Guess? Inc (GES) 2014 Q3 法說會逐字稿

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

third-quarter fiscal 2014 earnings conference call.

On the call are Paul Marciano, Chief Executive Officer; Michael Relich, Chief Operating Officer; Sandeep Reddy, Chief Financial Officer; 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.

Please note that this conference is being recorded.

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

Thank you.

Good afternoon and thank you for joining us today.

We are pleased with our third-quarter performance as we delivered adjusted earnings per share of $0.42, which exceeded the top end of expectation.

With the executive management team now fully in place.

We made very good progress on many of our strategic initiatives during the quarter.

Overall, the third quarter we saw stabilization of trends in most of our business across the regions.

With prudent planning we were able to anticipate and manage our resource carefully, as well as our inventory, finishing the quarter with nearly flat inventory to last year.

This is critical, considering that we're seeing more aggressive promotional activities globally.

In North America, our retail business met expectation with comp sales down 5%.

The business performed consistently throughout the third quarter.

Mall traffic remained soft in both US and Canada.

But we were able to significantly drive up conversion in our own stores with a more compelling collection.

In the month of November, trends had improved.

We were able to deliver slightly negative comp helped in part by a positive Black Friday weekend.

We saw great response to our offering in denim, knit top and handbags.

Traffic trend improved from the third quarter in both US and Canada and conversion continued to trend positively.

The product assortment in our stores is beginning to affect the vision of our design and merchandising team.

As we continue to innovate and refine our collection across our categories, I am very encouraged to see that our retail product strategy is improving rapidly.

Our omni-channel strategy continued to take shape during the quarter, now with 100 stores participating in our in-store fulfillment.

Along with some industry-leading technology that we implemented in the past year, we drove a 33% increase in our North America e-commerce business over last year.

In Europe, we made progress in our retail business even as economic conditions remained challenging.

Our retail stores in almost every country saw the trend improve from the first half, led by Spain, Germany and Portugal.

All comped positively.

Overall Europe comp finished down in the low single digit, consistent with our expectation.

Our wholesale business, especially Italy, continued to contract during the quarter, as we expected.

The decline continued to come primarily from our multi-brand customers, [while things are most] difficulty, navigating the challenging political and economic environment in Italy and France.

In Asia, our revenue declined by 3% during the quarter, better than what we had planned.

Our South Korean business grew modestly while the greater China business declined.

We continue to see soft consumer spending in mainland China while our Hong Kong and Macau stores remained strong and delivered positive comp.

In closing, we have a strong management team here.

We have a clear understanding of the Guess?

brand and history of international expansion, as well as a strong balance sheet.

It is our job to expand our growth and execute our vision in existing markets and deliver strong results.

Next quarter will be decisive for the year result and the discipline we apply to deliver high-quality product to our consumer for this holiday.

With that, I will hand over to Sandeep to discuss financial performance for the third quarter.

Thank you, Paul, and good afternoon everyone.

During this conference call all of our analysis will be on an adjusted basis, which excludes the impact of restructuring charges incurred during the first three quarters of fiscal 2014.

You can find more details on these charges and reconciliation to our GAAP results in today's earnings release.

Moving on to the results.

Third-quarter net earnings decreased 3% to $35 million.

And diluted earnings per share was $0.42, down 2% compared to $0.43 per share in last year's third quarter.

Third-quarter revenues decreased 2% to $613 million in US dollars, and declined 4% in constant currency.

Total Company gross profit for the third quarter was $228 million, down 8%.

And gross margin was 220 basis points lower at 37.2%.

Occupancy deleverage in Europe and more promotions in North America were the main drivers of the margin change.

We leveraged our operating expenses, posting an SG&A rate of 29.1%, an improvement of 110 basis points over last year's third quarter.

Overall SG&A decreased 6% to $178 million.

The lower rate was primarily driven by lower selling and merchandising spend in Europe, and lower advertising and marketing spend.

Operating profit for the third quarter decreased $8 million to $50 million, and operating margin declined by 110 basis points to 8.1%.

We recorded restructuring charges of $2 million in the third quarter, primarily related to consolidation and streamlining of our European operations.

These charges consisted mainly of lease termination payments related to the exit of certain store locations that no longer align with our strategic priorities, and severance expenses.

Other net income was $4 million, and mostly represents gains from other non-operating assets.

