Guess? Inc (GES) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Guess?

fourth-quarter FY14 earnings conference call.

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

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 quarter 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 Paul Marciano.

Thank you.

Good afternoon and thank you for joining us today.

We reported overall fourth-quarter results consistent with our expectation.

We posted adjusted earnings per share of $0.83, which was near the high end of expectations despite a very promotional retail environment in North America.

This quarter was a challenging year impacted by the continued softness in the economies of southern Europe, as well.

But I'm encouraged by the progress we made in 2013.

And I want to highlight some of these before getting into business performance.

We completed our executive team in North America.

We strongly improved our product and our retail stores will show you that.

And, three, most importantly, we are rapidly growing our omnichannel presence.

During 2013 we rounded out our top executive team with a combination of new and existing talent.

With this leadership position now filled, I'm very confident that we are now able to execute our long-term strategy [priorities].

Now about the product.

Everything starts and ends with the product, as we always say it.

From the first day of [three-jeep] jeans in 1981 to the curvy skinny jeans today, our brand heritage is rooted in denim.

We return to our denim roots in 2013.

We improved our denim design, increased our denim offering, increasing the curvy seat and our newest highlight heritage collection.

But speed to market, plays an increasing role in our retail stores where up to 25% of our buy now are left open for the latest fashion both in US and in Europe.

In addition to denim, dresses have developed extremely well over the last two years, and getting stronger, as well as knit top assortment, which fits in perfectly with our customer profile who look to us for iconic and fashionable styles.

Accessories like handbags and shoes remained challenging during the back year.

But we are driving increased collaboration and consistency between our apparel and licensed product which I'm confident will benefit the assortments.

Also, we're seeing strong momentum in the supply chain initiative that will allow us to achieve this goal, which Mike will cover later on.

Omnichannel was a commitment and a key priority on our last year March 2013 call.

We grew our North America e-comm business by 28% in 2013.

But the momentum really picked up beginning of the third quarter, and in the second half of the year we grew 34%.

So far this fiscal year e-comm is continuing the strong growth with significant increase from every brand.

Mike in his previous role as the CIO has put into place some industry-leading set of technology that links the brick-and-mortar stores, e-comm and mobile in one.

That tends to support a much larger business than the one we have right now.

We have big goals for omnichannel for the next three years.

Now, North America on the business update.

As I mentioned earlier, 2013 was a challenging year.

And I was especially disappointed in the performance of North American business outside of e-comm.

In the fourth quarter, due to adverse weather condition and shortened holiday period that negatively affected many of our retailers, we were not able to sustain the strong momentum of Black Friday weekend into Christmas and after.

We also faced highly promotional competition.

And on top of that, mall had negative traffic.

Finally, we missed product opportunities.

And, under bought, outerwear and sweaters which impacted the performance in our retail stores, we've now come down 4% in US dollar and 3% in constant currency for the quarter.

The bright spot was our e-comm business, as I mentioned before, which once again delivered a very strong growth of 35% in the quarter.

Europe -- I'm encouraged by the performance of our European business.

It showed signs of improvement in the fourth quarter, as our property retail stores in that region posted positive comp for the first time after 10 consecutive quarters of comp decline.

Within southern Europe, Spain continued to comp positively, up in the high single digits.

France was also up in the low single digits.

Italy remained negative with comp down in the low single digits.

So far in the first quarter, we're seeing positive comp in all these three countries, including Italy.

One of our new focus this coming year will be direct marketing.

We have a lot of customers who are passionate about Guess?

and want additional communication like e-mail, mobile and social media allow us to expose our brands to millions of customers around the world.

I believe the best way to get our customers connected to our product is to put catalog and mailer directly into their hand, which is all tied to e-comm one way or another.

Above all, as a closing, it is our Guess?

brand that is represented through an amazing lifestyle line of products from denim and apparel to handbags, watch and footwear that resonate and inspire customers.

We have a strong management team now and an outstanding network of partners, licensees and suppliers.

We are backed by our strong financial position and capital structure to take advantage of new opportunities.

Our strategy will remain consistent with our long-term view, never compromising our quality or our brand equity.

Our goal is to leverage our presence globally and execute on our strategies in each region of the world.

As a [wave], we will focus on the things that we can control and adapt each day to the new normal.

Thank you.

Sandeep will discuss now the financials.

Thank you, Paul.

And good afternoon.

During this conference call all our comments for both the fourth quarter and the full fiscal year are on an adjusted basis, which excludes the impact of certain restructuring charges in FY14 and certain tax charges in FY13.

