Guess? Inc (GES) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Guess?

first quarter fiscal year 2015 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 quarterly and annual reports filed with the SEC.

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 reported overall first quarter result, and posted a loss per share of $0.03, which was better than the high-end of our guidance, despite the overall difficult retail environment globally, especially in US and Canada.

Before our business update, I would like to address our strategic initiatives.

Omni-channel remain our key strategic initiative, with a very big growth potential for many years to come.

We continue to develop our branded website as key destination for our customers across all region, and we continue to make great progress there in North America and Europe.

While we have a strong footprint in brick and mortar, the strategy going forward is to productively allocate the capital to not renew stores that don't meet our financial requirements and build omni-channel initiatives.

We are in a very different environment than we have seen in the past, and believe our focus will be much more productive.

Then supply chain, where the goal is to build the world-class supply chain organization, in order to deliver the best value to customers.

We are already making some progress, and we have been able to improve our product costs in North America.

And finally, planning and allocation where system upgrades, allocation enhancements, process improvements and training are positively impacting our ability to more effectively allocate products.

Moving now to the business update.

In North America, our retail business met our expectation with comp sales down 4%.

The first two months of the quarter were affected by the change in calendar of Easter and by adverse weather condition.

But the business rebounded strongly in April.

With warmer weather and later Easter we comped positive including e-com for the month of -- in US and Canada, finishing down 4% for the quarter, despite a very challenging first two months.

Our primary goal has been to improve our performance through product and visual merchandising.

In our Guess business, we were pleased to see continued strength in our dress category, as well as a renewed dominance in our women's 5 pocket denim business.

Our knit tops were strong, but our woven tops category was, I will feel that we missed more offering.

Our men's business was strong in the first quarter.

Men's top was the largest growth category for us, and we believe we are uniquely positioned in the market to continue to capitalize on this trend going forward.

Accessory and footwear continued to be a challenge during the quarter.

However, we are reacting quickly to this business for the remainder of the year, and have already seen an improvement in trend so far this month, driven by a cleaner, more classic(inaudible) aesthetic, as well as investments in power key item with a clear point of view.

For the current quarter, we have tailored our assortments to be dressier and more versatile, offering more club evening styles and accessories.

Now about e-com.

E-com has taken center stage with a very strong growth, balancing the slow traffic we see in the malls.

Our North America e-com business grew by 49% in the first quarter, picking up from already strong momentum from the fourth quarter, as we continue to see a clear integration of consumer buying behavior across brick-and-mortar, online and mobile platform.

In Europe, we saw the trend of the first quarter continue to -- in the first quarter where retail outperformed wholesale.

Our retail stores in the region carried out the momentum since the last earning call, and posted a [7th] consecutive quarter of positive comp despite a decline in traffic.

In southern Europe, Spain continued to comp positively in the quarter, up in the middle single-digits, while Italy also comp up in the middle single-digits.

On the other hand, wholesale was weaker, reflecting the spring/summer 2014 booking down in the mid teens.

Recently, our Russian and Eastern European business were affected by the turmoil in the region.

So we are to continue to line up the business cautiously in these territories with our partners and regional managements.

In Asia, growth in our South Korean business offset the decline in the rest of the region.

Korea, which is our largest Asian business was severely impacted by the tragic ferry accident in mid-April that drove the entire nation into shock.

That reversed the momentum we had in the month before.

Our China business was soft, as we see continued softness in consumer spending, while Hong Kong and Macau stores remain strong and comped up in the high teens.

Finally, turning to the international expansion, It remains of course our priority as a global brand to expand our presence in international territories.

We see very good potential here in our two newest markets, Japan and Brazil as we enter the expansion phase in these two countries.

During the quarter, we opened our first three retail doors in Japan.

And in Brazil, we now also operate three stores, and are present in 200 wholesale stores.

Finally, we have been in the Middle East now for more than 20 years, and after my visit four week -- just four weeks ago, we decided to accelerate our expansion there.

We are planning to open more than 10 new stores with our key partners in the region in the next 12 months to reach the 100 stores goal.

In conclusion, in the last nine months, the product changes and strategic initiative we made are very encouraging, and we believe that this strategy if executed properly for customer need, is the absolute right approach.

So we are looking forward to back-to-school and holiday season, to see the result for that strategy.

With that, Sandeep will discuss now the financial.

Thank you, Paul, and good afternoon.