Our effective third-quarter GAAP tax rate was 33%, compared to 35% in the prior-year quarter, in line with our guidance for the quarter and for the year.

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

In North America Retail, third-quarter revenues were down 3% at $254 million, driven by a 5% decline in comp store sales in the US and Canada, partially offset by growth in our e-commerce business.

Gross margin declined in the quarter compared to a year ago, primarily due to more promotional activities.

SG&A decreased both in terms of dollar and rate as a result of lower store expenses, as well as lower advertising and marketing spend.

This was partially offset by deleverage due to negative comp store sales.

Operating earnings declined $3 million to $6 million.

And operating margin decreased 100 basis points to 2.4%.

During the quarter, we opened three new stores and closed eight, ending the period with 502 stores in the US and Canada.

In Europe third-quarter revenues were $201 million, representing a 1% decrease in US dollars and a 7% decline in local currency.

Wholesale shipments continued to decline in Southern Europe, partially offset by growth in newer markets.

In our Europe Retail business, comp store sales declined in the low single digits, but were more than offset by new store expansion and favorable currency translation.

Gross margin declined compared to last year, mainly due to a higher occupancy rate, driven by lower wholesale shipments and retail expansion.

SG&A expenses declined significantly, both in terms of dollar and rate, primarily due to lower selling and merchandising costs.

Operating earnings decreased by $1 million to $14 million.

And operating margin decreased 50 basis points to 6.7%.

In Asia, revenues in the third quarter declined by 3% to $73 million in US dollars and 6% in constant currency.

In Korea, the top line increased in the low single digits in local currency and mid single digits in US dollars, driven by store expansion as well as slightly positive comp store sales.

This was more than offset by the performance in the rest of Asia, especially in greater China, where revenues were down mainly driven by lower shipments to our licensee partners, partially offset by positive comps.

Operating earnings decreased 24% to $6 million.

And operating margin decreased 230 basis points to 8.1%, mainly driven by lower gross margin.

In North America Wholesale, third-quarter revenues declined 7% to $54 million.

Operating earnings decreased by 19% to $12 million.

And operating margin decreased 310 basis points to 22.6%.

The lower operating margin is primarily driven by a higher SG&A rate compared to last year's and mainly due to deleverage.

Royalties generated from sales by our licensee partners were up 3% compared to last year's third quarter at $32 million, but below our expectations.

Operating earnings increased 8% to $29 million.

Now turning our attention to the balance sheet, we ended the quarter with cash and short-term investments of $360 million, compared to $295 million a year ago.

This comparison includes the impact of $22 million of repurchases of our stock in the first quarter of this year and a special dividend of $102 million in the fourth quarter of last year.

Accounts receivable was 20% lower at $259 million.

And overall DSOs improved slightly compared to last year.

European DSOs were flat to last year as slower payments in Italy were offset by other regions.

Inventories increased just 1% to $427 million, as we continued to improve our inventory positions quarter over quarter.

Lastly, in the third quarter capital expenditures totaled $15 million.

For the full year, we plan to invest between $70 million and $80 million in capital, net of tenant allowances, primarily for new stores and remodels.

With that, I will turn the call over to Mike.

Thank you, Sandeep.

And good afternoon.

Today I will update you on our business trends and provide our outlook for the fourth quarter and the full fiscal year 2014.

Our overall earnings expectations for the year have not changed.

However, we are adjusting our revenue expectations given the improved visibility in our businesses.

In North America Retail, comp store sales were down slightly in the month of November, and we are planning the fourth quarter assuming comp decline in the low single digits.

This, combined with the impact of last year's extra week, would translate into a revenue decline in the low to mid single digits.

For the full year, we now expect comp store sales to decrease in the mid single digits and for revenues to decrease in the low single digits.

In Europe, so far in the fourth quarter comp store sales are consistent with the third quarter, and are down in the low single digits.

For the full fourth quarter, we expect the comps to decline in the low to mid single digits.

For the year, we continue to plan comp store sales decrease in the mid single digits.

In our Europe Wholesale business we have completed our sales order campaign for our spring-summer collection, which will ship in the fourth quarter as well as the first quarter of next year.

So orders, down in the mid teens, are not as strong as we had anticipated.

Considering these factors, as well as the larger store base and the impact of last year's extra week, we expect total Europe fourth-quarter revenues to decline in the high single to low double digits in local currency.

Assuming the euro remains at current rates, this would result in a revenue decline in the mid to high single digits in US dollars.