You can find more details of the current and prior-year charges and a full GAAP reconciliation to these and other non-GAAP measures on today's earnings release.

Moving on to the results, fourth-quarter adjusted net earnings declined 13% to $71 million.

And adjusted diluted earnings per share were $0.83, down 13% compared to $0.95 adjusted diluted earnings per share in last year's fourth quarter.

Fourth-quarter revenues were $768 million, 6% lower than the prior year, and down 7% in constant dollars, and includes the impact of the extra week in the prior fiscal year.

Total Company gross profit for the fourth quarter was down 9% at $302 million.

And gross margin declined 150 basis points to 39.3%, within the range of our expectations.

The gross margin was driven by a reduction in product margin due to increased markdowns that deleveraged the impact of negative comparable store sales on occupancy.

We leveraged our operating expenses for the four consecutive quarter this year, posting an SG&A rate of 25.7%, an improvement of 40 basis points over last year's fourth quarter.

Overall, SG&A decreased 7% to $197 million.

The reduction of SG&A was driven by lower store selling expense, lower selling and merchandising costs, and lower advertising.

Operating profit for the fourth quarter decreased 13% to $105 million.

Our operating margin declined 110 basis points to 13.6%, within the range of our expectations.

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

These consisted mainly of severance and lease termination charges.

Other net income was $1 million and mostly consisted of unrealized gains from nonoperating assets and foreign currency contracts.

Our adjusted effective fourth-quarter tax rate was 31.4%, roughly flat with the adjusted tax rate of 31.1% in the prior-year fourth quarter.

Moving to segment performance, in North America retail, fourth-quarter revenues dropped 6% to $329 million.

The main drivers were the impact of last year's 53rd week and a 4% decline in comp store sales in the US and Canada, which includes the unfavorable impact of the weakening Canadian dollar.

This was partially offset by a 35% revenue increase in e-commerce driven by the success of our omnichannel initiatives.

Operating income declined 24% to $27 million.

And operating margin declined 190 basis points to 8.3%.

Compared to last year, gross margin was lower due to higher markdowns and a higher occupancy rate as a result of negative comp store sales.

Our SG&A rate decreased mainly due to a reduction in our store payroll rate.

In Europe, fourth-quarter revenues decreased to $287 million, representing a 4% decrease in US dollars and an 8% decrease in local currency.

The decline was mostly driven by wholesale, reflecting the mid teens decline in the spring-summer 2014 order book that we communicated on the last call.

In contrast, the retail channel trend in Europe was encouraging.

For the quarter, overall comp store sales increased in the low single digits, marking the first positive quarter of the 10 consecutive quarters of comp declines across the region.

This is a continuation of the improvement and trend we have been seeing in the European retail channel in the second half of the year, especially in southern Europe.

Operating income decreased by 5% to $50 million.

And operating margin decreased 10 basis points to 17.3%.

In Asia, revenues in the fourth quarter were better than our expectations, declining 1% to $83 million.

South Korea grew the top line in the mid single digits, driven by positive comp store sales growth.

This was more than offset by the performance in Greater China where revenues were down, mainly driven by lower shipments to our licensing partners, partially offset by positive comps.

Operating earnings fell 13% to $8 million.

And operating margin dropped 120 basis points to 9.3%, but was slightly above our expectations.

In North America wholesale, fourth-quarter revenues decreased 20% to $41 million, which includes the negative impact of timing of shipments in the previous fiscal year due to the extra week.

Operating profit decreased by 27% to $10 million.

And operating margin decreased 230 basis points to 23.4%.

Royalties generated from sales by our licensing partners were better than we expected at $28 million, which represents a 5% decline from the prior year.

To summarize for the full fiscal year, consolidated revenues were down 3% at $2.57 billion and down 4% in constant currency.

The decline in sales reflects lower European wholesale shipments, negative comparable store sales in North America and Europe, and the impact of the prior year's 53rd week.

Adjusted operating earnings were $235 million, down 14%.

Overall, our operating margin of 9.1% was down 120 basis points from last year's adjusted operating margin, driven by the impact of negative comp store sales and our fixed cost structure, the lower mix of wholesale and Europe, and higher markdowns in North America.

This was partially offset by lower selling and merchandising expenses in Europe, resulting from productivity improvements and lower marketing spend, which improved the SG&A rate by 90 basis points versus the prior year.

For the fiscal year adjusted earnings per share decreased by 11% to $1.91.

Moving on to the balance sheet, accounts receivable was 13% lower at $277 million.

And overall DSOs improved compared to last year.

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

Inventories were down 5% versus last year at $351 million.

