Guess? Inc (GES) 2016 Q3 法說會逐字稿

Good day everyone, and welcome to the Guess?

third-quarter fiscal 2016 earnings conference call.

On the call are 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 Victor Herrero.

Good afternoon and thank you for joining us today.

We are pleased to report that our third-quarter earnings per share was $0.15, which was above the high end of our guidance.

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

Sandeep will talk more about the quarter results later in the call, but let me start by giving you an update on the progress that we have made on our key initiatives.

On the first initiative, which is to elevate the quality of our sales and merchandising organization, we have started to elevate the product knowledge of our entire organization.

Already we have implemented sales workshops, including product training, for the field and store employees.

In addition, we have introduced enhanced bestsellers reports that are resulting in review of merchandising on the sales floor to maximize sales of best-selling products and categories.

Number two, we have hired a new Director of Social Media.

As I mentioned during our last earnings call, I consider digital marketing and social media capabilities to be critical to interact with our existing customers and gaining new customers.

Number three, one of the big changes that we have already started to make is to ensure that the virtual merchandising in our windows and in our stores is more commercially focused to ensure that the displays emphasize bestsellers and diversity of categories in our lifestyle brand.

Additionally, the most crucial element of store management is to ensure that replenishment of products is a top priority.

The key to this is to be in full control of the stockroom in every store to make sure that product from the stockroom moves to store shelves very quickly and at the same time needs for replenishment are communicated to corporate headquarters.

Number four, planning of promotional cadence in retail calendars at a store, district, regional, and national level is already underway to take advantage of micro events that may occur at a mall level and are store specific, and also more macro events that are related to state or national holidays that will then relate to stores at a regional or national level.

Number five, we are in the process of hiring product managers who will be the interface between the field organization and the merchants at corporate headquarters to ensure that the feedback from the consumers at the store level is incorporated into the merchandising, planning, and allocation process.

Number six, as I mentioned last time, we are aligning pricing between markets and product categories.

A specific example of this alignment of market pricing is in Europe where, in some cases, we have had different retail price points for the same styles within the EU countries where the currency is the euro.

This difference has been eliminated.

In addition, in some cases, the relative pricing across product categories needs to be realigned to ensure that pricing across the assortment is consistent and delivers the right value to the consumer regardless of product category.

On our second initiative, which is to build a major business in Asia, since our last earnings call, we have taken the following steps.

Number one, we have hired a new Director of Greater China, a colleague of mine from my days at Inditex.

I'm very excited about this great first step in building our business in Asia.

Number two, we have hired a Director of the Middle East, India and Southeast Asia, also a former colleague of mine from Inditex.

Number three, we have doubled our capital allocation to grow in stores in Asia.

And number four, we have begun accelerating our e-commerce business in China through Tmall, JD.com, and GUESS.cn.

On our third initiative, which is to reinforce a strong culture of purpose and accountability throughout the organization, I am laser focused on the execution of our strategy, and my observation during the past few months is that there is nothing wrong with our strategy, but we have a lot of room for improvement in our execution.

Execution is the missing link between aspirations and results.

Execution is a systematic process for rigorously discussing what to do, how to do it, and why we do it, questioning, tenaiously following through, and ensuring accountability.

This is so important to the improved results of our Company that I have personally become immersed in both the substance and the details of our execution.

I am not only the Company's Chief Executive Officer, I am also its Chief Execution Officer.

I am very aware that leaders get the behavior that they exhibit and that they tolerate.

So in the past four months, I have personally visited many of our stores, mostly unannounced, to discuss execution issues directly with our store managers because the discipline of execution doesn't work unless people are schooled in it and practice it consistently.

It doesn't work if only a few people in the system practice it.

Execution has to be part of an organization's culture, driving the behavior of all leaders at all levels.

Organizations don't execute unless the right people, individually and collectively, focus on the right details at the right time and unless rewards are linking to performance.

I promise you that I have the emotional fortitude to put the right people in the right jobs to develop a social architecture of working together and to significantly improve the culture of execution in our Company.

On our fourth initiative, which is to improve the cost structure, we must be disciplined about, number one, the optimal use of capital by allocating capital in accordance with growth opportunities; number two, identifying synergies among departments to avoid duplication of costs and resources; number three, strengthening the supply chain.

