Guess? Inc (GES) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Guess?

second-quarter FY16 earnings conference call.

On the call are Paul Marciano, Executive Chairman and Chief Creative Officer; Victor Herrero, 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, strategic initiatives, capital allocation and financial outlook.

The Company's actual results may differ materially from current expectations based on risk factors included in today's press release and 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 and good afternoon, everybody, to join us today.

We are very pleased to report that our second-quarter earnings per share was $0.21, which was above the high end of our guidance.

Our operating earnings and margin were also above the guidance we gave three months ago.

We will talk more about the business and financial performance later on but I'm really excited to go in more detail on the news we announced in the middle of July with the appointment of Victor Herrero as our new Chief Executive Officer.

This is a milestone for the Company and it is the first time someone other than the Marciano family is taking the leadership as the Chief Executive Officer of Guess?

worldwide.

My brother Maurice and I have been working with the Board of Directors for over a year and a half now to select the right candidate to be my successor as the CEO.

The most important criteria, in our view, are the understanding of our brand, which will celebrate the 35th-year anniversary next year; the complexity of the business, being over 90 countries with more than 25 categories of products; and also a deep understanding of the current world of retail.

We believe we are finding Victor the ideal candidate.

And let me tell you a little bit more about him.

Victor comes from Inditex where in the last 10 years he has built a business in Asia from scratch to over $4 billion.

This incredible, rapid story growth story and achievement is why we believe he has the capability to expand the sales growth for Guess?, not just in Asia but across the world.

In the past few years there has been significant disruption in the industry by fast-fashion retailers.

And Inditex, without a doubt, is a leader in that disruption.

Victor will have a great perspective of how this shift of consumer took place, especially in the area of supply chain, global sourcing and processes.

Best of all, Victor is a true retailer at heart and lives and breathes the experience of the consumer in the store and online.

This will be critical to his impact on the opportunities that Guess?

business will represent today.

You will hear next directly from Victor in his own word his vision and strategy for Guess?

in the coming years and his priorities as he sees them.

But please forgive him for his Spanish accent.

He's working hard on it every single day.

WIth that, I will pass now to Victor.

Welcome to Victor.

Please.

Thank you, Paul.

First, let me say how excited I am to be here, and how honored I am that Paul, Maurice and the Board of Directors have placed such faith in me to nominate me the first CEO in Guess?'s history that does not bear the Marciano name.

I accepted the position because I love and believe in the power of the Guess?

brand, because I cherish the opportunity to work alongside Paul in writing the next chapter of this Company, and because, frankly, everywhere I look in this Company, I see opportunity.

I am very happy about the future of Guess?.

But enthusiasm does not itself pay the bills or create economic value.

So, I want to share with you very specific initiatives that I will execute immediately at Guess?.

Call it vision, call it a strategy, call it what you will, the important thing is that idea and concept have to be simple, concrete, and actionable.

I don't believe in theories or in abstract concepts that sound good.

I deal in execution.

I am a very results-oriented person.

The way I look at it, everything other than results is commentary

Specifically, these are the five initiatives that I will execute immediately.

Our first initiative is to elevate the quality of our sales organization and merchandising and strategy to match the quality of our product and of our marketing.

How we are going to accomplish this?

First, we will elevate the product knowledge of our entire organization and particularly our sales force.

We don't want managers, we want product experts who will develop in-depth knowledge of the latest trends, product composition, key selling items; and who not only knows our product but also knows the difference between our products and the competition; and who can provide valuable feedback to our product development team.

To this end, we will implement daily briefings, periodic commercial reports, sales workshops and competitor research.

We have a presence in 90 countries and the knowledge that is available to us by having this global footprint is very powerful.

In addition, our sales force should convey real pride and passion for our brand and for our product.

The key is understanding what consumers want.

Rather than push product down to consumers, we will deeply probe their desires first.

The idea is to keep the consumers at the center of all our decisions.

And in order to create a loyal consumer, we must get them to emotionally connect with our products.

Second, this is our marketing.

We will rejuvenate the brand experience as a distinct lifestyle concept that appeals to our global audience and allow us to adapt to changing times.

Digital marketing and social media will play a very important role here.

We will lower the average age of our customer and will improve our interaction with millennials through social media, bloggers and fashionistas.

