Guess? Inc (GES) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the GUESS?

second-quarter FY15 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 Paul Marciano.

Thank you.

Good afternoon, and thank you for joining us today.

We reported overall second-quarter results and posted earnings per share of $0.26, which was in range of our earnings-per-share guidance.

Overall, the performance was below expectations, with lower-than-anticipated revenue and operating profit.

However, it is important to note that all segments performed in line with our expectation, except for North America retail.

In North America, the overall retail environment in our category remains challenging with soft traffic and permanent promotion in the retail environment throughout most of the second quarter.

Despite these challenges, we are pleased with the very good progress in eComm business, which continued to show strong growth and balancing the slower traffic we see in the malls.

In North America, eComm business grew by 48% in the second quarter, extending the very good momentum we have seen for the last six quarter, as we continue to see an acceleration of the integration of consumer-buying behavior across brick and mortar, online and mobile platform, creating a true omni-channel shopping experience.

However, the strength we saw in eComm was not enough to offset the overall weakness in our regular stores, where our total North America retail business finished below expectation, with comp sales down 5% for the quarter.

The positive momentum we saw in April and May was impacted as we saw a sudden slowdown in traffic in the middle of June to the middle of July, which coincided with the World Cup, and particularly affected our tourist-doors.

In term of product, we are pleased with the performance of our men's business, which has significantly outperformed all of our categories for the last four consecutive quarter, and men knit top performed especially well during the second quarter.

We continue to see some weakness in women's and accessories where we missed some product offering in woven and dresses.

Our women's center performance was weak, and I believe we could have and should have performed better.

Because of that, we're restructuring the women design priorities as we speak.

In Europe, our retail stores performed in line with our top-line expectation, although we had to be more promotional than previously anticipated.

In southern Europe, Italy comped almost flat for the quarter, and while Spain comped down in the low-single digits.

As expected, our wholesale business in Europe was weak during the second quarter, reflecting the fall winter 2014 booking being down in the low-double digits, completely driven by door closure of customers with bad credit, as the same store buys were flat.

On the other hand, from the visibility we have on the spring/summer 2015 orders the booking is up versus last year.

In Asia, our business performed as expected in the second quarter.

South Korean economy remained soft in consumer demand, specifically in department stores.

In greater China, we experienced the same softness in our property stores in Beijing and Shanghai, while our stores in Hong Kong and Macau post positive comp for the quarter.

We are also encouraged, however, with the performance of our licensing partner, who are seeing positive comp year to date.

Turning to the third quarter, in GUESS?

North America, we are about a month into the standing of our fall product line, and so far the response from our customers is below what we had expected.

We are seeing good performance in men and women knit tops, but we are seeing light reaction to our overall denim assortment, which is consistent with what many of our peers are experiencing.

So far, sales trends have not improved from the second quarter, and the improvement we had expected during the last quarter have not materialized.

This will impact our outlook for the year, which we will address later in our guidance.

Now, I would like to share with you some key strategic initiatives that are already in progress.

First, in real estate, in light of the changing retail landscape and the shift of consumer demand towards eCommerce, we have conducted an analysis of entire North America store portfolio, and have identified 50 stores that we plan to exit before the end of FY16 through a combination of lease expiration and kick out.

In addition to these 50 stores, 50% of our North America store base will come up for renewal in the next 3 1/2 years, which will give us flexibility to optimize our real estate portfolio.

Next, about the Organization, we are streamlining our North American retail organization; and on the corporate level, we're also streamlining our cost structure by simplifying processes, realigning department, and merging division structure.

In total, we estimate that this will drive annualized savings at around $20 million a year or more.

Obviously, these Q2 results and current quarter are very disappointing to all of us, but we are taking all affirmative steps to correct the product misses and design issues.

All that does not take away our confidence in the strength of our brand globally, and we continue to believe in our long-term growth prospect and in our business model.

We believe in the integrity and perfection of the brand above all, even if it means reducing our exposure of number of doors in certain areas like eastern Europe.

We have a strong balance sheet, and we have no debt.

The GUESS?

line continues to be our number-one asset, and we will continue to do whatever it takes, as we have done the last 33 years, to adapt to the new normal of retail today.

With that, I will pass now to Sandeep to discuss the financial.

Thank you, Paul, and good afternoon.