We are increasingly using suppliers based on proximity to our core markets.

Also, the continued improvement of fabric management, i.e.

securing on trend fabrics for the new season, either internally or through our suppliers, and maximization of open to buy results in more competitive production costs.

The supply chain is further strengthened through shorter lead times through partnering with our suppliers.

Agility in the production process and the continuous search for new suppliers as well as sourcing markets in reaction to new trends and ideas.

Finally, in our fifth initiative, which is to revitalize the wholesale business, the main focus here is parterning with our wholesale clients to instill a retail oriented mindset and encourage the adoption of retail best practice, including high-quality visual merchandising, frequent rotation of product, and maximization of inventory turns.

Before I turn it over to Sandeep to discuss the results of our last quarter, you saw in our earnings release that, during the quarter, we repurchased 2 million shares of our stock.

Prior to my arriving at Guess?, Paul and Maurice built a strong balance sheet for the Company.

I was very lucky to have inherited such a strong balance sheet because the combination of a strong balance sheet and the ability to consistently generate free cash flow affords us the opportunity to pay a healthy dividend and at the same time to opportunistically repurchase our shares.

I feel privileged to be the CEO of a company that not only has a dividend paying stock but also has the financial flexibility to take advantage of price volatility in the financial market.

I will now turn it over to Sandeep to discuss our 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 on descriptions of such measures.

Moving on to the results, net earnings for the third quarter was $12 million.

Diluted earnings per share was $0.15, which includes a negative impact of roughly $0.13 due to foreign currency movement.

This compares to diluted earnings per share of $0.24 in last year's third quarter.

Earnings per share declined 38% versus prior year, including the negative foreign currency impact of roughly 55%.

Third-quarter revenues were $521 million, down 4% in constant currency and down 12% in US dollars versus prior year.

This was within the range of our guidance with a stronger-than-expected performance from Europe being offset by relative softness in Americas Retail.

Total Company gross margin decreased 100 basis points to 35.3% primarily due to the negative impact of currency.

This decline in gross margin was slightly worse than our expectations as we were more promotional than we planned to be in Americas Retail during the quarter in light of the lower than expected sales after Labor Day.

SG&A as a percentage of sales decreased by 80 basis points versus prior year primarily driven by lower impairment charges and partially offset by sales deleverage.

Operating earnings for the third quarter was $21 million.

Our operating margin finished down 20 basis points to 4%, including the negative impacts of foreign currency of roughly 170 basis points.

Our effective third-quarter tax rate was 38%, up from 33% in the prior year's third quarter due to the distribution of earnings between quarters and a larger mix of earnings in higher taxable jurisdictions.

Moving on to segment performance, revenue for the Americas retail segment decreased 3% in constant currency and 7% in US dollars.

We finished the quarter with comps down 2% in constant currency and down 6% in US dollars.

The results were below our expectations and were partly driven by a deterioration of performance in our tourist stores as well as overall lower average unit retail as we were more promotional.

Additionally, the warmer than expected weather since Labor Day negatively impacted our sales of cold weather apparel, notably outerwear.

eCommerce, which continues to be one of our top priorities, had another strong quarter and delivered topline growth of 18% in the quarter, marking the 17th consecutive quarter of growth in the US and Canada.

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

Continued strength in dresses, wovens and knit tops drove the women's performance.

On the accessories side, we saw a continuation of softness in the watch category as well as a slowing in our handbag and footwear categories.

In Europe, third-quarter revenues were down 2% in(technical difficulty) constant currency and 15% in US dollars.

Retail comps in the region were very strong and were up in the low double digits for the quarter.

This was above the high end of our expectations and we are very pleased with the improving strength in the business as we posted positive comps in almost all countries, including Italy and Iberia, where we posted double-digit comps increases.

This was more than offset by lower wholesale shipments for our fall-winter collection, consistent with our expectations.

In Asia, third-quarter revenues were down 9% in constant currency and down 17% in US dollars.

We were encouraged by the improving performance in mainland China, where we achieved positive comps in our retail stores.

However, this was more than offset by a shift of wholesale shipments to our franchisees in China into the fourth quarter.