We are very pleased with the sequential improvement of inventory every quarter over the course of the year.

We ended the quarter with cash and short-term investments of $508 million compared to last year's $336 million.

During the year we returned $90 million to our shareholders comprised of a share repurchase of $22 million in the first quarter and $68 million in quarterly dividends.

A key strategic focus of ours is free cash flow generation.

We are pleased that through strong management of working capital and a disciplined deployment of capital expenditures in FY14 we generated free cash flow of $253 million versus $169 million in the prior year.

It is important to note, however, that we have one-time cash inflows of roughly $57 million in FY14 related to a refund of multi-year VAT credits and a key money payment from one of our licensee partners.

With that, I will pass the call over to Mike who will talk about our key strategic and operational initiatives and their impact on our financial outlook.

Thank you, Sandeep.

And good afternoon.

I would like to now take the opportunity to address several of our major strategic initiatives that we will be focusing on in FY15.

There are three major initiatives I would like to cover -- expanding omnichannel, improving supply chain efficiencies including speed to market, and optimizing global planning and allocation.

First omnichannel.

As Paul mentioned earlier, we have made major inroads in this area this year with our North American e-commerce business being the fastest channel of growth.

Since a year ago our customers have been able to reserve merchandise online and pick up in store.

More recently, in the last year's third quarter, we rolled out in-store fulfillment capabilities that optimized the inventories we have sitting in most of our Guess?

stores and Marciano stores in the US.

We are now fully deploying these technologies across all of our stores in North America.

And just as importantly, continue to align our organization behind this key initiative.

Our omnichannel strategy is not limited to North America, as we are leveraging the platform used here in Europe where customers in 32 European countries can purchase directly from us online.

This business is underpenetrated and we intend to roll out similar omnichannel initiatives there.

Both in North America and Europe we expect to continue to see strong double-digit increases in e-commerce revenues.

And these assumptions are included in the guidance we are providing for the coming fiscal year.

Second, supply chain.

Supply chain has been my top priority since I took on my new role last August.

Our goal here continues to be building a world-class supply chain organization centered on efficient processes.

We are focused on driving efficiencies through optimizing our internal processes, further consolidating our supplier base, and building partnerships with key strategic measures, optimizing our country mix to reduce duties and improve transit time, driving competitive bidding and counter sourcing to capture further cost savings.

And further reducing the cycle time to react to market fashion changes, while delivering on Guess?

quality that our customers have come to expect globally.

While we are still in the early stages of executing to these initiatives, we have already made encouraging progress so far.

We were able to capture significant IMU savings for several of our North American businesses for the second- and third-quarter deliveries.

Overall we believe there is a cost opportunity from sourcing that can be accretive to the tune of 30 to 40 basis points in product margin this year for the Company.

And that is included in the guidance we are providing for the coming fiscal year.

Third, planning and allocation.

We are a fashion company and our goal is to develop the most accurate plans and allocate products to stores that can maximize their sell-through potential in the sales window.

I see a great opportunity to improve the process in North America through better processes and the use of advanced analytics, and to export the expertise to our European retail organization to drive globally consistent processes.

The success we had in e-comm order-in-store highlights the opportunity we have with omnichannel.

But at the same time speaks to the vast room for improvement in how we plan and allocate to our stores in the first place.

Our goal is to ultimately minimize order-in-store, which would mean we are doing a better job with initial allocation.

Finally, the brand has such great potential worldwide and we continue to grow our business in underpenetrated new markets.

This includes many markets in Northern and Eastern Europe such as Russia, and Germany, South America where we have established a new venture with a partner in Brazil, in Asia where we have entered Japan with direct operations.

We are committed to transform our operations by truly leveraging our investments in world-class technology to move quicker, reduce costs, and accentuate our competitive edge in this fast-changing industry.

The brand has such great potential worldwide that we are convinced that we have tremendous opportunity to take advantage of this in a strategic and disciplined way to drive long-term profitability and deliver shareholder value.

Moving on to guidance for FY15, overall for next year we are planning for modest top-line growth at the top end of our guidance, driven by e-commerce and expansion into Japan and Brazil.

Our cost structure will be impacted by the investments in infrastructure to support our businesses in these markets, as well as higher spend in advertising and marketing.

Considering these factors as well as the anniversary of nonoperating income in FY14, we expect a decline in EPS in FY15.

In North America retail, we'll be opportunistic with our store openings, and plan to open between 10 and 15 stores in the US and Canada during the year.

In parallel, we plan to have close between 25 and 30 underperforming stores in the US and Canada as leases expire.