During this conference call, all our comments for the second quarter are on an adjusted basis, which excludes the impact of certain restructuring charges in the prior-year second 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 earnings for the second quarter was $22 million, and diluted earnings per share was $0.26 compared to $0.52 adjusted diluted earnings per share in last year's second quarter.

Second-quarter revenues were $609 million, 5% lower than the prior year, and down 6% in constant currency.

Total Company gross profit for the second quarter was below our expectations at $217 million, down 13%.

And gross margin declined 330 basis points to 35.6% due to occupancy deleverage driven by lower European wholesale shipments, and negative comparable-store sales and more markdowns in North America retail and Europe retail.

SG&A dollars increased 3% versus the prior year to $187 million, which was better than our expectations.

The increase in SG&A was driven by higher general and administrative costs, partially offset by lower advertising and marketing costs, and lower selling and merchandising costs in Europe due to the decline in wholesale.

Operating earnings for the second quarter was $30 million.

Our operating margin declined 560 basis points to 4.9%.

Other net income was $5 million, and mostly consisted of net unrealized and realized gains on foreign currency contracts, and unrealized gains on other non-operating assets.

Our effective second-quarter tax rate was 35%, up versus the adjusted tax rate of 33% in the prior-year second quarter.

This is higher than our expected second-quarter tax rate of 32% due to a shift of earnings distributions between different taxable jurisdictions within the quarters.

Moving to segment performance: In North America retail, second-quarter revenues dropped 4% to $244 million, which includes the unfavorable impact of the weaker Canadian dollar.

Negative comps in brick-and-mortar stores were partially offset by 48% growth in our eCommerce business.

Overall, comp-store sales including eCommerce declined 5% in the US and Canada, and 4% in constant currency.

eCommerce sales improved overall comps by 3 percentage points.

Operating earnings decreased by $15 million to a loss of $5 million, and operating margin declined 600 basis points to a negative 1.9%.

Compared to last year's quarter, gross margins were lower due to more markdowns and occupancy deleverage.

The SG&A rate deteriorated due to a combination of higher impairment charges and sales deleverage.

During the quarter, we opened 4 new stores and closed 7, ending the period with 488 stores.

In Europe, second-quarter revenues were $235 million, a decline of 6% in US dollars, and 9% in local currency.

This was driven by a low double-digit decline in the wholesale fall/winter 2014 order book, as well as negative low single-digit comp sales in our retail stores.

Operating earnings decreased by 38%, or $15 million, to $25 million, and operating margin decreased by 530 basis points to 10.4%, driven by the impact of lower wholesale shipments and increased retail promotions.

In Asia, revenues in the second quarter declined 2% to $64 million, and declined 8% in constant currency, consistent with our expectations.

The decline in revenues was mainly driven by negative comps in South Korea and China.

Operating earnings fell 55% to $2 million, and operating margin dropped 420 basis points to 3.5%.

The decline in operating margin was primarily driven by a combination of product margin decline, and occupancy and SG&A deleverage.

In North America wholesale, second-quarter revenues decreased 8% to $38 million, as expected, mainly driven by lower off-price shipments in the US and Canada.

Operating profit decreased by 39% to $5 million, and operating margin declined 700 basis points to 13.5% due to SG&A deleverage and lower gross margins.

Royalties generated from sales by our licensing partners were down 1% at $27 million, in line with our expectations.

Moving on to the balance sheet: Accounts receivable was 14% lower at $234 million, and overall DSOs were relatively flat compared to last year.

Inventories were down 2% versus last year at $392 million.

The decline in inventory was driven by a reduction in European inventories that is partially offset by a buildup of excess inventory in North America.

We ended the quarter with cash and short-term investments of $467 million compared to last year's $349 million.

Free cash flow for the quarter was an outflow of $2 million, driven by 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 September 26, 2014, to shareholders of record at the close of business on September 10, 2014.

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

Thank you, Sandeep, and good afternoon.

As we look forward to the rest of the year, we have adjusted our guidance to take the most current trends into account.

The vast majority of the change in our outlook relates to our North America retail performance.

In our North America retail business, as Paul mentioned earlier, our fall collection is not getting the traction that we were expecting.

So far in the third quarter, comp sales have been down in the mid-single digits, and we are expecting that trend to continue for the remainder of the third quarter.

This would translate into a revenue decrease in the mid-single digits.

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

In European retail, so far in the third quarter, comp-store sales have been flat.