During this conference call, all our comments for the first quarter are on an adjusted basis which excludes the impact of certain restructuring charges in the prior year's first quarter.

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

Moving on to the results, net loss for the first quarter was $2 million, and diluted loss per share was $0.03, compared to $0.14 adjusted diluted earnings per share in last year's first quarter.

First quarter revenues were $523 million, 5% lower than the prior year, and down 6% in constant currency.

Total Company gross profit for the first quarter was below our expectations at $176 million, down 11%, and gross margin declined 230 basis points to 33.7%, due to the deleverage impact of lower European wholesale shipments, negative comparable store sales on occupancy, and more markdowns in North America retail.

SG&A dollars decreased versus the prior year down 3% to $178 million, which was better than our expectations.

The reduction of SG&A was driven by lower general and administrative costs, lower selling and merchandising costs in Europe due to the decline in wholesale, as well as lower advertising and marketing.

Operating loss for the first quarter was $2 million, and our operating margin declined 290 basis points to a negative 40 basis points.

Other net expense was $1 million, and mostly consisted of losses on foreign currency contracts, partially offset by unrealized gains from nonoperating assets.

Our effective first quarter tax rate was 32%, down versus the adjusted tax rate of 33% in the prior year first quarter.

Moving to segment performance, in North America retail, first quarter revenues dropped 4% to $228 million, which includes the unfavorable impact of the weakening Canadian dollar.

Negative comps in brick and mortar stores were partially offset by 49% growth in our eCommerce business, driven by the continuing success of our omni-channel initiatives.

This resulted in a net 4% decline in comp store sales including eCommerce in the US and Canada.

Operating loss increased by $4 million to a loss of $8 million, and operating margin declined 190 basis points to a negative 3.7%.

Compared to last year, gross margins were lower due to more markdowns, a higher occupancy rate as a result of the negative comp store sales, and the unfavorable impact of a weaker Canadian dollar on product margin.

Our SG&A rate improved due to lower store selling expenses, lower general and administrative expenses, and lower advertising and marketing spend.

In Europe, first quarter revenues were $159 million, up 4 -- a decline of 4% in US dollars and 8% in local currency.

This was driven by a mid teens decline in the wholesale spring/summer 14 order book that was partially offset by some store growth, as well as the low single-digits positive comps Paul mentioned earlier.

Operating loss increased by 27% or $1 million to a loss of $7 million, and operating margin decreased by 100 basis points to a negative 4.2%.

And this was driven by the impact of lower wholesale shipments, partially offset by lower selling and merchandising expenses and tighter inventory management.

In Asia, revenues in the first quarter declined 1% to $70 million, and declined 4% in constant currency.

In local currency, South Korea grew the top line in the low single-digits, driven by retail store expansion.

This was more than offset by lower shipments into the wholesale channel in Greater China and Southeast Asia.

Operating earnings fell 52% to $3 million, and operating margin dropped 500 basis points to 4.8%.

The decline in operating margin was primarily driven by inventory liquidation in South Korea.

In North America wholesale, first quarter revenues decreased 10% to $39 million, mainly driven by lower off-price shipments in the US and Canada.

As a result, operating profit decreased by 10% to $8 million, and operating margin was flat at 19.7%.

Royalties generated from sales by our licensee partners were down 15% at $26 million, partially driven by anniversary of some one-time royalty benefits in last year's first quarter, and soft tperformance in the handbag and eyewear categories.

Moving on to the balance sheet, accounts receivable was 13% lower at $218 million, and overall DSOs were flat compared to last year.

Inventories were down 1% versus last year at $373 million.

The decline in inventory is driven by a reduction of Europe inventories, that is partially offset by a build-up of excess inventory in North America.

We ended the quarter with cash and short-term investments of $478 million, compared to last year's $313 million.

Free cash flow for the quarter was an outflow of $17 million, driven by the timing of working capital and lower earnings.

Our Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company's common stock.

The dividend will be payable on June 27, 2014, to shareholders of record at the close of business on June 11, 2014.

With that, I will pass the call over to Mike, who will take you through the outlook for the second quarter and the full year.

Thank you, Sandeep, and good afternoon.

Overall, our expectations on earnings per share for the year have not changed.

We have incorporated the cost savings in the first quarter into our full year assumptions.

However, we have also incorporated some markdown pressure in our gross margin assumptions, due to lower than expected sell-through in the first quarter.

Looking at North America retail so far in the second quarter, comp sales have been down in the low single-digits, and we are planning the second quarter, assuming that trend will continue.

