUESS brand and plan to open 45 doors in total during fiscal 2014, of which half will be directly operated.

While we still anticipate some softness in the South Korean economy, we will be anniversaring these headwinds in South Korea from last year, when economic conditions initially weakened.

As we mentioned in our previous earnings call, we are in the process of establishing our team and infrastructure in Japan.

We expect our first flagship store to be open in fiscal 2015, and expect that the initial set of costs incurred in fiscal 2014 will offset some of the profitability improvements in other markets in the region.

For the first quarter and the full year, we expect Asia segment revenues to grow in the low to mid teens.

In our North America wholesale business, we expect revenues to be down in the low single digits for both the first quarter and the full year.

We expect to launch our Brazilian operations this year and plan to open two flagship stores.

We are anticipating that the initial startup costs will impact the profitability of the segment in fiscal 2014 as we invest in future growth.

In our Licensing business, for both the first quarter and full year, we are assuming that royalties will grow in the mid single digits.

For both the first quarter and full year, we expect overall gross margins to decline as the expectation of negative comp store sales in North America and Europe continues to put pressure on our occupancy rate.

With respect to operating expenses, we expect a higher SG&A rate for the first quarter, driven by the impact of negative comp store sales.

For the year, we expect the SG&A rate to be flat to slightly up as some of our restructuring initiatives start to impact the cost structure.

We are planning the full year with a 33% tax rate and our guidance assumes foreign currencies remain roughly at prevailing rates.

Considering all these factors for the first quarter, we expect consolidated revenues in the range of $545 million and $560 million.

We are planning an operating margin between 1% and 2% and adjusted EPS in the range of $0.05 and $0.10 per share excluding any restructuring charges.

These expectations would result in full-year consolidated revenues between $2.6 billion and $2.64 billion, operating margin between 8.5% and 9.5%, and adjusted EPS in the range of $1.70 and $1.90 per share excluding any restructuring charges.

For the coming year, we expect to generate between $220 million and $240 million of cash flow before capital expenditures and dividends.

For the full year, we plan to manage our CapEx carefully and opportunistically by investing between $80 million and $100 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, 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.

Good afternoon.

Paul, I just had a question first for you.

If you think about some of the restructuring of the management team in some of those key positions you highlighted that you are in the process of searching for, I was just curious if you could just be a little bit more specific.

You said you were looking for a head of design and then a head of merchandising for North America.

I wasn't sure if you already have someone in mind for both of those?

Or if your timeline is specifically 60 days and you're just now starting that search?

And then I guess in terms of that what are the key things you are looking for as you think about that role?

And then I have a quick follow-up.

Yes, let me correct that.

I said that on the call is the candidates have been selected.

Okay.

Have been identified and have been hired.

We will make a press release in the next few weeks but both positions have been filled in.

Okay.

They will start within 60 days, both of them.

Thank you.

That is very helpful.

(multiple speakers)

One will be the head of design and will not be head design of men, women or it will be a head of all products.

It means a total look of the Guess?

retail North America and that will definitely control also the design in Europe as an influence as a brand.

So, that's one executive.

This second one will be head merchant of all categories for North America and also that position has been identified -- candidate has been identified and has been hired.

So both of them within 60 days will start to work and both of them will report to me.

Okay, thank you, Paul.

That's very helpful.

I guess in terms of the COO role as well, it looks like you are now resuming that search.

Could you maybe kind of qualify for us what are some of those characteristics you are looking for for that role and kind of what will the COO be tasked with doing?

I would say, for me, with the help I need as a COO, will be focusing on the expertise on global sourcing,logistics systems, of course finance, and all, I mean having some global experience because we are truly, as you heard, one-third, one-third, one-third exposure around the world so that is an important factor for me.

But also somebody who understands the culture of the Company and the fit of what we still call a family culture in Guess?.

That's helpful.

And in terms of time line for that, Paul, I mean after you have the COO, I guess, what's your timeline for that and then are there any other key positions in the North American business or even globally that you're still looking for maybe a little bit below from a kind of mid-level management perspective that you are still looking for?