In Korea, where we have nearly completed the phaseout from our G by GUESS business, we saw a definite sequential improvement in comp trends relative to the second quarter.

In Americas Wholesale, third-quarter revenues were down 3% in constant currency and down 12% in US dollars.

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

Royalties generated from sales by our licensee partners were down 13% at $28 million, primarily driven by softness in watches.

Moving on to the balance sheet, accounts receivable was down 8% in constant currency and down 17% in US dollars.

Inventories were $373 million, down 2% in constant currency and down 10% in US dollars versus last year.

Free cash flow for the nine months was $24 million compared to a use of $58 million in the prior-year first nine months, an increase of $83 million.

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

As Victor mentioned earlier on the call, the Company repurchased 2 million shares of common stock for $44 million during the quarter.

At the end of the third quarter, roughly $450 million of our previously approved share repurchase plan remained available.

We ended the quarter with cash and cash equivalents $402 million compared to last year's $375 million.

During the last nine months, we have returned $102 million to our shareholders in the form of dividends and share buybacks.

In a year like this with significant headwind from currency, we think it is important to focus on the underlying results, excluding the impact of currency.

For this reason, we have provided a table in the press release that shows the impact of currency on sales of each of our segments.

With nine months of the year behind us, from a profitability point of view, we estimate that currency fluctuations negatively impacted operating margins for the Company by approximately 130 basis points.

Moving on to our guidance, excluding currency impacts, the top end of our full-year guidance reflects nearly 30% EPS growth and operating margin expansion of over 200 basis points.

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

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

Please note that guidance for revenues and comp sales by segment is included in the table in the press release.

Please refer to this table for guidance by segment, as we will only provide brief color on underlying segment drivers for the Company guidance in the prepared remarks.

For the full year, we continue to 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 8 percentage points for the full year.

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

The SG&A rate is now expected to be down for the year.

Our expectation is the tax rate remains unchanged at 36% for the full year.

We are planning an operating margin between 5.5% and 6%, including the impact of a currency headwind of roughly 130 basis points, and our guidance assumes foreign currencies remain roughly at prevailing rates.

Earnings per share is now planned in the range of $0.93 per share and $1.02 per share.

The earnings per share guidance includes a currency headwind of roughly $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.

Moving to the fourth quarter, Americas Retail comps have been down in the low single digits in constant currency but sequentially slightly better than the third quarter in the lead up to Black Friday.

In Europe, our retail comps so far in the fourth quarter have been up in the low single digits, down sequentially versus the third quarter as we are up against tougher compares from November last year.

In Europe Wholesale, our spring-summer order book has closed and we finished down 8% versus prior year, mainly driven by softness in Russia, France and the Middle East.

The softness in the Middle East is driven by a heavier than planned inventory position for our partner.

In Asia, so far in the fourth quarter, comps in mainland China continue to be positive as we see strong demand for our brands there.

Considering all of these factors, for the total Company in the fourth quarter, we expect consolidated revenues to range from a decline of 1.5% to an increase of 1.5% in constant currency.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth would be approximately 5.5 percentage points for the fourth quarter.

For the quarter, we expect gross margins to be roughly flat due to the fact that targeted price increases, lower markdowns and lower average unit costs are expected to be offset by the currency headwinds.

SG&A is expected to be down in the quarter as a percentage of sales.

We are planning an operating margin between 11% or 12%, including the impact of the currency headwind of roughly 170 basis points.

Earnings per share is planned in the range of $0.53 per share to $0.62 per share and is not assuming any share repurchases in the quarter.

The negative impact of currency on earnings per share in the quarter is estimated at $0.18.

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

To conclude our remarks, we are broadly satisfied with the progress we have made the past nine months and are looking forward to executing our plans for the holidays as well as making progress on the strategic initiatives that Victor has outlined.

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

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

Erinn Murphy, Piper Jaffray.

Great, thank you.

Good afternoon.

I was hoping you could talk a little bit more about the North American promotional environment.

It was a little bit more promotional I think you said post Labor Day.

How are you anticipating that to progress through the holiday season?

And any key differences in terms of what you're seeing at wholesale versus retail right now in the Americas would be helpful.

Hi Erinn, it's Mike.

You know, going into Labor Day, Labor Day, it fell on a Wednesday this year, so it was a little strange for us whether the crowds were going to come in before or after.