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

In Asia, our business performed in line with expectations in the third quarter, and our outlook for the year has not changed.

We are planning for Korea to continue its revenue growth in the fourth quarter.

The growth there will be offset by a decline in greater China as we see a persistent softness in consumer demand, and as we work through the impact from the steps we took to stabilize the business of our licensee partners in the last quarter.

Given these factors, as well as the impact of last year's 53rd week, we expect fourth-quarter revenues for Asia to decline in the mid to high single digits.

For the full year, we continue to expect revenues to decline in the low single digits.

In our North America Wholesale business, we expect revenues to decrease in the low 20s for the fourth quarter, driven by lower orders from our customers as well as the anniversary of last year's 53rd week.

This will result in a decline in the mid single digits for the full year.

In licensing, our licensee partners are facing a softer environment than they had expected.

As a result, we are planning royalties to be down in the high single digits in the fourth quarter.

For the full year, we now expect royalties to be flat.

Turning to gross margin for the fourth quarter, we expect consolidated product margin to decline, mainly as a result of continued promotional activity in North America.

We are also planning for a higher occupancy rate, primarily as a result of lower wholesale shipments in Europe and last year's 53rd week.

This would translate into a decline in gross margin for the full year.

With respect to operating expenses, we expect a flat to slightly down SG&A rate for the fourth quarter.

For the full year, we expect the SG&A rate to be slightly lower.

With respect to taxes and currencies, we are planning the full year with a 33% tax rate, and our guidance assumes foreign currencies remain at prevailing rates.

Considering all these factors for the fourth quarter, we expect consolidated revenues in the range of $750 million to $770 million.

We are planning an operating margin between 13% and 14.5%.

And for EPS in the range of $0.74 to $0.84 per share, excluding any restructuring charges.

These expectations would result in full-year consolidated revenues between $2.55 billion and $2.57 billion, adjusted operating margin between 9% and 9.5%, and adjusted EPS in the range of $1.82 to $1.92 per share, excluding any restructuring charges.

Including the $0.09 of restructuring charges incurred in the first nine months of the year, we expect GAAP operating margin between 8.5% and 9%, and GAAP EPS in the range of $1.73 to $1.83 per share.

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)

Eric Beder from Brean Capital.

Good afternoon.

Congratulations in a tough environment to making your numbers.

Could you talk a little bit about the acceptance of the new kind of value-priced product in terms of denim?

And is that driving customer traffic in the US?

And when you look at accessories, how do you feel the accessories business has been doing?

And where do you see that going from there?

Thank you.

Okay.

Starting with the value-priced items, it's been a big success for us.

The customer's really responding to the $79 denim.

We've had overall denim sales in the third quarter were much better than they were in Q2.

And we saw that get even stronger in November.

We had double-digit comps in November in our full-priced stores with denim.

So that's kind of a big success for us.

As has a lot of the key item programs that we put in the stores.

Especially in November, it's really starting to gain some steam.

We're picking up business in knit tops, which has been a really difficult category for a while, and we're making a lot of headway.

In the accessory category, handbags have been coming along very well for us.

We had positive comps in Q3 in our full-priced stores.

And factory trends have also been improving in factory, was actually up in November.

Watches have been okay.

Comps were down slightly in the third quarter, kind of consistent with the store.

And we're still working real hard to get the shoe business turned around.

We had a lot of success with boots early and we've been really chasing inventory recently.

Thank you.

Eric Murphy from Piper Jaffray.

Great, thank you.

It's Erinn Murphy from Piper.

Just a question, maybe for Paul.

If you could address just a little bit more on the European landscape.

It does sound like you're seeing a little bit of improvement relative to where we've been year to date, but it's really Italy and France that are still soft.

Can you just speak a little bit more about what you're seeing in those markets as we head into 2014?

And then just I guess related to that, the backlog for spring seems a little bit lighter than we were thinking, down low double -- it sounds like it's down mid teens.

Is that shortfall really from those two markets?

And is there any category specifically that could be driving that?

Thank you.

Yes, Erinn, this is Paul.

I just came back last week from Europe.

Definitely we see a turn, especially in countries where we are not expecting that.

For example, Spain.

Spain, Portugal has been positive trend.

Germany.

But France, Italy has been still on a slow pace.

France is picking up now.

Italy remains the most difficult environment at the moment.