In order to build a more strategic and operational online organization to engage millennials, we will hire a top-notch digital marketing officer.

And we will build a strong digital marketing team.

We will strengthen our online marketing efforts, not only from a technical point of view, but also as a generator of new ideas and at the crucial channel of customer feedback.

Number three, we will review our field and store structure.

We will invest in our key stores to elevate their image and to bring our new commercial concepts to the customer.

We will define three tier groups of stores based on low, medium and high performance, along with a game plan for improvement.

We will set high standards and goals including cost control related measures.

We will also put in place strong replenishment and visual standards.

And we will develop, implement and maintain a consistent stockroom standard for all stores across the Company.

The stockroom is the heart of our business and full control over stockroom translates into superior sales performance.

Number four, we will implement a yearly retail calendar for all stores.

We will closely review the retail calendar of each store to fully capture opportunities provided by mall events, promotions, holidays, et cetera.

Number five, we will increase the number of SKUs in our stores.

By using feedback from our sales force to improve our collection, we can focus on new and fast-growing product categories in line with the brand's DNA, and we can have a strong presence in fashion and accessory categories.

Number six, we will align pricing between markets and product categories.

We will implement an in-depth analysis per sub-family of each season's collections and we will implement a pricing system that has greater clarity and simplicity.

So, that was our first initiative.

Our second initiative is to build a major business in Asia.

As Paul mentioned, this is what I've been doing at Inditex for the last 10 years and I will do the same for Guess.

We currently do approximately $250 million in revenues in Asia, which is about 11% to 12% of our total revenues.

That number should be at least $750 million, or at least 25% of our revenues, and would result in a 50% increase in our Company's total operating income from last year's level.

Capital allocation is one of the most fundamental responsibilities of a CEO and I consider expansion in Asia to be a wise allocation of our resources in order to maximize our return on invested capital.

Our third initiative is to immerse a culture of purpose and accountability throughout the organization.

We will start by implementing flat and centralized organization structure.

In order to generate global synergies, corporate decisions including logistics, finance, communications, stock allocations, will be centralized in our headquarters in LA.

The entire organization will be structured to have a nearly fanatical obsession with sales and profitability.

And we will implement proper performance measurements and incentives in order to encourage and reward a sales-driven culture.

Our emphasis will be on consistency achieving positive comps quarter after quarter.

And to accomplish this we must and will foster accountability at all levels of the organization.

I only want employees that have a sense of urgency and purpose, that are prepared to be held accountable and that are passionate about working at Guess?

I like to promote from within and I am not interested in any employees that don't meet these three criteria.

As I said at the outset, I am a very results-oriented person.

So, the important thing is to understand and drive business outcomes, not just complete task and assignment.

Therefore, I will measure each member of our management not by the tasks that they perform, but by their results that they achieve.

Our fourth initiative is to improve our cost structure including supply chain and overhead.

Our fifth initiative is to revitalize our wholesale business.

I'm not prepared to discuss these two last initiatives in detail today because I'm still in process of studying and assessing them.

But I should be ready to discuss them in more detail during future earnings calls.

So, these are the five initiatives.

As a part of phase one, number one, we will elevate the quality of our sales organization.

Number two, we will build a major business in Asia.

Number three, we will immerse a culture of purpose and accountability throughout the organization.

And as a part of phase two, and number one, we will improve our cost structure, and, number two, we will revitalize our wholesale business.

As you can see, at least initially it's a short list of big concepts.

The reason for the short list is that the most successful organizations are those that keep things simple and do a few things extremely well.

So, we are going to pick very few fights going forward and we are going to win them.

I am energized by the sense of commitment and I am setting more ambitious goals for the Company.

Every product, every service, every cause that has a competitor is a brand that needs to define and defend its uniqueness.

So, we are going to play offense, not defense.

We have to think big.

Decimal points are for bureaucrats.

My goal is to put wings on Guess?'s operations by aligning the short-term execution with long-term vision, and by seeing all issues through the lens of profitability.

I want you to know that I am acutely aware that in this fiercely competitive environment the penalties for wrong decisions are very unforgiving.

Good planning always costs less than good reacting.

And a spectacular achievement is always preceded by spectacular preparation.

So, we are going to be prepared and we are not going to mistake motion for action.