For the full quarter, we expect the comps to range from flat to an increase in the low-single digits.

For the full year, we are now planning comp-store sales to range from a decrease in the low-single digits to an increase in the low-single digits.

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

Looking at the partial order book for spring/summer 2015 that we will start shipping in the fourth quarter, same-store buys are actually increasing, and we have reflected that improvement in our guidance.

Considering these factors, as well as some shift in timing from the second quarter in wholesale, we expect total Europe third-quarter revenues to range from flat to an increase in the low-single digits in local currency.

Assuming the euro remains at prevailing rates, this will result in US-dollar revenues that range from a decrease in the low-single digits to an increase in the low-single digits.

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

In Asia, economic conditions continue to be challenging, especially in Korea, where comps continue to be soft so far in the third quarter.

For the third quarter, we expect revenues to range from flat to an increase in the low-single digits.

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

In our North America wholesale business, we expect revenues to decrease in the mid- to high-single digits for the third quarter, as well as for the year.

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

For the third quarter and the full year, we expect overall gross margins to decline, as continued markdown pressure and occupancy deleverage are expected to more than offset the product cost improvements we are seeing in North America.

With respect to operating expenses, we expect a higher SG&A rate for the third quarter, driven by the deleverage impact of expected sales decline, costs associated with store closures and reorganization, as well as higher marketing expenses.

For the full year, we expect the SG&A rate to increase, driven by deleverage due to declining sales, costs associated with store closures, and reorganization in the back half, as well as higher compensation expenses.

We are planning the third quarter with a 35% tax rate, and 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 third quarter of FY15, we expect consolidated revenues in the range of $590 million and $600 million.

We are planning an operating margin between 3.5% and 4.5%, and for earnings per share in the range of $0.15 per share and $0.20 per share.

These expectations will result in full-year consolidated revenues between $2.44 billion and $2.48 billion; operating margin between 5.5% and 6%; and earnings per share in the range of $1.05 and $1.20 per share.

For the full year, we plan to continue to manage our CapEx carefully and opportunistically by investing between $70 million and $80 million in capital expenditures, net of tenant allowances, primarily for remodels and new stores.

In closing, I would like to recap some key points.

We are seeing continued recovery in Europe, and are optimistic about the business trend there.

We believe our brand and our product are strong and well positioned to recover along with the economy.

We are seeing a continuation of second-quarter comp trends in North America so far in the third quarter, and have revised our outlook accordingly.

We are making great progress in omni-channel globally.

We are optimizing our real estate portfolio in North America, and plan to close 50 stores within the next 18 months.

And lastly, we are streamlining our Organization and simplifying processes as we continue to push forward and make great progress on supply chain and planning allocation.

And we'll provide an update in our next call.

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, Wunderlich Securities.

Good afternoon.

When you look at the new designs and other pieces that came out for fall, what is working and what doesn't?

And what do you want to change going forward?

This was supposed to be the big changeover in the fall business and obviously not happening so far the first month.

Where are the weaknesses and the strengths, and where do you want to improve as you go forward?

Clearly we mentioned in our comment what has been a disappointment, which was a very core business for us normally, is dresses.

Basically the performance and styling has not been exactly what the customers wanted.

So we want to refocus where we were before, dress assortment, with the balance offering, capture back what we had just a year ago with club dresses, glamour dresses, outerwear.

Outerwear also has been not exactly what we wanted so we are focusing on that right now.

And definitely I think the denim, we [blog], for example, the high waist that maybe we went too far having too many choices and too many size on the high waist.

And women's tops, I believe that the women's tops we could have done better.

I say that we should have done better and could have done better.

It's a big business normally for us and have such a business so far develop in the summer and not at the beginning of fall.

Okay.

Thank you.

Erinn Murphy, Piper Jaffray.

Great.

Thank you.

Good afternoon.

I just wanted to ask a couple of questions.

You've had a couple recent departures, both in the design and the merchant ranks.

Paul, from your perspective, how do you think about building back the team?

Had there been people already in place since you've seen some of those departures?

And, then, just following up on Eric's former question on the fall, where should we think about where you are at in course correcting?

And what can be done to potentially change anything as we get into the fourth quarter and into the first half of the year in North America?

For the two person that you mention now, which is Charlene, first of all, she hired great talent over the last 14 months and they are all still here.

And as I mentioned before, I think that the key component for us has been that summer was not what we expected after a year.