And I think because of the huge debt they have, about the austerity plan they have put in place, new taxes.

And definitely have not seen the turn in Italy coming right now.

France -- I was in the streets everywhere last week and you see the shopping coming back, you see the energy coming back, even with the new tax law they put in place.

They have revised this new tax plan last weekend, the consumer seemed to respond to it.

Which was very unusual is, as you know, all the promotion and sales are very regulated in these countries.

And it was the first time I've ever seen that promotion everywhere with no rules, no restriction.

And meaning that the customers demand that and the retailers reacted to it, and that realigned themselves now to, we North America.

So this is a new day of a new normal, which I never thought it would happen.

Including stores opening Sunday which has been a big debate in France.

Which still doesn't happen in Italy, and which had 40, 50 days of business now for France.

So that's what I see above.

Sandeep will address the numbers.

Erinn, I think on the spring-summer 2014 order book, the last time we talked to you we were expecting to be more or less in line with the fall-winter 2013 order book, which was down in the low double digits.

And versus our expectations, unfortunately we've come in a bit softer and we're finishing that down in the mid teens.

And the issue really has been Italy and it's largely driven by the closure of multi-brand doors in Italy.

And almost half of the gap that we saw came from Italy.

And that follows very closely with what Paul was saying earlier.

Betty Chen from Mizuho Securities.

Hi, there.

It's [Alex Ham] on for Betty Chen.

I was wondering if you could touch a little bit on the softness that we're seeing in China.

Is there something else that maybe we can read into?

And then I was wondering if you could also touch upon product cost, what we're seeing maybe for 2014.

Thanks.

This is Mike.

Consumer demand in Asia continues to be soft, as Paul had addressed in his opening comments.

And in the last call we talked about steps we took to shore up our franchisee base.

Because of that we've had actually weaker shipments to our franchisee partners.

But if we look at our comps in greater China, actually they're soft in China but they're offset by strengths in Macau and Hong Kong.

In terms of product cost, I think Russ can address that.

Yes.

Our product costs were down slightly in the third quarter.

And we expect that to continue a little bit in the fourth quarter.

Next year we're still finalizing a lot of our plans but we're really happy with what we're seeing with the spring costing.

And we're really working on the supply chain team and we want to be even more aggressive with getting improvements in the back half.

But it's still a little early to say how we're going to be for the full year.

Janet Kloppenburg from JJK Research.

Hi, everybody.

Congrats on the progress you're making.

I wanted maybe for you to discuss your North American comps.

They're getting better.

It sounds like Black Friday was good.

My observations were that you may have been more promotional this year over last, although the product looks a lot better, as well.

So, I'm just wondering how the returns look there when you consider perhaps some margin pressure offset by improving sales trends.

And, Paul, I just wanted to clarify the European wholesale trends.

Could it be possible that wholesale orders are going to be up in some markets in fiscal 2014, like Portugal, Spain, Germany, and offset by continued declines in Italy and France?

Could it be possible that the product line is strong but it's just the demand and some of the macro pressures, European markets will hold off a turn up there?

And, lastly, Sandeep, if you could discuss the opportunity for continued cost reductions and cost containment as we go forward.

And if I could sneak in, if Mike could talk about supply chain initiatives, that would be great, as well.

Thank you.

Hi, Janet, this is Russ.

I'll talk a little bit about that North America first.

In November, you know as our business improved quite a bit.

I mentioned the denim earlier.

But another thing that's really paying off for us is our reduced SKU count and some of our deeper buys.

And I think, as you alluded to, the store looks better.

I think that we've got a stronger point of view.

And the knits have been giving us a significant improvement recently and we're looking for that to continue.

For Black Friday specifically, we were very happy with that.

We were up on Black Friday itself.

And we were up over the long weekend, as well.

And just to qualify that, we kind of read in the Thursday night sales as part of Black Friday.

We kind of looked at it as one longer day.

Some people looked at it differently.

Our promotion -- we tested promotions during the third quarter.

So what we did on Black Friday, it was a lot more profitable than what we did last year.

And there actually was very little margin dilution.

And what little margin dilution we had was really the result of us running it for a few extra days than we did before.

Great.

That's really good news.

Thanks, Russ.

And Janet, this is Sandeep.

I'll take the question on the wholesale shipments and expectations.

I think what we are seeing in Europe is we expect Russia and Germany to continue to grow, as we've talked about previously.