Over the last 35 years, GUESS?

has become a superb global company with a fantastic brand.

But I take absolutely no comfort where we are today.

The next few years, for me, will be like running a marathon interrupted every so often by a 100-yard dash just to make sure that I don't get too relaxed.

My ultimate objective, of course, is the creation of economic value.

In order to accomplish this objective, I believe that there are three indispensable ingredients.

Number one, continued strong and predictable earnings.

Number two, a well articulated and properly executed growth strategy.

And, number three, the creation of high performance teams with a dedication to a common purpose.

My commitment to you is to put all three ingredients in place and to make GUESS?

a dividend-paying growth stock.

Thank you all.

Honestly, I'm thrilled to be here and I look forward to giving you periodic updates on our progress.

I will now turn it over to Sandeep to discuss the operating results.

Thank you, Victor.

And good afternoon.

During this conference call, our comments may reference certain non-GAAP measures.

Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures.

Moving on to the results, net earnings for the second quarter was $18 million.

Diluted earnings per share was $0.21 compared to diluted earnings per share of $0.26 in last year's second quarter, and includes the negative impact of roughly $0.10 due to foreign currency movement.

Earnings per share declined 19% including the negative foreign currency impact of roughly 38%.

Second-quarter revenues were $546 million, down 1% in constant currency and down 10% in US dollars versus prior year.

Total Company gross margin increased 70 basis points to 36.3% primarily due to higher initial markups in Europe and America's retail, lower markdowns in America's retail, partially offset by the impacts of currency.

SG&A as a percentage of sales increased by 80 basis points versus prior year.

Expenses in the quarter include charges for legal matters that negatively impacted earnings per share by roughly $0.05 and was not contemplated in our previous guidance.

SG&A dollars still finished roughly in line with expectations when we guided the quarter, as we incurred lower expenses in other areas to offset these charges.

Operating earnings for the second quarter was $26 million.

Our operating margin decreased 10 basis points to 4.8% including the negative impacts of foreign currency of 170 basis points and charges related to legal matters of 130 basis points.

Other net income was $4 million and mostly consisted of net unrealized gains and realized gains on foreign currency hedges.

Our effective second-quarter tax rate was 37%, up from 35% in the prior year's second quarter due to the mix of earnings distributions between different taxable jurisdictions.

Before we move to segment performance, please note that we renamed the North America retail and North America wholesale segments as Americas retail and Americas wholesale to reflect the growing representation of business from Central and South American countries in the segment in addition to US, Canada and Mexico.

Revenue for the Americas retail segment decreased 2% in constant currency and 5% in US dollars.

Within the quarter, we saw definite sequential improvement both in traffic and comp versus Q1 and finished the quarter with comps flat in constant currency and down 3% in US dollars.

This performance was despite continued softness due to significantly lower traffic to our tourist stores.

E-commerce, which continues to be one of our top priorities, had yet another strong quarter and delivered top-line growth of 20% in the quarter, marking the 16th consecutive quarter of growth in the US and Canada.

In terms of product we were pleased by the overall performance of our womens' category, as we posted positive comps in constant currency.

An improved trend in denim and strength in dresses and woven tops drove the women's performance.

On the accessory side, we saw footwear and bags continue to comp positively but watches remain soft.

From a brand perspective, we continue to be pleased with the performance of the Marciano product line which achieved double-digit comps for the quarter, and are happy with the sequential improvement in the performance of the Guess?

brand.

In Europe, second-quarter revenues were up 4% in constant currency and down 15% in US dollars.

The quarter benefited from a $15 million early timing of shipments versus expectations.

This timing difference resulted in a $0.05 favorable impact on earnings per share for the quarter compared to our expectations.

Retail comps were roughly flat for the quarter.

This was slightly below our expectations as we had a slowdown of traffic and comp in the earlier part of July but saw a strong recovery of trend in the last week of the same month.

From a country perspective, we continue to be pleased with the performance in Italy, Iberia and Germany, as all these markets grew in the quarter.

In Asia, second-quarter revenues were down 6% in constant currency and down 12% in US dollars.

We were encouraged by the improving performance in mainland China where we achieved double-digit comps in our retail stores.