And back to school was weaker, much weaker, than what we expected.

Especially I think there was -- I think the talent we have now, we have a good team.

We have 45 people in design so I'm not concerned about that.

I'm back fully involved in the product.

I'm reviewing every line, being man, woman, Marciano, all categories.

And, honestly, we have a DNA and if after a year you cannot capture and understand what the DNA of the Company is, we cannot just say -- okay, let's give another year.

We cannot do that.

So that's what we did.

Then, about the merchant, the merchant was not a decision.

It was her personal decision for personal reason.

But same here -- I will say with confidence that the people that Hillary hired are here and very good talent and they're not going anywhere.

So, we are very happy with them on the buyers and merchants.

The category we're looking at, again, is the non-denim athletic leisure pants in woven and knits.

The soft woven [days to my] tops we didn't have and we don't have what we should have now.

And the dress variety from day to club wear on the dresses business, which was huge for us last year, the year before, performed very poorly summer and back-to-school.

In men's we are looking at dress woven shirt, blazer and non-denim [quote] pants.

This is where we are looking a lot of opportunity for us.

Got a. Thank you.

I really appreciate that clarity.

I just want to make sure I understand.

So, will you not be hiring back Charlene's position, and it sounds like the team has been built from internally?

Or are there still key positions that you'd like to be soliciting some incremental talent to come in?

We, of course, are open.

If, for whatever position comes up or talent comes up that we feel strongly that we want to add, we will.

But right now the team that she hired and organized, and reorganizing a little bit the distribution of responsibility of everybody in design, but the team we have in place, except the denim women, which will still be in the next few days, we have the right team that we need to have.

And we have a strong team.

I don't if you've ever visited our offices in [France].

We have very large strong team of design in Europe, which we can pull easily and with no problem, who have been in place for 14 years now.

Got it.

Thank you.

That's helpful.

And then just sticking on the theme of Europe, it is encouraging to see that improvement in the wholesale backlog for spring.

You talked about the same-store buys being actually positive.

Just curious, how far is the order book completed thus far?

And then, what has been your read on where we're at in the door closure cycle in markets like Italy?

Thank you

Erinn, this is Sandeep.

I think what we mentioned on the same-store buys for fall-winter 2014 when we talked about it were roughly flat.

And we have been very encouraged so far with spring-summer 2015 because now we've gone into positive territory on the reads we've got so far.

And we are somewhere between 80% to 85% of the order book is closed at this point.

And, as I think I've mentioned to you previously, the door closures we'll really have a read on only when we close the sales campaign and that's going to be probably a month from now at the end of September.

And so it's hard to know where you're going to end up exactly until we get to that point.

But what I will say is we are so encouraged by the same-store buys improvement that we've updated our guidance slightly for this, even though we don't really know where the door closures are going to finish.

And our guidance now ranges from a decline in the mid single digits to a decline in the low double digits.

And low double digits if you remember, was the fall-winter 2014 decline.

So, that's the assumption we've built in.

We will update it the next time we talk to you.

And if I can add to that, Errin, when Sandeep mentioned door closing we talk about mainly the multi-brand stores who are our decision not the customer decision, our decision to close down certain accounts for lack of credit or lack of potential to be able to continue their business in the next 6 to 12 months.

As you know, our business wholesale is very large in Europe, is very different of our business in North America where we have only our stores and basically federated and that's about it.

In Europe it's very different.

Europe still goes to the same turmoil that we see politically, economically, whatever you want to call.

We are very prudent because we know very well the credit environment in Italy and France specifically to don't take any risk.

We've lost customers.

If they cannot be able to afford a product and pay, we will prefer to cancel these doors.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone.

As you think about the changes and what's happening with product sell-through how do you think about pricing?

Does pricing need to be adjusted?

And in these times when you don't have the product that you want how are you thinking about marketing investments during the back half of the year?

And just lastly, Europe and US on wholesale and retail, are you seeing similar sales trends by category?

Thank you

I'll start with the last question first on wholesale.

Actually the trends that we see in Macy's, in the department stores, mirror what's happening in our stores.

So, we're doing very well with men's.

Men's is the strongest category.

We're actually, in terms of sell in and sell out, we're doing better than we did last year in Macy's and we are doing very well in our stores.

In terms of changing prices, it's interesting, if we look at, let's say, premium denim is actually doing well but the basics aren't.