We expect that sales will benefit from our initiative of optimizing our store portfolio by closing underperforming stores and replacing them with more productive stores.

As our omnichannel strategy takes shape, and the shopping experience between online and brick-and-mortar stores becomes more seamless, we'll be including e-commerce sales in our reported same-store sales comps and outlook for North America going forward.

So far in the first quarter, comp store sales, including e-commerce, have been down in the mid-single digits.

And we expect comps to be down in the mid-to low single digits for the quarter.

We expect revenues to be down in the low single digits the second half of this year when we will see the full impact of the lines directed by our new Chief Design Officer, in partnership with our head merchant for North America full-priced stores.

We believe that changes to the line and product assortment will drive improvements and trend in the back half of the year.

As a result, we are planning for comps, including e-commerce, to be down in the low single digits for the full year.

Considering these factors, we expect revenue to be down in the low single digits to up in the low single digits for the year.

In Europe, we are planning to continue to grow in Northern and Eastern Europe.

So far in the first quarter, retail comps for our owned and property stores in Europe are up in the mid-single digits, with encouraging trends, especially in southern Europe where we are seeing positive comps in Italy, Spain and France.

We expect comp sales to be up in the low single digits for the first quarter and the full year.

In Europe wholesale, we're planning the orders for our fall-winter collection to be down in the low teens.

Currently with the orders we have on hand, we are seeing an improvement in trend in southern Europe, with a slowdown in Russian growth due to the softening economic environment there.

We are not planning for any notable improvement in the back half of the year.

Considering these factors, we expect first-quarter Europe revenues to decline to the mid to low single digits in local currency, and declines in the low single digits to flat in US dollars.

For the full year, we expect revenues to decline in the low single digits in local currency, and range from a decline in the low single digits to an increase in low single digits in US dollars.

In Asia, we are excited about the launch of our business in Japan.

Our first property retail store was opened a few weeks ago in Tokyo.

In Greater China we are expected to start returning to stability once we get past the first half of this year and anniversary the softness in consumption we saw starting at the end of the first half of last year.

We are planning our Southeast Asian distribution down compared to last year based on order projections from our licensing partners.

Finally, we continue to see opportunity in South Korea, which is our largest market in the Asian region.

We plan to open more doors, including our G by GUESS brand, totaling another 30 to 40 new doors during FY15.

However, comp trends in South Korea have been negative so far in the first quarter driven by soft traffic.

We are assuming that the environment will remain soft for the first quarter as well as the full year.

For the first quarter we expect Asia revenues to decline in the mid to high single digits.

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

The revenue guidance includes the impact of our Japan operation where we plan to continue to invest in infrastructure to support our expansion.

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

This revenue guidance includes the impact of our Brazilian operations where we do not expect to see significant top-line contributions in FY15.

In our licensing business, we are expecting royalties to decline in the low teens in the first quarter, and we expect a decline in the mid single digits for the full year.

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

For the full year we expect gross margins to be roughly flat to slightly up as we start realizing some sourcing efficiency cost savings and manage markdowns more tightly to offset the negative impact on the occupancy of declining comp store sales.

With respect to operating expenses we expect a higher SG&A rate for the first quarter, mainly driven by the deleveraged impact of expected sales decline and investments in marketing.

For the full year we expect the SG&A rate to increase, mainly driven by investment in marketing as well as higher compensation expense.

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

And our guidance assumes foreign currencies remain roughly at prevailing rates.

Given our currency assumptions, we are expecting a net mark-to-market loss in the first quarter of roughly $0.02 of EPS.

Considering all these factors for the first quarter of FY15, we expect consolidated revenues in the range of $520 billion to $535 billion.

We are planning an operating margin between minus 1.5% and minus 0.5% for a net loss per share in the range of $0.09 per share and $0.05 per share.

These expectations would result in full-year consolidated revenues between $2.53 billion and $2.58 billion, operating margin between 7% and 8%, and earnings per share in the range of $1.40 and $1.60 per share.

For the full year, we plan to manage our CapEx carefully and opportunistically by investing between $75 million and $85 million in capital expenditures net of tenant allowances, primarily for remodel and new stores.

And, finally, today we're announcing that our Board of Directors has approved an increase of our quarterly cash dividend to $0.225 per share on the Company's common stock, a 12.5% increase over its most recent quarterly dividend.

Again, we are pleased with the strength of our balance sheet and our ability to generate strong free cash flows and wanted to reward our shareholders with an increase in our quarterly cash dividend.

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 second follow-up question.

Operator?

(Operator Instructions)

Eric Beder, Brean Capital.