However, this was more than offset by weakness in Hong Kong and Macau due to the decline in tourist traffic as well as softness in Korea in the aftermath of the MERS crisis.

In America's wholesale, which includes our businesses in the US and Canada, as well as in Mexico and Brazil, second-quarter revenues were down 9% in constant currency and down 15% in US dollars.

The decline in constant currency for the segment was primarily driven by softness in our US wholesale business.

Royalty generated from sales by our licensee partners were down 5% at $25 million, driven by softness in watches and bags.

Moving on to the balance sheet, accounts receivable was roughly flat in constant currency and down 15% in US dollars.

Inventories were $335 million, down 3% in constant currency and down 15% in US dollars versus last year.

We ended the quarter with cash and short-term investments of $471 million compared to last year's $467 million.

Free cash flow for the six months was $32 million, compared to a use of $2 million in the prior-year first six months.

This improvement was driven by changes in working capital and lower capital expenditures.

In summary, with six months of the year behind us, both including and excluding the impact of currency, we have been able to improve our gross margins and operating margin on the P&L while improving our free cash flow.

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 25, 2015 to shareholders of record at the close of business on September 9, 2015.

With that, I will pass the call over to Mike who will take you through the outlook for the third-quarter and full FY16.

Thank you, Sandeep.

And good afternoon.

Before I give the outlook for the third quarter and the full year, I would like to note that we have maintained the top end of our EPS guidance despite absorbing a negative impact of $0.10 in the year from costs associated with legal matters and the hiring of our new CEO that were not contemplated in our previous guidance.

Excluding currency impact, the top end of our guidance reflects nearly 30% EPS growth and operating margin expansion of over 200 basis points.

Our full-year guidance assumes that currency headwinds will impact EPS by slightly over $0.40.

In order to get better visibility to the underlying trends in our outlook, we will also provide constant currency metrics when applicable.

Before we move to the guidance by segment, please note that guidance for revenues and comp sales by segment is included in the press release.

In Americas retail, with respect to store closures, based on improving trends during the second quarter in some of the marginal stores in suburban locations, we have opted for one- to two-year extensions to allow more time to evaluate the financial performance of these particular stores.

Based on this, we have revised our expectations on closures for the year to be roughly 40 stores through lease expirations and kick outs.

As a reminder, roughly half of our leases have lease exit options coming up over the next three years.

Regarding our G by GUESS concept, we now plan to resume expansion in the Americas.

So far in the third quarter, comp store sales have been roughly flat in constant currency.

In Europe, so far in the third quarter, retail comps are up in the double digits, but we have been and are being more promotional than last year in August during the sales period.

However, we do not expect to be more promotional after the sales period.

In Europe wholesale, our spring-summer order book is still not closed but we don't expect a material improvement from the fall-winter book that finished down 10% versus prior year, mainly driven by softness in Russia and France.

At prevailing exchange rates, we estimate that the impact of currency headwinds on European revenue growth will be approximately 14 percentage points for the third quarter and 15 percentage points for the year.

Now, turning to Asia, the overall environment remains soft in South Korea where comps have been negative so far in the third quarter.

And our guidance assumes that this environment will remain soft.

Moving on to the full Company, for the third quarter, we expect overall gross margins to be down slightly as we start to get more severely impacted by currency headwinds as well as some promotional pressures in our international market.

For the full year, we expect gross margins to be up slightly due to lower planned markdowns, targeted price increases and lower average unit costs, partially offset by currency headwinds.

With respect to operating expenses, we expect a higher SG&A rate for the third quarter, partially due to deleverage from the earlier timing of European wholesale revenues in the year.

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

We are planning the full year with a 36% tax rate, up from 34%, partially due to the impact of the non-deductibility of our CEO's one-time hiring costs for income tax purposes.

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

Considering all these factors, for the third quarter of FY16, we expect consolidated revenues to decline between 4.5% and 3% in constant currency.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 8 percentage points for the third quarter.

We are planning an operating margin between 2% and 3% including the impact of currency headwinds of roughly 150 basis points.

Earnings per share is planned in the range of $0.08 per share to $0.12 per share.

The negative impact of currency on earnings per share in the quarter is estimated at $0.12.

Excluding the negative impact of currency, operating margins and earnings per share are projected to be flat versus prior year for the quarter at the high end of guidance.