So, we see that if we have the right product there's basically no resistance to price.

So, our pricing strategy is really good, better, best.

Good is the opening price points that we want to lure customers with, we have the mid price points and then better.

And we find out that, like I said, when the product is right there is no resistance.

Then on marketing?

On marketing we have a comprehensive marketing program that includes magazines, direct mail, social media, digital advertising.

And I think that our marketing efforts are materializing because we're seeing a slowing of traffic decline so far in Q3.

So far in this quarter traffic was down in the low single digits.

So, the trend is increasing.

And keep in mind that most of our marketing spend occurs in Q3, and this year we still expect to spend more than we did last year.

However, in light of the current trend and the current performance, we're actually analyzing what our projected marketing spend is on the back half of the year and we're going to adjust accordingly.

And just pricing on product, do you see that needing to be adjusted?

No.

We do, obviously if you look at inventory, we bought to a higher sales plan.

And of course we will have to probably mark down to be able to clear through some of the excess inventory.

But I don't see a huge need to shift prices.

Thank you.

Best of luck.

Betty Chen, Mizuho Securities.

Thank you.

Good afternoon, everyone.

And nice progress in Europe.

I was wondering if we can maybe talk to the European margins a little bit.

It definitely is very encouraging that we're seeing some of the bookings increase and will start to lap some of the door closures.

Should we think that margins could start to stabilize in the European segment in the second half or should we assume that is more of a spring calendar 2015 occurrence?

And then related to that, in terms of gross margins, Sandeep, should we think that with some of the inventory carrying over into the third quarter that the gross margin degradation will be similar to the magnitude we saw in Q2?

Thanks.

Hi, Betty.

This is Sandeep.

On the European story, I think one of the things that's really encouraging for us, and we've been talking about all along, is our property retail comp performance has been a leading indicator of what we're beginning to see now in the wholesale business.

And that's something where if you think about the first quarter we were up in the low single digits.

The second quarter when we actually guided we were down in the low double digits but there was timing.

We recovered to being down in the low single digits.

And so far we are roughly flat for the third quarter.

So, what we're seeing is a relative stabilization so far between Q4 of last year and now of the comp trends in our property retail stores.

And sure enough, if that's a leading indicator of what's happening in the wholesale business, we talked about the same-store buys earlier when I talked about this to Erinn, saying that the same-store buys are flat for fall-winter 2014 roughly, and we are seeing increases for spring-summer 2015.

Now, what this is indicating is the consumption of appetite from the wholesale customers is growing stronger.

And as they are growing their businesses their liquidity will improve, and the likelihood of them going out of business and being unable to buy from us diminishes.

Now, we don't have a crystal ball, we don't know exactly what door closures are going to happen in the next four weeks, but if we see a change in trend I think that will be significant.

So we'll be in a better position to tell you about what our expectation is going forward on the next call.

But in terms of really where operating margins are going it's too early to tell, in any case, and we don't specifically guide by segment.

But what I can tell you is longer term, as sales start stabilizing, there's an opportunity because we've taken a lot of costs out.

And then your next question, actually moving on to the total Company, was about gross margin.

From a gross margin perspective, we were under pressure in the first couple of quarters largely due to occupancy to like deleverage because of the negative comps.

But I think one of the things that we do have going for us in the second half is the IMU improvements and the AUC improvements that Mike has talked about on the previous calls where, because our product costs have improved a bit in the back half, we will see a narrowing of that pressure on gross margin.

It's still going to be down because we do have inventory that we're carrying that we will have to get through in the next couple of quarters.

Thank you.

Omar Saad, ISI Group.

Hi, good afternoon.

This is Warren Cheng on the line for Omar.

Can you talk about the difference in productivity between your bottom quartile stores versus the base?

And also, as you think about the ultimate store footprint in North America, what are the main metrics or hurdles you look at as you make decisions around these lease renewals.

Hi, this is Sandeep.

We don't really specifically get into profitability by store and the segmentation of that.

But what we continuously do do is look at the portfolio of stores to understand what the productivity is.

In the past year or so the stores that we have opened have done as well as or better than our pro formas, which are well above our hurdle rates internally.

So, we're very confident in our process of capital allocations as we're applying it right now.

We will continue to make investments but at the same time we will cover the portfolio for unproductive doors like the ones we announced on this call.

David Glick, Buckingham Research

Yes, thank you.