Could you talk a little bit about Europe?

What is it going to take -- it sounds like you guys are making a lot of progress in Europe at your owned stores.

What is the lag we should think about with the distributors?

And are we seeing the bottom in terms of distribution channel driving some business here?

When can we think about Europe really starting to turn?

Eric, this is Sandeep.

I think you're exactly right.

We're seeing some very encouraging trends in our owned property retail stores.

Comps up last quarter up in the mid single digits so far.

And the really encouraging part about that is it's in southern Europe, and that's where we're seeing positive trends.

I think how that translates into wholesale is, when we look at our spring-summer 2014 order book, we were down in the mid teens.

About two-thirds of that came from door closures and about one-third of that came from reduction in same-store buys.

As we look at the projection for fall-winter 2014 -- the order book is not closed yet, it's about 90%, 95% done -- what we're seeing is the rate of door closures is still continuing to be about the same rate, but we are seeing a slight improvement in the trend in the same-store buys which is accounting for the improvement from the mid teens decline to the low teens decline that we talked about earlier in our prepared remarks.

So, coming back to your original question of when can we see the bottom, I think if we continue to see positive comp store sales in our retail stores, hopefully the same trends will be seen in our wholesale doors, as well, which gets into a more healthy position and therefore that we should be getting more towards the bottom.

Great.

And just a quick question.

How big was Italy for last year?

I know at one time it was up to 55%.

What is the percentage that Italy was last year for Europe?

Yes.

We don't get into that specifically, but rough math, it's about one-third.

Okay.

Great.

Thank you and good luck.

Erinn Murphy, Piper Jaffray.

I just wanted a little bit more clarity on the guidance, just tying some of the pieces together.

There's some clear ongoing supply-chain improvements that should mitigate some of the gross margin pressure from promotional environment.

But it does seem like this is going to be a significant year of spending.

So maybe either Mike or Sandeep for you, could you just help us bucket some of the SG&A dollar growth initiatives coming in this year?

You referenced marketing, you referenced some of the compensation, as well.

But just help us appreciate how that broader bucket could look as we think about that dollar growth.

This is Sandeep.

Let me try to help you with this.

To try to bridge the gap from our earnings per share of $1.91 last year to $1.60 at the high end of our guidance, there are three major buckets in which we can describe it.

The first one is what we talked about from a marketing investment perspective.

From a brand perspective we're looking at it from a long-term guidance perspective.

And a great portion of our investment, about one-third, a little bit more than one-third is driving the difference between EPS of last year and this year.

The second bucket that you could think about is we had a benefit from nonoperating income, which is gains from nonoperating assets and on our foreign currency contracts, worth about $0.10 last year, which we're not planning to repeat this year given where things are at.

Between these two elements we only cover about two-thirds of the gap, or a little bit more than two-thirds of the gap.

Then you move into the operating performance of the business.

And one of the things that Mike actually talked about in his prepared remarks was the royalty income is expected to be down in the mid single digits.

And that's pure profit, it goes straight to the bottom line.

And that's an important impact.

And while we have greenshoots of the European retail business, the wholesale business down mid teens for the spring-summer 2014 campaign, expected to be down low teens in the fall-winter 2014 campaign, we don't necessarily see an improvement in trend.

That's going to be a headwind from a revenue perspective.

So, you take these three things together, that gets you somewhat to the $1.60, at the high end of the guidance.

Okay, thank you for that.

And just a clarification, then.

At this point what do you need to leverage expenses from a comp perspective both in North America and Europe?

I think in Europe it's really about the wholesale business stabilizing.

The moment the wholesale business starts stabilizing I think you're going to start seeing an improvement over there.

I think from a North American perspective, comps up in the low single digits will be where you start to see that leverage, given continuing occupancy rates.

Okay.

Can I just ask a quick follow-up?

Just in terms of the royalty revenue being down mid single digits, could you just clarify a little bit what category that's coming from?

Is it mostly handbags or footwear?

How should we be thinking about the accessory piece that's in that royalty business?

Thank you so much.

This is Paul.

On the royalty business you have two sides of that.

One is pure revenues which the lower income will be from footwear, will have some challenges last year, and we see still some challenges this year on the footwear.

and last year we experienced some income, a one-time payment of some consolidation of revenues from some licensees.

So it was a one-time payment.

All the while, the handbag will be slightly down maybe around 6% or 8%.

Janet Kloppenburg, JJK Research.

First question is if you could talk a little bit about current trends in North America.

Paul, how much of it is coming from bad weather?