We found out that the sales really did materialize, it was kind of a weird situation.

So obviously we had bought a little more aggressively, so we wanted to keep our inventory in line with sales.

And so thus we were a little bit more promotional.

Now, going into the fourth quarter, it's the same thing.

We want to manage our inventories well but we want to make sure that, if it's a very competitive environment, that we price accordingly and meet the competition at times when the traffic is in the mall.

When it's not in the mall, there's no reason to give away margin.

So that I think we will be promotional and maybe a little more in the next year, but we definitely have to meet the competition.

Okay, that's helpful.

And then I guess, Mike, maybe for you, just on the wholesale margin, the North American margin in the quarter, it was little bit worse than we anticipated.

Is that just the retailers coming back for more markdown dollars or is there something else specific to that?

And then should we anticipate the wholesale margins to continue to lag as we exit the year?

Right, so there's really two components there.

So one is currency.

You know we have a wholesale business in Canada and that's basically -- and also Mexico, and that was subject to currency, so that was part of the margin decline.

The second piece is Victor -- one of his initiatives is to really align pricing and make sure that we are competitive and that we are offering value for the dollar.

And this affected us in the US wholesale market.

John Kernan, Cowen and Company.

Victor, I wondered if you could talk a little bit more about Asia.

You were obviously part of a very robust platform at your prior gig.

Can you help us understand how you reinvigorate the top line for GUESS within Asia, and how big you think the segment can be and when you can start to restore some of the profitability?

Basically, we are focused at this moment in China and particularly in online and also retail stores.

So we'll open several stores in China.

And as well, as I mentioned in my call, what we are going to do is reinforce our operations online with Tmall, reinforcing a little bit our presence there, as well we open a as we speak JD.com and we are going to also open our GUESS.cn.

Okay.

Then I guess Sandeep, can you talk a little bit about the lingering FX effects that might continue into next year?

You're guiding to a pretty significant hit in the fourth quarter.

So I'm assuming there's going to be some lingering effects as we go to the first half of next year.

Can you help us understand the transactional headwinds that you may face to gross margin next year?

Yes, John, this is Sandeep.

And you're right.

I think when we've talked about the currency headwinds, we've had both a translation and transaction, but the transaction being more significant.

But remember, in the first half of this year, we already had hedges locked in at pretty favorable rates and as those rates start rolling off, those hedges start rolling off, we are potentially going to see a bit of a headwind in the first half of next year -- after the first half of next year as we go into the year.

And so it is too early for us to guide on this.

We will actually guide on this specifically in March.

Dana Telsey, Telsey Advisory Group.

You spoke about speed and shortening the leadtime.

Where do you think you could get to and what are the guideposts that we should be watching for to increasing speed, whether it's the proximity sourcing or it's the change in fabric vendors that you're using?

How should we think about it and what could it mean over time?

For the time being, I cannot answer the question because we are in the process of trying to improve a little bit speed.

But at the same time, all of these actions as you just mentioned and the actions that I just mentioned on the call will be basically the strategy in order to reduce leadtimes.

And then on the wholesale business, where are you on the wholesale business in terms of overseas and here in the US, in store shops, order trends in terms of what you're seeing?

And just lastly, how is denim doing versus the other categories?

So let me start with the European wholesale book, because that's where our more material wholesale business is.

And then I think Michael will actually pick up on the rest of the business as well.

But I think, on the European wholesale business, we just closed the spring-summer 2016 order book.

And we finished down 8%, which sequentially was a slight improvement against fall-winter 2015, which was down 10%.

If you look at the drivers of the decline, the drivers were Russia and France, which were the same offenders last time as well unfortunately, but sequentially we saw a bit of an improvement in France while Russia has remained on the same trend.

The place that is actually a new factor this time is the Middle East where our partners got a bit of excess inventory that they are carrying.

And their orders basically have been adjusted accordingly and that was a big driver.

The good news is, if you actually take out the three regions, most of the markets are actually doing fairly well.

Italy has been relatively flat for a while.

Spain and Portugal are doing better too.

So, we're pretty comfortable that the health of the European Wholesale business is improving relative to where it used to be.

And Dana, looking at North America Wholesale, there's really three components there.