Sandeep, just a question on the balance sheet and your capital return policy.

Obviously you have a very strong balance sheet and are generating nicely positive cash flow, although, when you look at the last Q, I think about only 32% of your cash and short-term investments were US-based.

Could you give us a sense of -- we're calculating at least $100 million in free cash flow based on your updated guidance -- how much of that is US-based cash flow?

And how do you think about the dividend in light of the fact that you're paying that in US cash and you hold the majority of your cash outside of the United States?

And as part of that, how do we look at licensing in terms of US cash versus international, because that's obviously a big source of operating income and cash flow?

I think you hit the nail on the head with your last statement.

When we talk about US cash we've got to keep in mind three businesses -- one, North America retail; two, North America wholesale; three, licensing.

All three of those are revenue sources that are here in North America and therefore US cash.

And as a result, there's a lot of cash coming in in the US to fulfill the dividend needs that we have.

And from our free cash flow perspective we're pretty confident that with the actions we've talked about on the call already, we're going to be able to actually generate the free cash that we're talking about in our projections.

From a dividend perspective, we have $467 million on the balance sheet so we're in a very strong position, as Paul mentioned.

We feel pretty confident that we will be able to maintain the dividend program.

But we have conversation with our Board every quarter and they keep on approving it on a quarterly basis.

John Kernan, Cowen & Company.

Good afternoon, guys.

I wanted to talk about the implied Q4 guidance.

It seems like you're assuming that there's going to be an improvement in the run rate of the decline in the operating margin.

I'm wondering what line that's going to come from?

Is it gross margin?

Is it SG&A?

And then just on the store closures, is there a concept that the store closures will focus on?

How committed are you to some of the smaller concepts like GUESS?

by Marciano, G by GUESS?

and GUESS?

accessories at this point?

Thanks.

Okay, John, this is Sandeep.

You were asking about the implied improvement in the Q4 operating margins.

The first thing I would say is, if you think about our business and the seasonality in it, we have a fixed cost structure that goes right through the year relatively straight line.

But the biggest quarter in terms of sales is the fourth quarter.

So, to the extent that there is a higher level of sales in the fourth quarter, you're going to leverage a lot more.

And you'll probably see this if you go back and look at our history.

It is our most profitable quarter.

So, we see an ability to basically claw back some of the declines that we've seen in the first three quarters that we're projecting right now in the fourth quarter, and that's a big piece of it.

Then there's another piece of it which is revenue based organically.

And we talked about the European trends on wholesale.

When you go into the first quarter we were dealing with the spring-summer 2014 order book, which was down in the mid teens.

Then you go into the second quarter and the third quarter, you're dealing with the fall-winter order book which was down in the low double digits.

And I just talked earlier about the spring-summer 2015 order book which we're seeing ranges from a decline in the mid single digits to a decline in the low double digits.

So, you are seeing an improving momentum in wholesale sales which pretty much lands into the fourth quarter.

So, you put all these things together and then also think about the gross margin improvements that we talked about earlier on AUC improvements, that's also lifting us into the fourth quarter, and that helps the operating margins, as well.

Okay, that's helpful.

And then just on the store closures is there a specific concept that you're going to focus on or is it fairly broad-based?

It's pretty broad-based.

This is Paul.

I think there's no specific.

We look at what make sense to us, what expiration lease we have, what the kick-out clause we did on certain stores, a mall that we tried and we had a way out three or five years, and we move forward on that.

But there's no specific concept we look at.

We look at what does not produce what the profitability should be in the store and react from that.

And for that we for sure identified 50 doors in the next 18 months, which is substantial.

Robbie Ohmes, Bank of America Merrill Lynch.

Thanks.

I had a follow-up question on the North American back half outlook.

Could you give us a little more color on the outlet store versus full-line store performance, maybe in the second quarter and also for the back half, and how you foresee the buildup of inventory in North America being managed.

Do you guys expect it to be a promotional environment overall in the back half away from you?

And how much of your downward guidance revision for the back half reflects your own issues versus your expectation that it's going to be very competitive this fall and holiday?

Thanks

Let me start with, really I think you're getting towards guidance in general and I think the big picture of what happened.

I think, as Mike mentioned on the prepared remarks, the big driver of guidance change for the total Company was driven by North America retail.

If you take out North America retail, there are puts and takes across the other businesses, but, really, we probably would have been in the same range of guidance on a full-year basis.