They are growing and that trend is expected to go on.

Eastern Europe also is an opportunity for us to keep growing.

The reality is, all these, while they are opportunities, there is definitely softness in Southern Europe.

And when I say Southern Europe I'm talking about the wholesale market, whether it's in Italy or France or Spain or Portugal.

All of them are multi variables.

Okay.

So, Sandeep, then, we should expect that region to really be under pressure at least through the first half of next year.

Yes, I think we've talked about the spring-summer 2014 order book.

And, just so you know, it ships in the first quarter of next year.

So already by giving you that projection, you get a sense of what the trend is expected to be in the first quarter.

But I think for the fall-winter order book, by the time we talk to you next, we'll have some visibility into that and then we can give you better (inaudible).

And, Janet, it's me, Paul.

I wanted to complete what Russ was talking about, November.

We saw that big turn, big turnaround, (inaudible) velocity.

But also, to mention the knit top and sweater, big turnaround story there on the sexy knits, date night tops.

We had a fashion key item in that and this one was driving the comps.

We wish we had more fashion sweater.

We were a little bit short on that.

Dresses, we have excellent business in November.

Mainly driven by Bodycon.

And, of course, our Claudia dress is all over the windows.

We have right now one single dress has been doing a lot of business.

We wish we had more comps.

Men's business has been really strong in November in all markets.

I can tell you now about the misses, what we missed.

Footwear has been challenging for us.

We under-invested, we believe, in boots and booties.

But we have reorders coming right now next week.

We were a little bit short on that.

And sweaters, Canada, we were a little bit also -- our business was soft on that because we under-bought, we believe.

But we had a clean, clear balance question of inventory, and we are very happy to be just 1% inventory, almost flat inventory in Q3.

The environment is extremely promotional.

And the last place we want to be is to be heavy in inventory right now.

And the marketing looks terrific, Paul.

Great progress there.

We focused a lot in denim, denim and denim.

Denim, denim, denim and really it feels like Guess?

again.

Thanks.

Janet, just to follow up on the discussion on Southern Europe, we talked about the wholesale markets being tough.

We've seen an interesting trend in the retailer, directly operated retail stores, where we improved in Spain, Portugal and Italy.

And we've seen that trend coming in Q3 and continuing into Q4.

So that's something for you to note, that there's a divergence in trend between wholesale multi-brand and property retail.

Thanks.

John Kernan from Cowen.

Good afternoon, guys.

The competitive environment in North America is obviously evolving pretty significantly.

You've reduced SG&A dollars at least $40 million year over year.

CapEx is down pretty significantly from where it's been historically.

Is there a risk you aren't investing enough in marketing and omni-channel and supply chain, given kind of the evolution of the competitive environment here?

Are you worried about that?

And then, as we look into 2014, are there more marketing and SG&A reductions, to the point where we could potentially see SG&A dollars decline again year over year?

And then I have one follow-up on the licensing business.

Thanks.

This is Paul.

About marketing, we see to next year a flat investment in marketing.

We have a lot of effort on now social media, the CRM and all that category, which is not under the marketing budget.

And definitely we continue in that direction.

But if you open any magazine of fashion, clearly you will not see a slowdown in our presence in magazine in North America or in Europe or in Asia.

Maybe less billboard, maybe less bus shelters, but clearly our presence for 30 years has been and will always be heavily present in print magazine, besides the digital advertising and Internet.

And just to follow up on the question on whether we think we're making enough investments.

Absolutely we are.

I think the intention of this year was to prune our cost structure to actually be able to fund investments.

And we continue to do that, whether it's in the form of resourcing our supply chain organization or we actually talk about putting money into new green markets like Japan and Brazil where we've already been investing during the course of this year.

And we will continue into next year.

Okay.

That's helpful.

And then the licensing business is obviously amazing business for you guys.

I think at this point it's now making up the majority of your operating profit.

Can you talk about how your licensing partners, by specific categories, feel about heading into next year?

And how many more licensee stores?

I think you're up to 862 at this point.

How many more of those stores do you think the brand can support globally?

Thanks.

I think there's a mix of we have franchisees, we have joint venture stores.

For example, if you take Portugal, Canary Island, the South of France, these are joint ventures which are consolidated in our numbers.

We consider that as directly operated.

And then you have the franchisees like Southeast Asia and Europe.