How much is it coming from underperformance of certain categories that were performing well in the fourth quarter including denim and knit tops?

Also, if you could spend some time on South Korea.

The performance of the region improved nicely in the fourth quarter but it looks like it's worsened again here in the first quarter.

It would be interesting for us to learn what the dynamic would be behind that change.

And, lastly, on the door compression in Europe, is that coming because more and more wholesale accounts are no longer purchasing the guess line?

Are you making some of these decisions because you don't want to deal with some of these stores?

And how much more vulnerability is there on that side?

Thanks so much.

Okay.

These were about 15 questions here.

Let's try to remember the first one.

If you could talk about product performance, I think that's important.

And also, I think what you mentioned, what is a portion of how can we allocate really the nonperformance between the bad weather, the promotion and the product?

I think the weather, we know that clearly played a big role.

Weather had a concentration of stores in the East Coast.

We had an unusual winter and beginning of the year, especially January.

And that is a good portion.

The second portion is that we have a shortened holiday.

And besides that, it was a massive promotion that -- I'm in this business for 42 years, I've never seen that.

And you have heard that time and over and over by every company saying the promotion level is unheard and unseen.

And each time we said that, each time it gets to a higher level.

But then there is an issue of product.

And that is good news and bad news.

The good news of that is that we had a big demand, more than what we expected in certain categories in our stores, and we did not have the product.

We did not have enough of this product.

And that was the other side of that, is that we were short in outerwear, we were short in sweaters.

We were short in certain denim, broken down in sizes.

So that means we did have the customers, we did have people coming in the stores, and that means that is easily fixable to us.

So, I would say that if we have the product, maybe instead of minus 4%, we could have been minus 1%, or maybe flat.

That's my speculation.

But clearly, we learned from that.

And one thing what we cannot learn is weather, we cannot control that.

When you have 50, 60, 80 stores closed per day, and that happened three or four days, that's huge number missing there.

The West Coast has been performing very well.

Could you talk about the spring product performance right now in North America?

Yes, definitely I can.

For the Q1 so far, first of all, as Mike said that, the e-comm has been really strongly performing, even much better than holiday.

We are much higher than where we reported this morning for Q4, and across all brands.

Then YCs, or young contemporary, is doing really strong, especially in dresses, in denim of course, and tops.

Tops has been really picking up speed across the board for us.

Logos, dresses.

Logos, also.

Dresses and Body-Con dresses, bodysuit, crop top -- all that has been performing really well.

And this is where we are seeing, we think, a good spring.

But again we have to mitigate what we have as a performance depending on the region.

So far, we're okay.

And Janet, with respect to Korea, we were comping positive in mid single digits in Q4 and then it swung to the negative high single digits in Q1.

It's a very volatile market.

We've seen headwinds there.

One, consumer sentiment is quite low.

It's a high promotional environment.

And the weather has been pretty cold in Korea.

And we've seen reductions in traffic.

And that does not apply just to us but our competitors are facing a very similar situation.

The one thing is, the high end of our guidance assumes that the comps will improve later on in the year but we assume that it will remain soft.

Okay.

Thank you, Mike.

And what about the European accounts?

Yes.

Janet, on this one, we have a combination of things going on with the door closures.

In many cases, I think it's really us cancelling the doors because they've not really got the right credit capacity to actually pay us.

But in a few cases it's the doors themselves that are collapsing because they're not adding liquidity over time to be able to survive.

So it's a combination of both these factors are what's contributing to this.

As I mentioned to Eric in the earlier comment, I think we're closer to the bottom than not, especially if retail comps continue to improve.

Jeff Black, Avondale Partners.

Just a couple quick ones.

Have you talked about what exactly your Russian exposure is?

And if you could just lay that out for us.

And then, secondly, on the marketing spend, I had understood that you were getting more efficient in the marketing process but it sounds like you're upping the dollars.

Is that catalog spend?

Is that e-commerce spend?

What specifically is that going to, Sandeep?

Thanks.

Okay.

I'm going to start with Russia and then I'll hand it over to Paul on marketing spend.

On Russia specifically we don't really talk about the value of the Russian business.

What I can say is it's been in the last year a very high-growth engine for us.

We've just seen a slowdown in trends.

And that's really what it's about.

But we don't get into specifics by country.

And for marketing, the reason you see a push there of the cost is not only what I said during the conference call, is we do a lot of social media, being the Twitter and Instagram and Facebook, but that remains still really more of a brand strategy than direct impact in a sale.

We believe strongly that the catalog and the product in the hands of the customers will and does have an impact directly in our e-commerce and in our stores, having constant flow of what is in the store and available on the new season for each brand.