Now, coming to North America itself, the key is -- and we've talked about this previously -- we were expecting a big improvement in trend in the back half of the year based on the product launches that were coming out in the fall.

Unfortunately it hasn't materialized, as Paul mentioned, as well.

The important thing to note is we are still trending at the same rate that we saw in Q2.

So, we haven't deteriorated, we're just not seeing the improvement.

But because we built in that improvement, that's the adjustment you are seeing.

And on a $1 billion business, which is North America retail, we plan to be down in the low single digits on comps for the year.

We're now saying we're going to be down in the mid single digits.

You can do the math.

That's a pretty big hit in earnings.

And we bought inventory for at least into the third quarter, and the fourth quarter we can adjust a little bit.

But that's going to put pressure on our gross margins as we move through the inventory.

And your factory stores versus your full-line store performance?

I think we're really speaking not a huge difference between the factory and the full-line store performance.

Nothing more specific to talk about on that

Jeff Van Sinderen, B. Riley.

Thanks for taking my question.

This is Richard Magnuson in for Jeff Van Sinderen.

Can you speak some more about the year-over-year metrics of your denim business in the quarter and so far this current quarter, whether units are up, down, what was the average selling price?

And are you selling more or less at regular price or markdown?

And overall order of magnitude, can you speak on the profitability of your denim business over last year?

One of the initiatives that we had in the fall was to relaunch our denim walls, which is our basic core denim.

With that we actually were liquidating a lot of the old stock.

So, with that liquidation the average price points came down.

But the denim business, you've seen from other retailers, actually it's not very strong.

In no one's business is the denim business very strong.

What we find, though, is actually we have the strength in our fashion denim, which actually is doing well, and we see very little price resistance there.

Okay.

Then can you speak to us more about what you're seeing in your North American same-store sales and European same-store sales trends going forward?

I just talked about it earlier in the guidance for North America so I'm not going to repeat the same thing on North America.

But Europe same-store sales we basically guided to be down in the low single digits to up in the low single digits for the full year, in the prepared remarks, as well.

Thank you.

(Operator Instructions)

Dorothy Lakner, Topeka Capital Markets

Thanks, good afternoon, everyone.

Just to follow-up on the denim question I just wanted to make sure I understood what's going on within that category because you did say, or you just said, you are seeing strength in the fashion denim side of the business and no resistance to price there.

But I think Paul had mentioned earlier maybe just some issues with the components of the assortment, that maybe there was too much of the high-waisted denim.

So, I just wanted to have you clarify that.

And then on the operations side, if you could talk about when you expect to see the $20 million in savings, or how should we look at that, looking out over the next 18 months?

And a little bit more color on what you're going through in terms of the North American reorganization merging divisions and so forth.

Just a little bit more color on what exactly you are doing here.

Thanks

Hi, Dorothy.

All what you said was correct, all of it.

If you look at what's happening now, what Mike was mentioning is the fashion denim, which is what we call fashion denim, is like $108, $118, $128.

$138.

We have not encountered that much resistance.

Where we had some resistance has been on the lower price, in general.

And especially watch what's going to happen the next three days starting the Labor Day weekend, you're going to see the price of denim across the country across all brands as low as what is low.

And that's reality of today.

If you were around in 1998, 1999, 2000 we had what we called the denim statues brand war.

Everybody was just like -- who is going to go lowest.

And you know what?

-- nobody wins that war.

Nobody.

And we don't believe in that.

So, we're going to do what we have done always, and always last three decades, the last 33 years.

We will adapt of what is right for our brand.

We are not going to go and just say -- okay, this one does that, we do that; this one does that, we do this.

It's impossible.

We will not be a brand -- we'll not be in business if we do that.

So, we have some over assortments in certain styles, like the high waist, which I mentioned to you, which was a good trend, but we had too many of too many wash and too many styles.

We are correcting that.

It's easy.

If you don't know what (inaudible), that's a problem.

If you know what is your problem, you know that you have a cure, you correct it and you do it.

That is somehow where we always look at the half glass full and not the glass half empty.

We know, we identify, we act on it, we adapt, and we move on.

That's for my part.

I'm going to just take the first piece of it, which is the financial piece of it.

Then I'm going to give it to Mike to add more color on what the reorganization is about, and more details on that.

In terms of the savings that we're talking about, the $20 million annualized, the impact of that is really going to be seen in FY16.