This would translate into a revenue decrease in the low single-digits to flat range.

For the full year, we continue to expect comps sales to decrease in the low single-digits, and for revenues to be down in the low single-digits, to up in the low single-digits.

In our European retail business, so far in the second quarter, trends have been softer than the first quarter, as the first half of the quarter last year is a tougher compare, and some of the holiday weekends this year have shifted later into the quarter.

As a result, quarter-to-date comp sales in Europe have been down in the low double-digits.

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

For the year, we are planning comp store sales to increase in the low single-digits.

In Europe, we recently completed the sales order campaign for our fall/winter season, and now have more visibility into expected wholesale trends over the next few months.

The fall/winter wholesale orders are down in the low double-digits, with same-store buy almost flat to last year.

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

Considering these factors, as well as some later deliveries in the season in wholesale, we expect total Europe second quarter revenues to decline in the mid to high single-digits in local currency.

Assuming the euro remains at prevailing rates, this would result in US dollar revenues that decrease in the low single-digits in US dollars.

For the full year, we are now expecting revenues to decline in the low to mid 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, economic conditions continue to be challenging, especially in Korea where comps have been softer so far in the second quarter.

For the second quarter, we expect revenues to decline in the low to high single-digits.

For the full year, we now expect revenues to be down in the low single-digits to flat range.

In our North America wholesale business, we expect revenues to decrease in the low double-digits for the second quarter.

For the full year, we are now planning for revenues to be down in the low single-digits, and this revenue guidance includes the impact of our Brazilian operation.

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

For the second quarter, we expect overall gross margins to decline as continued markdown pressure is expected to more than offset the product cost improvements we are seeing in our North America business.

For the full year, we are now expecting gross margin to be flat to slightly down.

With respect to operating expenses, we expect a higher SG&A rate for the second quarter, driven by the deleverage impact of expected sales decline, as well as higher compensation expenses.

For the full year, we expect the SG&A rate to increase, driven by anticipated investments in marketing in the back half, as well as higher compensation expenses.

We are planning the full year with a 32% tax rate, and our guidance assumes foreign currencies remain roughly at prevailing rates.

Considering all these factors, for the second quarter of fiscal 2015, we expect consolidated revenues in the range of $615 million and $630 million.

We are planning an operating margin between 5.5% and 6.5%, and earnings per share in a range of $0.25 per share and $0.30 per share.

These expectations will result in full year consolidated revenues between $2.53 billion and $2.57 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 continue 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 in these stores.

Finally, as Paul mentioned earlier, I want to reiterate that myself, as well as the whole management team remains focused on the three strategic initiatives addressed in the last call.

First, omni-channel, where we continue to align the organization behind this key initiative, and we will make the necessary investments to ensure the growth of this business.

Second, supply chain, where we already have been able to impact our product cost in only a few months.

And finally, planning and allocation, where our focus is to maximize our use of analytics, as well as to optimize our internal processes.

With that, I conclude the Company's remarks, and open the call up to 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?

Thank you.

(Operator Instructions)

Operator?

And, yes here.

Our first question here comes from Erinn Murphy from Piper Jaffray.

Please go ahead, Erinn.

I am hoping you could talk a little bit more about the accessory trend you saw during the quarter.

It sounded like they were still challenging, but you found a couple things from a product perspective, thus far in the second quarter.

I guess, first part of that, could you just help us explain kind of what you see, or what you saw from a handbag, watch and footwear perspective, both domestically and in Europe during the quarter?

And what you have changed going forward?

So from an accessory trend perspective, what we saw in the past quarter was an improving trend, and it is still down.

We were down in the quarter, but we have been seeing continuously improving trends, as we moved in the first quarter as well.

And then specifically, when you talk about from a regional perspective, in North America, things have actually improved slightly.

But in Europe, we still remain challenged on the accessories business.

We were down in the first quarter, and we have seen a slightly improving trend but still down.

And I think, to add onto that, in watches actually in Q2, we have seen a big -- a reversal trend, and watches have gotten quite strong in Q2.

Handbags, we actually were over-assorted in $100-plus handbags in North American retail.

We actually got in some new shipments, and we have seen a reversal of trend, and strengthening in the handbag business in North America.

Thank you for that.

So it is still predominately footwear though, that is causing the weakness, and then handbags to a lesser extent in Europe?

Is that the right way to think about it?

Yes.

Okay.