There's Canada, the US and then Latin America, which is Mexico and Brazil.

So we are seeing relative strength in Canada and in Mexico.

And you know, the wholesale business seems to be -- is doing well there.

In the US, the trends pretty much compare from Q2.

Basically, the department stores are taking conservative approaches to their receipts and we're continuing to see that.

Now, the second part of your question was with respect to denim.

So, in denim, we really see kind of a split here in our premium basics, which is Smart GUESS, that would be the FleX denim, with our new cuts, the shape-ups, the push-up, et cetera.

We're actually seeing really healthy sales and the customers reacting to these cuts quite well.

The problem is it has to be more than offset by weakness on our denim wall, which is the five-pocket basics.

Now, before on that wall, we had about 16 different SKUs and we are reducing it down to eight.

And we had quite a bit of inventory that we had to work through, and so we didn't really initiate any newness into the wall.

And I think sales are a little bit soft because of that.

So now that we're getting inventories back in line, we plan to start introducing newness there and trying to get some strength back in the basic denim business.

Eric Beder, Wunderlich Securities.

Victor, when should we start to see the gains from your three new initiatives?

How should we look upon that as kind of when should we start to see that in the financial numbers?

Well, I think that we have already seen some progress, but I mean it's not -- I cannot quantify at this moment the progress.

But definitely we are very consistent on continuing with these three initiatives, and hopefully we will see some results soon.

And when you look at Europe, your comps are doing positive there.

Is there a thought process in terms of rolling out new stores towards Europe?

How do you look upon that as a growth vehicle here?

You know, any realistic opportunities anywhere in the world, particularly in Europe, as we are increasing our sales, will be studied and will be identified.

And whenever it's a good opportunity, we will try to open stores wherever in the world we are.

Betty Chen, Mizuho Securities.

Congrats on a nice quarter.

I was wondering if you can talk a little bit about the Americas business.

It sounds like the accessories category may have seen softness around watches, and I think you also mentioned handbags and shoes.

What do we think is needed?

Is it that perhaps the mind share is shifting away from the category, or we just need to see some revamped newness?

And related to that, Mike, I think, when you talked about ready to reinvest in newness in the basic denim category, should we start to see that in Q4 or is that more spring 2016?

So, to answer the denim question, that's probably in the spring that we'll see that.

Now, talking about accessories, yes, we did see some weakness in accessories specifically around the watch category.

And the watch category has been trending down for quite some time, not just for us but for all of our competitors.

And so yes, we continue to see weakness there, although so far this month there's a slight sequential improvement, but it's nothing major.

,Now looking at shoes, shoes is something where we bought heavily into booties and boots, really more cold weather categories.

And they were performing well in Q3 in Canada and in the colder weather areas but we had unseasonably warm weather on the East Coast and the West Coast and it suffered.

Well, now that it's actually gotten cold, we've actually -- in Q4, we're comping positives in shoes now that the weather is cooperating.

So that's a category that is doing much better now, given that the seasonal group buys are cooperating with the weather.

And then the last thing you mentioned was handbags.

Handbags, you know, we had -- we rely on a fairly clean assortment, you know, Delaney and our luxe.

And it's quite frankly getting a little boring.

And from direct customer feedback, we heard that they want a little more variety.

So we have responded.

We bought a little bit wider in the assortment and going into Q4, we're seeing a slight sequential improvement there in handbags.

Okay, that's great.

I had a follow-up also regarding China.

It sounds like you've been building behind the team now, hiring talent.

When can we also expect that acceleration in store rollouts?

And is there any way you can quantify the number of openings we may see starting next year?

For the time being, I don't have tangible visibility on the number of stores or the number or when it's going to happen, but definitely we will open several stores or a few stores or many stores during fiscal year 2017.

And regarding the -- I think that we have seen some improvements already, as Sandeep said.

Basically, we are at positive comps in China and greater China.

Robert Ohmes, Bank of America Merrill Lynch.

Could you guys talk a little bit about the licensing revenue business?

It was down I think 13% in the quarter, and just sort of thoughts on what that could trend like in the fourth quarter and maybe into next year, and sort of what categories you are pressuring, you know, or causing the decline in that business?

Thanks.