(multiple speakers)

Well, this is where we -- I just mentioned that we are -- one of the key priorities will be to look at realignment and restructuring uncertain synergies between regions and right now the three key position was this one, I mean the two on product, and head merchant and then COO which has been already on 2.5 months and I have at least four candidates that I'm seeing with my brother Maurice, and organizing a priority, that is a big one.

Thank you very much, and then just a quick follow-up for Nigel or Russ on the guidance of $1.70 to $1.90.

We think about -- it looks like you're essentially assuming in Europe a continuation of the weak trends and really no pickup in the fall-winter bookings, kind of still down high single digits.

Have the European fall bookings actually closed yet or is the window still open?

Is there any opportunity for that to be better?

Or is this a pretty realistic scenario at this point?

I think I can answer that because I just came back from Europe.

If you are really familiar with what's happened in France and Italy and Spain, of course, but really in France and Italy, I think that I could say with comfort to say that you can feel fear in these two countries of the near future of the consumer.

You see that they are worried and I am talking about the wholesale customers and I'm not talking about customers in the stores.

The stores will address that.

But I feel personally that the customers multi brand stores are concerned of the very next future this quarter, next quarter, about the new tax laws, the new (indiscernible) has been raised in France and Italy really pushing away the customers and it's a cascade of the little things that make them more cautious, more prudent in their buying, and more close to the months ahead, what they want to buy for the next month and not what we want to buy six months from now.

And that is really challenging to deal with because on one hand you cannot blame them not having any visibility of the economy for these customers and on the other, you have the product.

What do you do?

Do you cut more, do you cut less?

So it's -- that's why some of Europe and we have a lot of stores in Europe so we know how well we have a long relationship with our customers, where just to be prudent who we sell to and who have credit and who have guaranteed and insurance and all that.

So, we want to take a very prudent approach with France and Italy, especially Italy has a brand-new government again the last few weeks and we are seeing what's happening.

Thank you.

Betty Chen, Wedbush Securities.

Thank you, good afternoon, everyone.

Hi, Paul.

I was wondering if you or Russ can talk a little bit about North America Retail.

It sounds like we're refocusing on some entry price point items to better target that aspirational customer.

I guess timing wise, when should we expect that and if that's going to start in Q1 or more so Q2 or second half, and related to that, it sounds like you and the team have already been working on some new denim product.

If you can talk a little bit more about that as well?

Thanks.

Thank you, Betty, I would answer that because I'm right in the middle of all that.

For the denim prices, the $79 to $90, I would say $98.

It was a category we had heavily in 2009, 2008, '09 '10.

'11 and '12 actual I'm talking, not fiscal.

Actual '11 and '12 we did not raise the price we shift the balance of SKUs between the two that we had much more to go when you have been in our stores many times.

We have a lot of $108, $118, $128, $138, $148 and only a few SKUs at $89 and $98 like maybe nine or eight or nine SKUs which was nothing.

And the majority was in what we call premium and I think the timing has not worked for us and we have to reassess and analyze to say we made a mistake.

And we said okay, now what the customer message is, I love your product but I would like that but also I would like also to carry some which I can afford myself and the message was loud and clear.

But it doesn't mean we'll walk away from the premium at all.

We continue that on a much more balance that we had in 2006, '07, '08, '09 and '10.

That's what I think you will see happening in the next six weeks that you will see product in more details of denim prints, denim dyes between $89, $98 and even $79.

We still carry the $118, $128 and $138, absolutely.

But to rebalance the SKU plan between the two and add things at the last minute or so.

And Paul, do you think that opportunity exists in other categories as well whether it's women's tops or dresses or outerwear?

You are right on.

Absolutely what I just said to denim, I just had a meeting again last week with the whole team in design and the merchant and production.

We will have -- we have selected few categories declining, few SKUs to be entry price, the message of the customer.

The customer decides, we don't decide.

We realize certain things here but to say it's not the time but to say it's a free spending time, everything is rosy and pink and beautiful.

So, we are dealing with that.

It will be in t-shirts, it will be in shirts, it will be in dresses and look at within eight weeks.

Betty, we found the fourth quarter we saw a lot of success in a lot of different categories in our entry-level price points.