And then just, Paul, for you, from a European perspective, just curious on some your comments on the quarter-to-date trend.

Just seeing a little bit of a reversal.

I realize there is a comparison issue to last year.

I guess, first, what was the comparison you are up against from a comp perspective last year?

And then, as we think about the region in the second quarter, what is really -- is there anything to call out that is really driving that deceleration?

Thank you.

Well, which was very encouraging for us has been a continuous trend to improve, on the comp in our stores across the board.

And but as mentioned, during the call, the wholesale has been weaken.

What we see is traffic, with a negative traffic a positive comp month after month, especially in Italy and in France.

And that shows definitely a confidence coming back on the consumer.

What or so has to do with that, I believe is product assortment very focused on the denim, where we are being -- making a big push in dresses, and this has been reflected very much across the world.

So what we are looking at really is a back-to-school, and of course, holiday to see a much bigger impact in the business.

Accessories is the same.

We believe that we are a little bit overpriced in Europe, and we are -- we have addressed that, and we are making a different assortment now.

Erinn, I will just add a little bit on the second quarter trend, because you seem to be asking about that as well.

What we talked about during the prepared remarks that Mike went through was, can you hear us?

Can you hear us?

Can you hear?

Yes.

(Multiple Speakers).

Yes.

Okay, so.(Multiple Speakers).

Yes.

I am sorry.

I am just going to continue the answer.

So we have had -- always in Q2, there are a very difficult cadence to the quarter, because of the timing of the holidays in Europe.

Now if you go into to our first quarter earnings release last year in the transcripts, you will see that at the time we guided second quarter, we were running flat.

But we actually guided to be down in the mid-single digits for that quarter and that is where we ended up.

And it is the volatility of the timing of the holiday weekend.

This year, the situation is reversed.

So even though we are down in the low double-digits right now, we expect the traffic to come back in the back half of the quarter and our sales to finish up, down in mid single-digits.

Now you may ask the question, are you up in the first quarter, or are you going to be down in the second quarter, what is driving that?

What is really good for us from a trend perspective is, if we look at our comps, the new season product have been performing well all year, and we have been seeing this for all four months so far, that we have been in the year.

Yes.

What has been a challenge is, we are sitting on some markdown inventory from old seasons, that we expect to get through by the end of this quarter.

Once we get past that, we expect the run rate to go back to what we saw in the first quarter, and comps to be in the low single-digit increase for the year.

And so, that's really gives you a flavor for what the timing shifts are.

Thank you.

Our next question here will come from Janet Kloppenburg with JJK Research.

Please go ahead.

Hello, everybody.

I was wondering if you could talk a little bit about the North American business.

I think you said comps were positive in April.

I am wondering if that was markdown driven, or if you saw some improvement in full priced business?

And Paul, I didn't hear you well, I think you said dresses and knits were doing well.

And I wondered how the denim business was?

And I think you also said, accessories and footwear was getting better.

Do you think you can sustain that trend in the -- in North America in the first half?

Thank you.

Yes, Janet.

No, during the call I mentioned for accessories that for the Q1 the big challenge has been accessories, specifically the footwear.

And that was the biggest one, and handbag, we see an improvement.

Okay.

That has been really a challenge for us.

About the comp, you see the trend we have.

Definitely the apparel has been really trending on a positive, but has been kind of offset by the accessory performance.

And this is where we have adjusted now, for especially the back-to-school, that the assortment in accessory is much more, much more focused, much more clear for the consumer.

And really the key item where we went on the big buying of bags.

But the knits[underneath], that you mentioned before, yes.

We have been performing well on the knit top, but we believe and my view that woven, we could have done better.

Not that we have the wrong style, we didn't have enough.

We should have had more offering.

Right.

And that was address or so that you would have seen in a store in the next 45 days.

A woven top would be much more diversified than what we have currently.

We went too much on t-shirts and knit tops, and not enough on woven.

On the wovens, okay.

And Paul, could you comment, I was just wondering if you done any pricing analysis versus some of your competitors?

And if you think for instance, in the dress category, and perhaps in the handbag and footwear categories whether your prices are as competitive as they need to be?

Well, I think that especially on the handbag, we are little bit on the higher end on the pricing in handbag and (inaudible).

When it comes to the dresses, we go from the $79 to the $149, so we cover basically everything and we have a very, very strong business in dresses.

Again, if you visit any of the stores in New York or there in Florida, we have maybe the most assorted dress business of any competition we have right now, because we built a very strong franchise of that.