So that's why instead of two catalogs a year, whether to do four catalogs, four (inaudible) catalogs a year.

And of course the cost of doing that, printing that and mailing that, is substantial when you go by hundreds and hundreds of thousands of customers.

That is what we see as a cost for the marketing and advertising.

And I guess top-line remains to be seen, right?

All right, thanks.

Good luck.

David Glick, Buckingham Research.

A quick question on the impact of e-commerce on your same-store sales.

I'm wondering if you could help us understand the benefit to your comp so we can put your outlook in context.

And then just a follow-up on cash deployment.

Obviously you're sitting on a significant amount of cash.

You're paying a very healthy dividend which you just increased today.

Not buying back a lot of stock.

CapEx, you guys are managing carefully.

I'm just wondering why the Company's not more aggressive buying back their shares?

In terms of the impact of e-commerce on our comp, you could see in our press release that when we add e-commerce in, basically there's a significant impact on the comp of about 1% -- between 1% and 2.3%.

And then moving on to the next question on cash deployment, I think where we are is, if you look at our balance sheet at the end of the year, David, we finished really strong on cash.

We had over $500 million of cash.

And to us, what we wanted to do was make sure that we return back to the shareholders by increasing the dividend, as we did.

What we have done in the past, as you know, is that we've done share repurchases.

We have share repurchase program open currently almost $500 million worth of it available to us.

We've done special dividends in the past.

So, we keep ourselves flexible on how to return value to shareholders.

But we believe that with the strength of the existing balance sheet, plus our confidence in operating cash flows going forward, is a sign that we could actually return full value to shareholders, and that's why we increased the dividend.

In terms of our capital expenditures, we continue to invest (inaudible).

We have a fleet of stores which is maturing, to a great extent.

So we spent a lot more money on remodeling, making sure that the customer gets the best quality experience when they come into those stores.

And there's a shift in spend away from new stores where, because we have a more mature portfolio, to more of remodel.

And that's the focus of our capital expenditures.

Okay.

And just the last component of free cash flow, obviously in 2014 you've given us CapEx and your net income projections.

I'm just curious how you guys are looking at working capital going forward and whether that's a source of cash this year.

I think on working capital itself I wouldn't really think about it as much as a source of cash, because you really have a lot of improvements that we made on inventory and accounts receivable last year.

So we don't specifically guide on this but I don't expect it a big improvement.

So, more of a neutral item?

Yes.

Okay, thank you very much.

Appreciate it.

Good luck.

John Kernan, Cowen and Company.

Paul, you talked earlier about it all coming back to product.

And I know Hillary Super was a big hire for you guys.

Can you talk about any initiatives she's put in place, any of the categories you feel she's really making an improvement in?

And then, Sandeep, just some quantitative questions.

On CapEx, I think it's running below depreciation at this point.

How sustainable is CapEx at this level?

And then, finally, just on the composition of the same-store sales increase in Europe, how much is traffic-related and how much is related to ticket?

Thanks.

About Hillary, definitely we see an impact now, especially in the YC business -- young contemporary.

Denim is working across the board completely on all styles that we have, especially the curvies, the high-rise.

And also the style of the '90s that we invented now, with the new feel, of course.

And across the board it has been good.

The dresses, also.

Dresses has been very strong, in double-digit increase for this current quarter.

The knit top also very strong.

Overwhelming success in logo, lace and bodysuits.

These are the three categories that we have seen really picking up enormously.

But on the other side, accessories have been really not performing as we expected.

And it's not only one category because it has been the handbag, it has been the footwear.

And we expected better and we have not.

We're getting there, but as soon as we have that balance between accessories and apparel, definitely we will have a better number to report.

That's for sure.

The men has been overall doing very well, in general, even last year across the year.

And men has been -- you have the denim, the tops, knit, and also the shirts.

Woman's shirts, I'm sorry.

On your follow-up questions on CapEx specifically, John, you asked how sustainable the CapEx levels are.

Quite sustainable, actually, because that's exactly why we increased our dividend.

We actually believe that with our operating cash flows we have enough cash to be able to fund both CapEx and return money to shareholders.

So we feel pretty confident on that.

Then on your second question on the EU comps, Q4 actually saw an improvement in traffic in EU.

And that's what helped the comp increase in the fourth quarter.

In the first quarter we've actually seen a slight decrease in traffic.

But the good news is our conversion has improved quite significantly so we have a positive swing over there in Europe.

And what's really nice about this is our margins are holding up very well while all of this is going on.