So that's what's given us a lot of confidence to expand this in a bigger way going forward.

Any specifics you can cite, Russ?

I can.

I give you example.

If you take -- I mean that's why I say with such a strong brand, we have such a brand recognition and now for a long time.

The minute the customer finds the product they want at the price they want at that moment which was November, December I introduced some dresses between $79 and $89, the traffic and velocity of the product was really super strong.

But I didn't develop enough.

I didn't have enough.

So, why I say that is because I love what we have also the $129, $139, $149, but the velocity was much smaller the minute we put the $89 dress which we have regular margin on it and everything, the customer reacted by jumping on it.

This was a loud message to us to say we love your brand, give it at the right price to us, we love your brand.

And do you think Paul, to kind of compliment that we should see some marketing messages, whether it email, social media?

Absolutely, Betty, absolutely.

I give you two examples.

One will be clearly on our website.

You are going to see it and we are going to communicate that loud and clear.

Two is going to be in a campaign fall, which I just finished ten days ago which is beautiful, gorgeous, all, all denim and for back-to-school which will be in July 15 and August and September.

And three, we do mailings to our customers, our CRM, our loyalty customers which is by hundreds and hundreds andthousands of mailers which will have all the current product with prices on it.

These are the three big things, of course we don't put prices in windows but we will have some price signing in the stores.

You can have my assurance that the message is going to be loud and it is going to be clear.

With the level of (indiscernible) that we need for our brand.

That's really great.

We'll be looking forward to that.

And then a last follow-up if I could.

I think, Russ, you had mentioned that going forward we're going to be much more opportunistic in terms of store openings in North America and I'm sorry that I missed the number of closures for this year.

And is it possible that there could be additional closures to come and whether the team has identified a potential number of underperforming stores to close in upcoming years?

Yes.

So the number of openings is 17 and to put a little color behind that, the majority of those stores are going to be factory outlet locations.

The number of closures -- we've got 22 this year and going forward, we've got another 30, maybe 35 stores that we've identified to likely close beyond this year.

And the 22 closures, just to remind you, are expiration leases and some of them very few of them kick off close that we went in some mall but did not perform and we are just closing the store because the mall had not performed for us.

So that simple.

Thank you for your one question, Betty.

Eric Beder, Brean Capital.

Could you talk a little bit about accessories?

I know that the handbag business was tough for you in the beginning of last year and what should we think about in terms of watches going forward?

So the handbag business got a lot better in the fourth quarter in our full price stores.

Or actually our full price sales within that segment were up for the quarter which was really encouraging.

We did have a lot less markdowns which is also a good thing.

The changes we made by putting more logo in the store and adding more fashion to the line with more balance, it's really starting to work for us in handbags.

Watches, watches were still down in the fourth quarter but they did improve quite a bit from where they were in the third quarter, so we're starting to get a little bit of momentum there.

We got a little further to go there than we do with handbags but we've got a lot of initiatives going forward with jewelry styles, another Tiesto watch and things like that that we think are going to work.

Okay, and in terms of international, I mean how should we think of both the Japanese and the Brazilian opportunities?

Obviously they're in 2014 but how should we look at those going forward?

And, thank you.

Yes, this is Paul, Eric.

For Brazil right now location with our team, they are there in Sao Paulo.

We plan to open the first store I think in the second quarter and Japan, we just secured our space, offices and all that.

I hope to open, we found one location which I'm not crazy about, and we plan to open before the end of the year.

That's my hope and we really want to go cautiously in Japan.

We were there for many, many years with licensees and we've seen of the market over six years to let go and clean up the market.

I don't want to stop with the wrong step here in Japan.

It's such a delicate market.

So we will do what is right for the brand in Japan, but for sure, we establish a team now, we have the headquarter there and we will do like we did in Korea and whether to go act cautiously in Korea has been such a success for us but because we do the timing of events to establish a world map, team structure and really market research.

Janet Kloppenburg, JJK Research.

I'd wanted to just ask Paul as you lower the prices on the jeans assortment, if you could do that with margins that were compared -- equal or close to the kinds of margins that you were able to secure on the higher priced jeans or how you felt we should think about the possibility of the lower-priced product.