When it comes to certain categories, for example, the light outerwear for Q1, we believe also that we missed the [opportunity] we could have more, because we had such a cold, cold Q1.

And but, we didn't plan that way.

We thought that it would be warmer, and that it didn't.

Especially after the meeting at Canada, I learned a lot of lesson a few weeks ago.

So that's that.

But I think again, the receipt in the stores we give you a much better picture today of where we are, and how much more focused and well-assorted the merchandise it is today, compared to a year ago.

Our next question comes from Omar Saad from ISI Group.

Please go ahead.

Thank you.

Good afternoon.

I wanted to ask about SG&A, marketing, and some of the investment things that you have been talking about.

It is -- I have noticed that the SG&A dollars have actually been down for you for the last I think five, the five last consecutive quarters.

Last quarter, you have been talking about kind of ramping SG&A up in dollar terms and percentage terms.

You were talking about the catalogs.

Kind of wanted to get an update around that those activities, where you stand?

How you are looking at SG&A philosophically, reinvesting in the brand, in this environment where it is kind of tricky in terms of top line, and you are seeing some pressure?

Thanks.

Hello, Omar.

This is Sandeep.

So Omar, I think when we talked about the SG&A investments for the year, we really focused in on two major drivers.

One was marketing and advertising to drive traffic into our stores, and I will let Paul talk about that a little bit more in a second.

And the other was we have some compensation costs that we were annualizing, and that was also driving both our dollars and rate up in the full year.

The marketing costs are more backend-loaded, and because we plan to actually tie it in to the new product launches that are setting up with in the fall.

And that is why you don't see really much of that impact in the first quarter so far.

And I think with that, I am going to let Paul talk a little bit more about the [operating] investments.

Yes, Omar, I think that, when it comes to marketing, even you have -- even if it looks like less correctly, this does not mean that for the rest of the year, it would go on that trend.

And we have a lot of investment currently, and especially what I mentioned before which is in process now, which is printed now for back-to-school, all the mailers, all the catalog, all the new campaign, everything will hit the stores and the magazine within four weeks.

So you will see a big, big impact in marketing.

Does that translate to [automatically] that the minute you put the ads in the magazine, people are going to rush to your door?

I don't know about that.

That the traffic in the mall is definitely, a continued concern for all the retailers of the trend we have been seeing for the last 8, 9, 10 quarters.

Also, you have an improvement on the windows stores that you have seen recently.

But more important, the big investment we have is all the CRM, and all the e-com building of digital media, and what we have there.

So I would say, that we buy very well, and right now the Q1 was not a very, very big spend for me.

The Q2 will be more, but really the heavy one will be Q3 and Q4, which is of course, holiday.

Our next question here comes from Dana Telsey from Telsey Advisory Group.

Please go ahead.

Hello, good afternoon, everyone.

Can you talk a little bit about the strategy that you had in adjusting your opening price points once the reception has been?

And then also, would be marketing investment that you stepped up, where are you in that process?

How do you see it -- see that progressing?

And what's the impact?

And then just lastly, an update on online relative to the stores, what you are seeing in product sell-through and category?

Thank you.

Okay.

Actually, one of our strategies from our merchants has been to buy deeper at opening price points, and that has been specifically in denim and knit tops, and we have been seeing considerable success there.

In terms of marketing, Paul has just talked about what we are doing.

But one of the things we have is 7.1 million people in our loyalty database, and right now we are investing in some technology and predictive analytics to actually segment those customers, so we can better target them with the type of information they want, at the frequency they want, and the message they want.

So we think that is being help actually drive traffic.

And thirdly, online relative to stores, basically online we have a higher penetration of accessories, because obviously they are not size dependent, et cetera.

And so, the accessories actually skew higher, but we have actually seen considerable success in denim online.

Got it.

And then, if you think of the marketing spend, and how that's changing?

Yes, Dana, I mentioned just that to Omar, I think you will see definitely a ramp up in Q -- now, which is four weeks from now, all the fall campaign coming in magazine, catalog, in the stores, mirrors interest in [those] we see happening just as we speak now.

Q1 was lower than we expected, and back-to-school now for us holiday

Thank you.

Our next question comes from David Glick from Buckingham Research.

Please go ahead.

Thank you.

Just a quick follow-up on Europe, just I don't know if you have disclosed or will disclose the penetration of your business in that Russia/Ukraine area?