Yes, so the licensing revenue did come in below expectation, and that was mainly driven by watches.

Watches were soft.

Now, looking at the full-year guidance, basically we've changed the guidance a lot.

We were guiding to be down in the mid-single digits versus prior guidance of low single digits, and that's mainly driven by watches.

Now, keep in mind that the licensing business is just a wholesale business and it's subject to the same timing issues that we see in our own business where they can take orders and do shipments.

So right now there is some volatility there.

Now, with respect to next year, we're not guiding to next year yet.

Got it.

Thanks very much.

David Glick, Buckingham Research.

Thank you.

Just a quick follow-up on licensing, because your guidance is down low singles in Q4.

So does it sound like there was some -- in addition to watches, there were some timing issues.

Is that how we should think about the difference between Q3 and Q4?

Yes, it's mainly due to timing.

Okay.

And then I just had a question on Europe.

I mean you said you had tougher compares.

You had a really strong third-quarter comp, slow to -- from low doubles to low single digits.

Obviously, there's been a lot of press reports about retailers in Paris and in Brussels seeing obviously a big slowdown in their business.

I'm just wondering how much of the deceleration is a function of some sort of key gateway cities?

What are you seeing in terms of the tourist traffic?

Is it just really centered in -- because France is a decent sized business for you if I'm not mistaken.

How are you thinking about that, and how's that factored into your guidance in what's clearly an uncertain situation?

Hi David.

This is Sandeep.

So let me try to help you with this because, in Q3, we actually had relatively easier compares because comps last year were down in the mid-single digits in Europe, and so we were up against that until we delivered the low double-digit increase.

And it was, as we said in our prepared remarks, very strong across the board, Italy and Spain especially double-digit comp increases.

So, very pleased with that.

As we rolled into the fourth quarter and in November specifically, last year, comps actually sequentially improved quite significantly in Europe.

So, we were up against tougher compares and so the comps went from down in the mid singles to up in the low singles in November.

And so considering that for us to be up in the low singles again on a stack basis is not that different from where we were trending in Q3.

And I think more specifically, when you talk about the terrorist attack in Paris and the tragedy surrounding it, we were expecting to see a much bigger drop in comp trends than we've seen.

It's softened, but not materially, and we really haven't broken trend a whole lot in aggregate across the entire region.

And so we feel especially encouraged that there's been a couple of weeks since that incident and there hasn't really been a material shift of the trend.

And that's why we are guiding up in the mid-single digits for the quarter as we actually roll through.

Dorothy Lakner, Topeka Capital Markets.

Thanks and good afternoon everyone.

Just following up on the issue of tourist traffic, I just wondered if you could speak to the Americas.

I know that was a factor certainly in the third quarter.

But just what -- just remind us what we are up against in the fourth quarter and, you know, how are things as you've begun November in those tourist markets which are important for you?

And then just a follow-up question on if you could comment on the men's business, that would be great.

Thank you.

Hey, Dorothy, it's Mike.

In the tourist market, we, actually into Q3, we actually saw a widening of the performance difference between our tourist stores and our non-tourist stores.

Actually, the gap got wider.

You know, our tourist stores continue to underperform, and we see that issue, and we also see -- we have AUR pressure as we were slightly more promotional.

And so in terms of men's, men's actually has sequentially gotten better.

So we went from -- it has been weeks, but we've seen a sequential improvement in men's, and that's driven specifically by knit tops.

Knit tops has performed very well as a category.

And going into Q4 as we see the weather getting colder, we are seeing really, really strength in outerwear and a sequential improvement in denim also.

Randal Konik, Jefferies & Company.

Yes, thanks a lot.

I guess the question is for Sandeep first around margins and then around CapEx.

As I think about the margin cyclicality of let's say North American Retail, it's gone from a peak of let's say just under 20% to 0%.

Europe is around 20% to 5% or mid-single, and Asia peaked 15% down to like let's say 3%.

What's a realistic recapture margin rate for these different geographies in your perspective?

And if you don't want to give a single point type number or range or what have you, can you just help us understand which of these three areas or geographies had the most opportunity to rebound and why?

And then just my last question is on the CapEx.

The CapEx has come down over the years and it's allowing you guys to -- it's below depreciation and amortization and you're generating healthy free cash flow.