We continue to see an average a year between 100 to 150 stores opening a year, on a regular year.

And then you see also some closure, mainly south of Europe, of credit issues, like in France and Italy again and again.

That will offset that maybe by 50 doors a year.

So net could be 100 stores.

I'm talking franchisee and joint venture.

What was the rest of the question?

How do your licensing partners feel heading into next year?

Yes.

About, for example, if you take handbags, handbags we look at the improvement and going on positive in the next year.

Watches has been in the negative trend this year but we see also a turnaround here on this month of November, and improvement.

They were negative but improvement.

And then you have also the shoes.

We just reviewed yesterday, in fact, all the summer and next fall shoes, and we are extremely pleased and ready to invest much more heavily for the next back-to-school delivery.

We feel stronger about that.

Belt and jewelry is minor for us.

I mean the three categories is handbags, watches and footwear, which represents, I would say, 80% of our license business.

So in general, we see definitely an improvement throughout not only our stores but throughout the wholesale business for the licensee.

Okay, great.

Thanks.

That's helpful.

Good luck.

Jeff Black from Avondale Partners.

Yes, thanks.

Congrats on a well-managed quarter.

Could you maybe talk about what's going on with the new merchants in the apparel division in the US, and how you're managing that business going forward?

And what are the opportunities into 2014 on the apparel design production side?

Thanks.

Yes.

If you heard the comment just before about November, this was really the first months where we could see a first impact of our head merchant, Hillary, where we saw some really big turn.

And also much more strong confidence in assortment and SKU plan.

We saw positive comp coming with 25% less assortment in our stores in North America.

That is Canada and, of course, is there.

But also the focus and clarity of the selection of denim and buying conviction which came with it clearly was shown by the numbers of product we have been selling in certain specific categories.

In one style I think there was almost 10,000 units in one style, so did one week, which is an unusual number for one SKU for us.

Because we are such a large lifestyle brand, with many categories in accessories and apparel, men and women.

We see every single week and every single month improvement week after week in North America.

The best way is to go and visit the store, I think.

That's the best, is to go and get a sense, when you go in a store, what is your impression comparing to six months ago or comparing to a year ago.

About the design, the design you see also, you're going to see a much more clear point of view as what Guess?

brand is, and working very closely with the head merchant and, of course, with myself.

But also production.

I think Mike will address that, about the supply chain and global sourcing.

Supply chain is a core initiative for us.

Our goal is to build a world-class supply chain organization.

And along those lines we just hired a Chief Supply Chain Officer who's got extensive global experience, and especially experience in denim.

So, we think that we have a big opportunity to reduce costs, increase IMU and shorten lead times.

Right now we have pretty much original sourcing structure.

We think there's a big opportunity to aggregate demand, especially in raw materials, to drive better pricing -- aggregate demand along key categories such as denim.

Also, reduce our factory base.

And then provide supply chain visibility with our biggest partners so they have visibility into our projections, et cetera, and they'll help drive efficiency.

So, we're really excited about making inroads in this area.

And to add something to that, we think that we are again in a denim and end euro cycle.

And this is definitely our landscape.

We know that landscape pretty well.

But what we saw a little bit as a surprise for us was fashion denim.

Fashion denim has not been as strong as we thought.

And we were a little bit over-assorted at the beginning of Q3.

We corrected that.

And clearly, again, you will see a reduction of fashion denim offering, and much stronger presence of the $100 denim and under that, where we have double-digit comp every single week the last few weeks now.

Great.

Good luck on all the initiatives.

Thanks.

Dana Telsey from Telsey Advisory Group.

Good afternoon, everyone, and congratulations on the improvement that you're seeing.

When you talk about the opportunities that you have with cost reduction, IMU increases and shortened lead times, which one is there the most opportunity in?

And as the operating margin has suffered over the past two years, where do you see it getting back to?

I think the peak was around 17%.

Where are we going back to and over what time frame?

Thank you.

Okay.

We think there's opportunities, obviously, to reduce costs and shorten lead times.

We just hired this new Chief Supply Chain Officer.

He's only starting on Monday.

So we're currently putting together a plan.

And when that plan materializes we'd be more than happy to share it with you.

With respect to the operating margins, we don't provide guidance on operating margins going forward.

Right now, we'll do that next year.

And when we're ready, we'll be more than happy to share that with you.

Dana, this is Paul.

Of course, the 17% that you talk was at the peak when also we were less operating on the direct stores operation.