And then secondly, it sounds like you have a lot of exciting product initiatives for fall.

I am just wondering what your approach is from a promotional perspective, as you try to balance challenging traffic trends across the mall and in your stores?

How you balance sort of the newness you are going to have in your product, with how you approach it from a promotional perspective, obviously understanding you need to drive sales?

Hello, David, this is Sandeep.

I will just take a question on Europe and Russia specifically.

On Russia, we don't really talk about the specific number, but what I can tell you is consistent with what most of the competitors are probably seeing as well, we have seen some definite softening in that business.

We were growing extremely rapidly in the previous quarters.

But this -- during this past quarter, we have closed fall/winter booking sales campaign.

Sales are still growing, but much slower than they were in the previous quarters.

It doesn't change our long-term perspective on the market and the opportunity there, and we will just have to get through this period before we know that.

And about the product that you mentioned before, as you can see right now, we are entering again a very strong [Indigo] denim cycle.

And for that, I think that we are in a very good position, by the fact just about we have so much history and archive of what the trends are right now.

Which include that overall the jumpsuit, the [highways], the [hot sheet] wash, all that was really what made Guess?

and started Guess?

thirty years ago.

All that, you are going to see that in the delivery four weeks from now.

And you also, what I did not mention just before, was what takes a big role more and more in our business at retail for women, has been really the fast track -- the speed to market.

Speed to market is a key element for us, and has been growing and growing, up to almost 28% of all the women's business apparel, which is substantial for us.

So we see that role continuing to have an impact.

Thank you very much.

Thank you.

Our next question comes from John Kernan from Cowen and Company.

Please go ahead.

Hey, good afternoon.

Good afternoon.

So just wondering if we could talk a little more about the order book in Europe?

I think, you Sandeep, I think you said down low double-digits for the fall.

And I think you also said same-store order books were about flat.

So at what point do you think we have lapped enough of door closures to start seeing some stabilization in the wholesale side of the business?

And is there a specific category or region that is really driving the declines in the order book?

Yes.

So John, you heard right.

And I mean, I think when we look at the spring/summer 14 order book, we were down in the low -- in the mid teens.

And we actually were down in low double-digits for fall/winter 14 that we just closed.

And honestly, the entire improvement came from the improvement in same-store buys, which were roughly flat.

And so, obviously the door closure rate has not changed season on season.

What we do believe is, once you start getting into flat to positive territory on same-store buys, there is an underlying indicator of the health of the businesses of the wholesale customers.

So hopefully, this will actually cause a reduction in the rate at which the doors are being closed.

But we don't know that yet until we go through the spring/summer 2015 season.

So our planning assumption right now is no change in the rate of closure from the fall/winter.

Okay, and then.

(Multiple Speakers).

Go ahead, sorry.

From a regional perspective, it's not changed a whole lot from what we saw in the spring/summer of 2014 and fall/ winter 2014.

That is correct.

Thank you.

Our next question here comes from Robert Ohmes from Bank of America Merrill Lynch.

Please go ahead.

Thanks for fitting me in.

Just two follow-up questions.

I think you mentioned the off price shipments being down.

If you could remind us why the off price channel shipments are down?

And also, could you give us some color on how your factory stores did during the quarter, and how they are doing this quarter-to-date?

Thanks.

So basically in our wholesale, North America wholesale segment, we are satisfied with the full priced sales to our customers like Macy's.

Off price, mainly liquidation of excess inventory was down.

Now the good news there, is that we really didn't have excess inventory to sell, and we saw a slight improvement in gross margins in that segment.

In terms of factory, factory store sales in February were impacted by weather, March by the shift of Easter, but it was our strongest performing segment in April.

And the trend, it slowed down a little bit in May, but we are still seeing an improvement of trend over the first part of Q1.

Got it.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Jeff von -- I am sorry, Jeff Van Sinderen.

Please go ahead.

Yes, regarding North America retail, do you expect more or less -- or was there more or less promotional stuff this year in Q1 than last year?

And do you plan to be more or less promotional in this coming Q2 this year over last year?

Yes.

In Q1, we actually were slightly more promotional than we were last year.

And a lot of this is driven by -- the weather impacted traffic, and we ended up with a little higher inventory position than we expected.

And that caused, put some pressure on the margins.

And right now, we have a plan to work through that inventory in Q2, so we can start Q3 clean.

And so, we expect to actually continue the same trend into Q2.

Okay.