Yes.

And also, Russ, could you talk a little bit about the accessory business?

It sounds like it's gotten a lot better which is encouraging and I'm wondering if it's continuing to trend well here in the first quarter and then I just want to ask Nigel about inventories.

Okay, so that's three questions.

I'm sorry, Paul.

I'm sorry.

I'm just kidding.

Let me address --

We don't get to talk to you that often, Paul.

Anyway, go ahead.

Come here, come here.

Every day I am in the office.

So, first is denim.

First of all we are not creating these price denim, it exists.

We just simply and last the diversity and the choice for the consumer.

Right, I understand.

And the margin in -- It will be in line with the IMU with the profit margin we are planning to.

What I'm planning to come to personally is to do some tests with product made in LA which will be small unit but to get the market, which the margin will not very high, but the quantitywould be so very small so the risk is very small but if the reaction is very good, I can react immediately and go international being in Mexico, whatever, Colombia, whatever I decide to do with the supply chain.

We will have the marketing in place.

That I'm very confident and we're doing as we speak, we're doing some product will be in the store May 1, which is in five weeks, and the margin will be very good and retail price will be $89 and I'm very excited about.

Okay, great.

Great.

And Paul, do you feel like the advertising and marketing program which you and I have talked extensively about, do you feel thats now more compatible with the target customer?

Yes but honestly and I'm going to be blunt with you, you can do whatever advertising you want.

You can do whatever you want.

If you don't have the product that the customer needs, you can just spend as much as you want to and you won't change anything.

And that's the (multiple speakers)

In other words, you have to get the product right?

Exactly.

At the price that they can afford.

They would love to buy maybe higher but today it's tougher for everybody and if somebody believes over why, I don't believe it.

Okay, thank you.

And if the accessory business continue to pick up here in the first quarter or is that been soft as well?

Yes.

Accessories are doing better than how apparel's been doing compared to fourth quarter so far.

Okay.

And do you feel like that business has turned?

In other words that you have the right formula in terms of product design and pricing?

I think we can still do better.

I think it's starting to turn but we can do better going forward.

And let me add something, Janet.

What I just mentioned to you I forgot to mention during the call, is whenever I am talking about denim and dresses and skirts, to say we have more offering at entry price, I really believe that also the customer handbag is looking for a price where the competition is severe in handbags by so many brands, up and down.

Is we need to have also some more entry pricing handbags around the $69, $79, and not like everything else at $99, $118 and $128.

So that's what our price do that as well.

John Kernan, Cowen & Company.

Good afternoon guys.

Thanks for taking my question.

Just wondering what you think the right size store fleet is for each concept in North America.

You're now pushing nearly 150 factory stores if we account for the store openings you're planning for this year yet I Guess by Marciano, G by GUESS and Guess?

accessories our still well under 100 stores.

So what do we think long-term square footage growth looks like here as you slow some of the smaller concepts?

Starting with the Guess?

full price stores, we've got a pretty mature space of stores.

There's room for growth.

I mean we've talked a lot about New York City and larger markets like that but that's where we're going to find it.

We're in almost all of the best malls.

Factory outlet stores, that's an area that's still growing and landlords are developing new centers.

But a lot of the growth you're going to see is us following a lot of those new centers which a lot of them are very successful.

Now G was 85 stores.

There is a lot of room to ultimately grow G when we get it right in that moderate space but for now we're pausing it and were trying to focus on existing store productivity.

And shifting to the licensing business, it seems like accessories, even though you have some momentum to become a more competitive category with everyone trying to become more of a lifestyle brand, what is the long-term growth profile of this licensing business looks like given how high a return of a business it is for you?

When we expect the licensing business to become a growth business again and what gets it back to total top line growth?

I think that, this is Paul, about the licensing, when it comes to the three big category which is really the handbag, watches, and footwear, the growth that you can expect will be in different divisions depending of course with the economy.

But being if it's factory, if it's G which is a price much more appealing than Guess?, if it's Guess?, it could also have a little bit lower price than what we have currently which we start at $99 and $109, we might do shoes also at $89 which change the whole picture so this is the total of the number stores we open and the licensee stores we open for example, I give you a number, total stores we opened in between franchisees and property stores, we opened 160 stores.