For the full year, we now expect consolidated revenues to be down 1.5% to down 0.5% in constant currency.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 7.5 percentage points for the full year.

We're planning an operating margin between 5% and 6% including the impact of a currency headwind of roughly 130 basis points.

Earnings per share is planned in the range of $0.89 per share and $1.02 per share.

The earnings per share guidance includes a currency headwind of slightly over $0.40 per share.

For the full year, we plan to manage our CapEx carefully and opportunistically by investing between $55 million and $65 million in capital expenditures net of tenant allowances.

With that, I will conclude the Company's remarks and open the call up for your questions.

(Operator Instructions)

Erinn Murphy from Piper Jaffray.

Victor, I was hoping that you could maybe speak a little bit, coming from your outside perspective, what were the biggest opportunities about the Guess?

Brand that were most attractive to you?

And then any context that you have for how relevant you see this brand globally, just given your international background.

First of all, thank you very much.

Regarding your question, I think being present in 90 countries and also with global, I will consider Guess?

similar to Inditex in this respect, that it is a truly global company.

So, I see opportunities in several countries where we are not really present at this moment, such as, for example, China, such as Russia, such as Turkey.

We have a presence, but we don't have an important presence.

I believe that there is a customer there for Guess?

and there's a customer, as well, that can be very appealing to the Guess?

family.

This is one of the opportunity, but I see, as well, opportunity, for example, in China, as I mentioned before.

China, for example, we can grow a lot our business in the next coming years.

As I mentioned in my speech, we will try in more than five years to do at least $700 million in total in Asia.

Then, a part of that, I see opportunities, as well, on improving the supply chain.

I see opportunities, as well, on people, on the talent inside the organization and hiring the right people, as well, from the outside to improve our operations and our way of doing business.

Eric Beder from Wunderlich Securities.

Could you talk a little bit about the US operations?

We are in a pretty decent denim cycle right now.

What are we seeing on the US?

And where is the opportunity here in terms of bringing this brand back to prominence after a number of years of negative comps?

Eric, it's Mike.

In denim, we've seen a huge sequential improvement from Q1 to Q2.

And, actually, our basics, where we are up against liquidation last year is a little bit soft, but we are doing really very well with fashion and premium product.

And this is driven by innovations in fabrics.

So, we've got new silhouettes that have bodies, push up and shape up, the Curve X that have body slimming capabilities.

We've capitalized on the destroy trend.

And we're really seeing some pretty good momentum in that business.

With that, I'll turn it over to Victor where he can talk about where we are going to take it for the next steps.

In US, I think for all our formats, Guess?, GUESS Factory, G by GUESS and Marciano, I believe there is plenty of opportunity for development not only from a real estate point of view but also from a product point of view.

This is something that we are addressing at this moment.

And we believe, as I mentioned on my speech, it's about basically everyone concentrate -- the operational people concentrate on sales and in product.

This is what we are going to try to do and how I think that we can have a lot of opportunities in the US market.

Omar Saad from Evercore ISI.

Congratulations, Victor.

And, Paul, you, as well, on a lot of the exciting changes.

Victor, can you talk about � Inditex is so well known for having a world-class supply chain, the flat organizational structure you alluded to, and some of the cultural elements, experiences you've had in building that company, helping build that company.

Can you talk about the supply chain element?

Is that a critical component, do you see, for the future of Guess?

and the success of this company, the franchise, globally?

Or maybe Guess?

is a bit more of a brand company where it relies more on marketing and advertising to drive the business.

Help me understand how you view the differences between the two.

First of all, of course, we will try to concentrate or trying to improve our supply chain.

As a preview, I can give you some measures that I will consider for future development of our supply chain.

First of all will be the replenishment.

We will try to improve our replenishment inside the stores.

We will try to, as well, improve our suppliers' proximity to our main markets, which at this moment are the US or North America and Europe.

And then suppliers that will be, for example, in Mexico, even in the US for the North American business.

And in Europe, we'll try to reinforce the suppliers in the Mediterranean area and Turkey, as well -- Mediterranean, Turkey, and Eastern European countries for supply in our second-largest market, which is Europe.

Then, also, we will try to reinforce the fabric, kind of creating a fabric platform.

And then, also, we will reinforce the open to buy.