And then regarding inventory for the second half, what is the inventory per square foot stand right now for North American retail?

And can you give us any more color on the inventory regarding overhang, excess, and how you expect to evolve for the coming quarter?

So, we are up on a per square basis 6% in North American retail.

Yes, and in the second half, we have plans to actually go liquidate this in Q2, and our desire is to start Q3 with basically sales in line with inventory.

Thank you.

Thank you.

(Operator Instructions)

And our next question here comes from Dorothy Lakner from Topeka Capital.

Please go ahead.

Thanks, and good afternoon, everyone.

I think Paul had mentioned at the beginning, that you've been made some positive, or gotten some positive impact from your efforts in planning and allocation.

So I just wondered if you could kind of update us on what is happening now, what we should expect in the back half of the year?

And then also, I think you talked about product cost, and having made some improvement there.

I just wondered for the back half of the year, how much you have been able to lower those costs?

And I think it was in North America where you are -- you have kind of made those efforts?

Thanks.

Yes, so planning and allocation has been a really big initiative for us, and we have been actually putting a lot of resources there.

So the first thing we have done, is we put in a demand planning and allocation system in Europe.

We implemented that third quarter of last year, and that was for retail and wholesale.

And I think the strength in the comps that we have seen in Europe are somewhat attributed to basically our ability there to more fine-tune our assortments, to the geography there, with different type of weather, climate and taste, et cetera.

Here in the US, we just finished rolling out an assortment planning system to all concepts, and that is going to help do the same, to tailor our assortments to store clusters.

We have also upgraded our planning and allocation system with the latest technology.

We are using analytics for size curves in store clusters.

But more important, we put together a training program to train our staff to make sure that they can effectively use this technology.

And planning and allocation is the heart of any kind of retail company.

You have got to make sure you put the right stuff, at the right place, at the right time.

And we feel we are making steps in the right direction.

In terms of project cost, we talked last quarter that focusing on North America retail -- now don't forget our accessory business, we don't control the supply chain.

It is a licensee product.

Right.

But we were able to reduce the average unit costs between 200 or 300 basis points.

And at the last call, we had purchased through fall.

Well, now we have finished our buying through holiday, and those trends have continued.

So we are really pleased by continuing those efforts, and getting the success that we won the other day.

Great.

Thanks, and good luck.

Thank you.

Thank you.

Our next question comes from Alex Pham from Mizuho Securities.

Please go ahead.

Hello there.

It is Alex on for Betty Chen I wondered if you could just touch on the Asian business by country?

I think you mentioned that Korea may have been impacted by the ferry incident.

It seems like margins have been down, I think you mentioned 500 basis points or so.

Just wondered if you can provide any color there?

Thanks.

Yes.

So in Korea, actually keep in mind, it is two-thirds of our business, and it is a very volatile environment.

We actually performed better than we expected in Q1, and comps were down in the low single-digits.

And we had -- our guidance assumed it would to be down low double-digits to mid single-digits.

So it performed better than expected.

But then in Q2 it took a reversal, and that ferry incident actually had a huge impact on demand in Korea.

For instance, I was there actually two weeks ago, and I was really shocked to see that traffic had declined in restaurants and stores, in shopping malls, et cetera.

So it is not impacting us, it is impacting the whole country.

And that has definitely put a drag on margins, plus it has been a very promotional environment.

And then in Greater China, so if we go on to the other region, let's say in greater China, we are actually performing slightly below expectations.

We had positive comps in the low single-digits.

And so, we are very strong in Hong Kong and Macau, but our China business is still -- there is still weakness in consumer demand.

And our shipments in our franchisee business to our licensee partners in Southeast Asia, they have also been -- are a little bit weaker due to slower consumer demand.

Great.

Thank you.

Thank you.

Thank you, this concludes the question and answer session.

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

Yes, thank you.

Thank you, everyone.

As I mentioned at the beginning of the call, the change we are making are taking time.

But we see now, already after nine months, the product change, the strategy change initiative, the new system, all of that is taking place now.

The only thing that we cannot control has been really the traffic.

The traffic has been and continues to be in mall, a continuous challenge.

And but on the other hand, we see numbers in e-com who are growing at a very fast pace.

That effect offsets the traffic in the mall enough to a degree, so we continue to give all our work and effort, to really look at how the business of e-com could be doubling, or maybe tripling, or it being more than that in the next future.

And we will talk to you the next quarter.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and you may now disconnect.