And the reason being that you basically for the current fiscal year, you're going to have some one-time costs that are going to offset some of the savings we can generate this year.

So, the impact of any is minimal in the current year and it's already included in the guidance that we provided.

In terms of total cost, just keep in mind when you're looking at it that covers all of North America -- retail, wholesale and some of the corporate functions, as well.

So, don't look at it on a segment perspective.

And last but not least this is annualized savings from this program.

This doesn't mean we don't keep investing in new markets like Brazil, like Japan, or any other investments that are coming up.

Just keep that in mind when you're thinking about your projections.

Dorothy, hi, it's Mike.

To follow on what Sandeep was saying, the goal of our streamlining was to reduce the complexity of our organizations, simplify processes, and simply let's become more efficient.

So we looked at the entire North America organization -- all business units, the back office, sourcing, distribution, everything.

Everything was on the table and it included both payroll and non-payroll.

One of the key things we did was to basically consolidate the four brands we have into two.

So, we're merging GUESS and Marciano and we're merging factory and G by GUESS?

What we see here is an opportunity to leverage pockets of expertise that we have in each brand, share best practices across the brand, and drive more commonality in processes, which will save us money and make things more simple.

At the same time, we've eliminated redundancies and right-sized the organization.

Keep in mind, right now we sell Marciano product in the top GUESS?

stores and it actually outperforms, does very well.

And we're looking to actually expand that to more doors.

So, I think this reorganization gives us a really good footing to do better.

So, does that mean that you are looking at, since everything's on the table, perhaps closing the standalone Marciano doors as you build more of that assortment into the top-performing GUESS?

stores?

No, Dorothy, no.

If we have opportunity in certain stores -- which it's no secret today but landlords are basically increasing, on the new leases, sometimes 50%, 80%, 100% the rent in certain malls -- of course we will walk out of those malls and we will consolidate with another GUESS?

store.

But where we have excellent stores, very good lease and good performance, Marciano stores stay where they are in place because we, after 10 years continue to believe in the brand and continue to believe in the product, which continued to perform well right now.

And we will stay focused but we will now expand on the GUESS?

store to have a basically shop-in-shop of Marciano in all our stores.

Betty Chen, Mizuho Securities.

Thank you.

I had a follow-up, if I could, regarding North America retail.

I think you had mentioned earlier men's outperformed women's in accessory.

Is there any color you can give us on women's and accessories business?

And especially as we go into the holidays when gifting could be quite important for the accessories business, could we see some of the adjustments made, or given the long lead time that could be difficult?

And then just related to that, certainly we understand Q4 inventory will need probably some time to adjust, but is the team able to affect some of the late Q4 or, more importantly, spring calendar 2015 buys as you plan forward?

Thank you

There was quite a bit there.

Basically let's talk about readjusting the inventory.

Remember last year, we actually started out Q4 doing fairly well but then we ran lean on inventory in core products in core category such as sweaters and outerwear, et cetera.

So now we eventually went back to what works for us.

And so in the Q4, this is really the core GUESS?

that worked for us last year -- so, it's outerwear, sweaters, etc.

-- and we bought appropriately there.

And then, keep in mind that we've had a strategy of keeping 25% to 30% of our open to buy open to chase into it.

So, we have been able to adjust the assortment using that mechanism.

And then you mentioned accessories.

In terms of accessories it improved slightly in Q2 from Q1 and then slightly into Q3.

But one of the rays we are seeing of green shoots there is in women's handbags.

Women's handbags, which were down double digits in Q1, rebounded, and in Q2 we saw it almost flat.

And so far in Q3 it's actually comping slightly positive.

And the beauty there is our regular-priced sales are actually outperforming the markdown sales and our margins are up.

And another category that we're doing well in accessories is jewelry where we have actually quite a decent increase from Q1, and that's basically flowing into Q3.

The areas where we see weakness is peripherals and small leather goods.

We see weakness there.

The key category with weakness is watches.

So, we see weakness specifically in women's watches.

Mike, on the watch business, can you adjust that at all for holidays or we're going to have to wait after that, given the lead times?

For watches we hope that we will correct for holidays because it will be against some negative number over last year.

And we have adjusted Q4.

I reviewed the product back a few months ago for holidays and I was very pleased on it.

Again specifically, we have an outstanding line of watches for men.

So I'm confident we should be more than okay in watches.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.