I just want to get some perspective on how we should be thinking about the CapEx free cash flow profile of the Company over the next couple of years.

Thanks.

Hey, Randy.

So let me try with the first part of the question, which is related to our operating margins by segment and the pressure that we've seen recently.

I mean, the reality is it's really been driven by sales.

And we've said all along whether it's the total Company or specifically each region, the key to actually getting operating margin expansion is really getting the sales trends going in the right direction again.

And so I think we've talked about the initiatives that we are looking at, whether it was eCommerce and omni channel in the Americas, increasing store productivity in line with what Victor has been talking about through all the initiatives that he has laid out.

In Europe, things are already beginning to work on the retail side, as you've seen.

The comps have been much better this year.

And I think, in Asia, we really are talking about a maximum geographical expansion with China being such a big focus.

So what I'm actually focusing on over here right through this is sales.

So sales will be the driver of how margin expansion is going to come and that's why we are so focused on driving the incremental sales opportunity.

And then in terms of CapEx, it's too early for us to guide.

But needless to say -- I mean if we're going to actually be expanding in China there's going to be incremental CapEx associated with that.

But keep in mind, the base is very low and it's going to take a while to ramp up anyway.

But we'll give you more particulars on that when we guide in the new year on fiscal 2017.

Thomas Filandro, Susquehanna Financial Group.

Congratulations on the progress and the buyback.

I was hoping -- you know, this whole process of hiring these product managers in the space with the merchants at headquarters and field organization, I was hoping, Victor, could you give us a better understanding of what that feedback loop process will be like?

It sounds like you haven't implemented it yet.

When will you fully implement it, and what is the expected outcome?

And then my second question is, Victor, I think earlier you stated there were some pricing adjustments that were going on on tickets.

And maybe this is for Sandeep.

Just in general, how should we think about your tickets, your global tickets, going forward?

Are they going to be about the same, lower, or higher, on average?

Thank you.

Basically what we are trying to do is, on this initiative, is trying to approach or trying to understand customer feedback and customer perception about our collection into our headquarters to try to create a better collection.

And this is basically all these initiatives about the new product managers, about the store managers as a (inaudible) figure in the Company.

And everything has to be related to the product, and that's why we are doing all of these initiatives.

And I think, for the time being, we haven't seen a lot of results, good results, and also the field team is very excited of all of these new initiatives.

I think you had a follow-up on the pricing as well, Tom.

So, in terms of where we are in pricing, we specifically talked about what we did in Europe where we just are really focused on alignment of pricing.

That's really the key focus.

Now, alignment of prices is really to create simplicity in the communication to the customer so they understand the value.

So in terms of what's going to happen, in some cases the prices may come down.

In some cases, the prices may go up.

But the whole objective over here is to make sure there is a very consistent message to the customer.

Janet Kloppenburg, JJK Research Associates.

Good afternoon everyone, and congrats on a good quarter.

Sandeep, if you could stay on that for a second, I think that you talked about executing price increases in Europe this year or this fall.

And at the same time, Victor is talking about aligning prices so I think that they are more on par between markets.

So I'm a little bit confused on that.

And I know you just talked about it, but maybe if you could help me understand it a little bit better.

And secondly, I was wondering Victor, or whoever, when you look at the performance in North America of the retail stores, if you think that it's largely due to the competitive environment and maybe lower priced competitors promoting more aggressively than you expected, or perhaps if you think there's some work to be done in some of the underperforming product categories.

So I would really love your view there, and if we could look forward to some merchandising strengthening as we go through next year, or if you think it's just a matter of the promotional environment continuing to be very challenging?

Thank you.

Hi Janet.

I'll take actually both questions on that.

So let's talk about the price increase first.

And I think, from a price increase perspective, we had already executed on price increases, especially for our wholesale customers, quite early in the year.

And so that is in place for goods that are actually shipping as we speak into the wholesale channel, specifically spring/summer 2016, which is actually shipping in right now.

And I think when we talk about the wholesale versus the retail business, keep in mind that the assortment from wholesalers is very wide relative to the retail assortment.

And so we are looking at specific items within the retail assortment where there could have been some inconsistencies that have been adjusted.

But in relative terms, it's quite small compared to what's in the wholesale pricing.