Let me give you the right number, yes, so that's a substantial number of stores.

But, as you mentioned before, the competition, especially in watches and handbag, has been coming from all angles, being low price, moderate price, and higher price went down also, of major brands.

So, we continue to protect our marketshare, we continue to have an expansion on this world of accessories but it's getting crowded.

Jeff Black, Avondale Partners.

Just a couple on the traffic.

Could you remind us where we were in 4Q and what kind of traffic trends we're seeing thus far in 1Q?

And then on the cost, what have we, I guess what are we outlining in terms of buckets that we want to attack?

What's the overall amount of cost we think we can take out of the business and what part of that flows into this year if we could have some help on that?

That would be great.

Thanks.

So, Jeff starting with the traffic it was down in the high single digits in the fourth quarter but it's slowed since then.

It's been down in the teens so far in the first quarter.

Jeff Van Sinderen, B Riley.

This is Marcelo in for Jeff.

In your own retail stores, how should we think about promotion levels in Q1 versus last year's Q1 and how should we think about merchandise margins overall?

Yes, so looking at the first quarter, we've been a little bit more promotional then we were a year ago and we had the similar case in Q4.

We gave back a little bit in product margin, but if you're looking at the overall year, we'll have easy compares starting in the second quarter and especially in the back half of the year so that's a little bit of an opportunity and a lot of the price changes that we've been talking to too are also going to help us manage our markdown rates a little bit I believe.

And Marcelo -- I mean, I don't know, I'm sure you are in is east coast right now, 10 days is April 1 and we have just again yesterday a snowstorm in New York I think.

I talked to my brother in Europe right now we are snow in Paris, in Milan, I mean the weather has been pushing more and more colder within the year and that doesn't help release the traffic of customers we are looking for spring summer product when it's snow outside.

Susan Sansbury, Miller Tabak.

In terms of the stores that you are going to close, you admit that they are underperforming.

Once they're out of the store base, can you give us any idea of what the lift is going to be either in terms of cost savings or elimination of losses or step up in sales per square foot or something of something like that?

Is it going to be meaningful?

The stores don't lose a lot of money.

I mean were talking about $0.01 to $0.02 a share benefit from the closure of these stores.

It does help our sales productivity number but again, you're talking about 1% to 2% on that line.

And the closures, they're spread across different concepts also.

Okay but going back to Jeff Black's question about cost savings, you're going to analyze some cost savings by 2015.

Can you give us a rough idea whether these are going to be significant or not?

Susan, when you look at what we've done, it's been a very targeted approach.

We've looked at both our North American and European cost structure and we're focusing on those businesses that are underperforming.

So, we are going to continue to invest in growth areas like North and Eastern Europe, Asia, we mentioned Japan, Latin America, and in some cases we may actually redirect some of those resources towards those growth regions.

But when you look at what we've already executed up on in North America and Southern Europe, they essentially we protect all of the back-office functions and you're talking about roughly with those specific functions about 5% to 10% of the cost structure.

So, when you look to the guidance and the outlook we've given, we do have some embedded cost savings in the back half of the year that we expect to achieve in that were talking, the goal here -- we look at it more is more on an SG&A basis, and that even with the tough economic conditions the goal is still to have the SG&A rate flat to last year.

And then on a long-term basis, are there any more opportunities, historically we've been at about 27% SG&A rate right now we're probably about 300 basis points higher and so the goal in our long range plans is to get back closer to that 27%.

There are no further questions in the queue at this time.

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

Please proceed.

Thank you.

Thank you everyone for being part of this call and this is the beginning of the year, and we look forward to achieve all these goals that we have in mind then.

We just finished an executive retreat 10 days ago and there is one word we walked away with to accomplish this goal we have.

It's courage.

Courage about to do new things, courage to do decision and what will impact our customers, what will impact our business, what will impact our productivity, what will impact our purchasing roles, and it takes courage either way, one way or another.

But we are firmly decided to do that and we will do that.

So thank you very much and we will see you in two months, in May for the Q1 report.

Thank you.

Thank you for your participation on today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.