So, if you look at that, that was when we had maybe 300 stores directly operated at the time.

So I think a more realistic goal will be around 14% in the next maybe two years as a goal, two and-a-half years, three years, more in the 17%.

17% would be a long shot.

And when you talk about increasing IMU and shortening the lead times, how much do you want to shorten the lead times on?

And is there categories where you can get the biggest benefit?

And on the increasing IMU, the same thing -- which categories could you see it and how much?

Clearly, again, denim.

Denim, we are -- in fact, yesterday we had a large meeting about that -- we are going to shorten lead time by many weeks.

Mainly also because competition has been cutting those lead time.

IMU, we are seeing some improvements, again.

But the lead time is more important for us right now to be lower and lighter in inventory, and be able to move on a faster pace to have latest trend, emerging trend, and have open door to be able to react to any last minute trend.

On the IMU, I think that clearly if we have a better supply chain on less vendors, and a more focus on the assortment between fashion and fashion basics, I think IMU should definitely improve.

Thank you.

(Operator Instructions)

Mr. Chandak from B. Riley & Company.

Hi, guys, it's Pankaj Chandak for Jeff Van Sinderen.

You're clearly sitting with very strong reception for $79 entry price point denim.

Does that change your thinking about selling your $130 full-priced denim?

And maybe you could give us some color around the performance for premium denim in Q3 and in November.

This doesn't change our perspective about selling the $130.

There's still an appetite for that, for the higher-quality denim in our stores.

So, it's something that we still plan to offer.

However, we are skewing some of that buy at the higher price points to the under $100 price points, as Paul mentioned, because we're able to turn that product a lot faster.

So, some of that business has moved toward the lower price point.

But, as I alluded to earlier, the overall denim sales are still up quite a bit as a result of that.

Okay.

So I think when Paul mentioned the fashion denim, was that the full-price denim?

Yes.

And it's not only the $79 denim.

You have the $89 and $98.

So it's all the jeans under $100.

A lot of the sales are $89 and $98.

The entry point is $79.

Understood.

But what we had a year ago was a very large selection of jeans between $128 and $168.

We reduced that offering and expanded our offering at the $100 and below.

And clearly that was the right decision and the right strategy.

And the customer definitely reacted very strongly to that.

Got it.

And if I could do a quick follow-up.

How would you compare your Black Friday promotional levers this year versus last year?

Anecdotally, we noticed a 40% sale on the entire store.

Yes.

Last year it was $30 off of regular price and it was $40 off of markdowns.

But because we skewed more of that business toward reg price stuff we didn't lose any margin on Black Friday itself compared to a year ago.

So, we were very happy with the results.

It was something we had tested earlier in Q3 so it gave us a lot of confidence.

Thank you guys.

David Glick from Buckingham Research.

Thank you.

Most of my questions have been asked.

I just had a question, however, about the trends in November in North America.

If I'm not mistaken, you're reporting on a 4-5-4 basis, so you're a week ahead of last year.

It sounds like you made some progress over Thanksgiving.

I assume that was on an apples-to-apples basis.

As I understand the 4-5-4 calendar, the November trend should be significantly above December, given the six fewer selling days in fiscal December.

So, I just want to understand how you're looking at that November result, and how you'd be thinking about the plan relative to December, given the calendar anomalies this year.

In our guidance we're guiding to down low single digits.

So, we do expect some softness during the first half of December.

And that's really a trend we've seen over the last three, four years.

And we do expect that to continue and for a lot of the customers to show up at the last minute before Christmas, and even that last week of December.

So that dynamic is embedded in our guidance.

Okay.

And so you did benefit in week one from the Hurricane Sandy compare in November?

Yes, we did.

Okay.

Great.

Thank you.

Good luck in the fourth quarter.

Thank you.

We have no further questions at this time.

I will now turn the call back over to Paul Marciano.

Thank you.

Thank you for being part of our conference for the Q3.

Of course, we are all focusing now, praying that the weather will be helping us also, that we don't have another surprise for Q4.

But we feel very good.

We feel very strong, but even for spring, the spring coming up.

We feel that the cycle will be in our side now on the denim and we are excited about that.

We're excited about what we have seen coming up already.

And we will talk to you on the closing year, which will be in March, I believe, March 14.

Have a great holiday.

Have a great new year.

And merry Christmas, also.

Thank you.