As important measures that are going to cover for the next coming days and coming weeks, is to improve our supply chain.

Regarding the flat organization that you were mentioning before, without any doubt I'm coming from a very flat organization and I'm going to try to, as I mentioned, as well, in my paper, is I'm going to try to improve that flat organization that we are having at this moment at Guess?, centralizing all our functions in LA and the other two centers of responsibilities at this moment that we have, one in Europe and one in Asia that will be the executors of that strategy.

Betty Chen from Mizuho Securities.

Welcome to you, Victor.

It's exciting to hear your strategies and vision.

I was wondering if you can maybe give us clearly your several different initiatives that you and the team will be working on.

Any sense in terms of timing that we can possibly think about?

Then my second question, if I could, is, regarding the European wholesale shipments that helped the second quarter, are there any other timing shifts that we should keep in mind for Q3 or Q4 as we model out the back half?

Thank you.

This is Sandeep.

Just the second part of the question that you were talking about on the European wholesale shipments, as we talked about in the prepared remarks, about $15 million shifted out of Q3 into Q2, and that effectively will manifest in Q3.

There's nothing else that's very material that is in our guidance.

And regarding timing that you were mentioning, as you may know, I'm coming from an Inditex background so I will try to do it right now.

It's not possible to do it right now but definitely you will hear from us in the coming few weeks and few months.

Janet Kloppenburg from JJK Research.

Welcome, Victor.

I look forward to working with you.

I wanted to ask a couple questions about what's going on, for Sandeep or Mike, something about this double-digit comps due to promotions.

I'm really unclear about what's going on, there.

Mike, are you optimistic that the back-to-school lineup for Guess?

-- does it indicate that denim assortments are now on track?

I'm thinking that means that the investment in fashion denim is up and that the basic component may be a smaller investment year over year.

I'd like to just hear the strategy for capitalizing on the trend on the fashion side of the business.

Thank you.

This is Sandeep.

I think you were asking about double-digit comps in Europe, and that's the trend we've had so far in the third quarter.

Remember, this is a markdown period so it's not surprising that it's going to be a bit more promotional.

We are a bit more promotional than last year because we have a bit more inventory that actually carried through from the sales period in July.

That's why the margins have been impacted, because we are a bit more promotional.

But it's quite normal.

And, Janet, with respect to denim, we saw a huge sequential improvement, as I said earlier, from Q1 to Q2.

We see a little bit of weakness in the basic denim because last year we were up against the liquidation.

But we've reduced the number of SKUs there.

In fashion, in premium, we're actually seeing a really strong response to our offerings.

We've got a couple new fits, shape up and curve up, which basically they have body slimming capabilities.

Our Curve X continues to perform well.

And our knit or flex denim is really performing well also.

So, the customers, they're responding to the new fabrications.

And we've capitalized.

The destroy trend is something that's working quite well with us.

This is all happening in YC and women's.

In men's, the basics are working.

But fashion, we are probably a little bit behind.

But we are taking the learnings that we've gotten from women and applying those in men, and we will have new offerings hitting the stores and we expect to see some results there, too.

Jeff Van Sinderen from B. Riley & Co.

This is Richard Magnuson in for Jeff Van Sinderen.

My question is, could you provide any additional color on the gross margin details and what you expect your gross margin to be like or impacted by looking forward to the second half?

And then maybe the latest trends in Europe, particularly in Italy where you have considerable presence.

Richard, this is Sandeep.

You were a little bit difficult to catch but I think you are asking about gross margin cadence in the guidance that we have included.

So, let me just give you what we've actually talked about in the prepared remarks and give you a bit more color on that.

In the third quarter, we actually are coming up against currency headwinds.

There's a little bit of promotional activity in Europe that we talked about, as well, that is affecting us, and that's why we think that the gross margins should be slightly down in the third quarter.

However, as we've talked about on previous calls, on the full year, we still expect our gross margins to improve, driven by the improvement in markdown rate as we actually get into the back half of the year, the better average unit costs that we're going to be able to leverage in the back half of the year, and the strategic price increases that we're going to be doing towards the back half of the year.

This is, of course, offset partially by the currency and is quite material as a headwind, especially as we're moving into the back half of the year.

Thank you.

We have no additional questions at this time.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.