So, even though we are at the tail end of the markdown season, our margins are actually pretty strong compared to last year.

So it's good news.

Okay.

That's helpful.

Thanks.

(Operator Instructions)

Jeff Van Sinderen, B. Riley & Company.

This is Richard Magnusen sitting in for Jeff Van Sinderen.

My question is, were you more or less promotional overall -- again, more specifically for denim -- this year versus last year during Q4?

And are you expected to be more promotional in Q1 coming up versus Q1 this past year?

We weren't more promotional in Q4.

We took 40% off the whole store but it was a very promotional environment overall so we had to respond.

But coming into Q1, we're not any more promotional this year than versus Q1 of last year.

We are changing the mix a little bit.

We're doing more target promotions that we think will be more effective.

But overall we're not more promotional in Q1.

Okay.

And then with the merchandise margins overall in Q4, were you up or down for Q4?

The merchandise margins were down.

Down, okay.

And then, again for denim specifically, was it the same thing?

Yes.

Thank you.

Dorothy Lakner, Topeka Capital Markets.

A couple of questions here.

I wondered -- last year you'd taken some action in both denim and dresses and reduced pricing.

And it seems like, if I'm understanding you correctly, in both categories you feel like you've gone where you want to go.

I just want to make sure that that's correct because those categories seem to be -- still pretty good for you, even very strong.

But I know that earlier this year, I think Hillary talked about, or you've talked about, reducing SKU counts.

And I wondered where you are in that whole process and what kind of reduction are you actually looking to make in order to make the assortment -- clarify the assortment, if you will?

Then also just wondered, I think for Sandeep, just in terms of remodels this year, how many you did last year, how many you're doing this year.

And then depreciation for this year.

Thanks so much.

This is Paul.

About what you mentioned about denim and dresses, definitely we did take the right action.

And that's created much more traffic in our stores than what we had the year before.

So the denim at $89, $98, the dresses at $79, $89, $98 or so, has created the big traffic.

And, by the way, the average -- still -- the average price of denim out of the door on regular price is still around $105, $108, I believe.

On the dresses -- and you can see when you go to visit the store -- on the dresses, basically the same.

We range from $89 to $149, I believe.

And the bulk is pretty balanced.

The bulk, if you say that between $89 and $108 would be like 60% and above that it's 40%.

And we have a huge following of buyer customers in dresses being online or being in our stores.

And, in fact, it seems like we are building really a name the last two, three years as destination for dresses.

The SKUs -- clearly I'm very broad in that -- has been a target to reduce, and we did reduce the SKU plan.

If you go to any of our stores, whatever state you are in -- Connecticut or New Jersey or New York or anywhere -- you will see much more clarity and distinction when you go in a store than it used to be just a year and a half ago, two years ago, three years ago, that we were saturated by SKUs.

We had too much product on too many categories everywhere.

The message is much more clear.

The windows are much more clear.

And the SKU plan has been reduced around 27% this year coming right now, Q1, Q2, Q3 of FY15.

Okay, great.

Thank you.

If you visit our stores, you will see that definitely on your own.

They definitely look a lot better, Paul.

It's very clear.

It takes time.

As everything it's hard to do anything overnight.

It takes time.

And the only thing we need is some patience.

But we try really our best to execute the best possible with the best message to our customers.

And Sandeep?

Yes.

Dorothy, you were asking about remodels and roughly how many we did last year and what we expect this year.

It was probably between 25 and 30 both years, probably going more on the higher side towards this year, as we move more to remodels versus new stores.

And on depreciation we should be roughly flat.

Not that different from last year, as you have in the press release.

Okay, perfect.

Thank you so much.

At this time I'll turn the call back to Paul Marciano for closing remarks.

Thank you, everybody, to be with us today.

If I would say like three, four things that we will take away today, will be to look at the product, if you have any chance to look at the product being in our stores or being in our website, but we assure you that definitely I strongly believe that we're in the right direction because love the product today and much more clarity than we had for a long time.

Two is also the fast-track product.

Definitely we are on that and we have been on that the last six months, seven months, eight months.

And that will have an impact.

I'm convinced about that.

Three is planning and allocation.

We are executing better and better but, that I just mentioned, it takes time.

And also, finally, is e-comm.

This is a big priority and a big thrust we're seeing across the board on every division, being the GUESS stores, the Marciano store, the G by GUESS, all of that.

And we are making huge progress.

And we are going to continue to concentrate on that.

We have high hopes for this year, but we still have to make a lot of investment, a lot of adjustment and patience.

So, thank you very much.

And we will talk to you in the month of May in two months for the Q1.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.