And so I think that's not the price increases themselves.

But I think the other one you were talking about was EU retail sales performance in general.

What's really been very good to see is, in the past quarter sequentially over the previous one, traffic has actually improved over Q2 and that's been a big help.

And also conversion has improved quite significantly.

And so this is telling us that the health of the European retail market is extremely strong, and we're actually capitalizing on that.

Jeff Van Sinderen, B. Riley and Company.

Maybe I could just jump in since we're talking about pricing.

I know you mentioned the basic denim wall.

Maybe you could just give us your latest thoughts on pricing in denim, if there's any shift you think there that's needed?

No, I don't really think there's any shift that's needed.

I mean, our basic denim wall, the entry-level, there's one or two SKUs at $79.

The meat of it is at $89, and some of it goes to $99.

That's where we see the performance is weak, and I think it's really driven by injecting newness in the product.

Where we see strength is actually in the $100 plus denim.

So, I don't think it's really a matter of pricing.

It's a matter of having the product that the consumer wants.

Okay.

And then I understand supply chain is somewhat a work in progress and there's more to come there.

But any thoughts you can give us at this point in terms of what you think the potential is to impact gross margin from supply chain?

So, Jeff, this is Sandeep.

I think, at this point, it's really too early to actually quantify this because the initiatives that Victor has laid out in his prepared remarks are basically the roadmap for how we're going to go after this opportunity.

And it will take us some time to get through all of them.

And once we have more visibility, we'll come back to you on that.

(Operator Instructions).

Erinn Murphy, Piper Jaffray.

Great, thanks for taking my follow-up.

I just have two follow-ups.

I guess first, on Korea, you talked about it improving during the third quarter if you backed out the G by GUESS.

Could you just talk about what it's doing quarter-to-date in the fourth quarter?

I may have missed that.

And then secondly, going back to some of the previous conversation on the licensing business, I believe the watch license expires at the beginning of 2017 unless it's been updated recently.

Can you talk about how you're thinking about the renewal process there?

Would we anticipate kind of a change in royalty or timeline or contract minimum for that license, just given the underperformance of kind of kind of the space right now?

Thanks.

Hi Erinn.

It's Sandeep.

I think your first question was on Korea.

So, in Korea, what happened was, G by GUESS excluded, what we saw was a sequential improvement in comp in Q3 versus Q2.

And what we have seen since Q3 into Q4 so far is a bit of volatility.

So, it's hard to see a clear trend, but broadly it's not that different when you aggregate it, but it's been very volatile in the 3.5 weeks that we've had in the quarter so far.

Then in terms of the licensing business, and I'm not going to actually talk about watches specifically but more globally across all of the licensing business, our licensing business is built with long-term partnerships with partners across all of the categories where we do the licensing.

And so the contractual term is one thing, but I think it's more about the long-term relationship.

And so we are just looking at it from a very long-term perspective all the time with all of these relationships and we'll do what's right for the business.

And it's still a couple of years away anyways, so we just have to wait and see how things evolve.

Betty Chen, Mizuho Securities.

Thanks.

I had a quick follow-up.

It looks like SG&A was down a lot in the third quarter.

I believe you mentioned, Sandeep, that it was merely due to lower impairment charges.

I just wanted to kind of double check that and see if there were any other variables like favorable currency that may have helped SG&A, and whether we could continue to see that benefit going to Q4 in 2016.

Thanks.

Yes, so I think, Betty, on this specifically, the driver was impairment last year.

Last year, we took a pretty big impairment charge, close to $10 million.

And I think you'll have all the details in the K. And so that was the big driver of the benefit to SG&A rate.

Now, currency doesn't really impact the rate because sales and SG&A gets impacted by the same -- for the same impact on currency.

So if you look into Q4, we're guiding down again because I think we are coming up against an impairment charge in Q4 as well that we took last year, which was not dissimilar to Q3.

And that's part of the reason why we're guiding SG&A rate down in Q4 as well.

Regarding next year, it's too early to guide, so will give you more on that in March.

John Kernan, Cowen and Company.

Thanks for letting me in for one quick follow-up.

One thing we noticed was your licensee store base continues to contract, both in Europe and Asia.

Can you help us understand the dynamics there and what we should expect going forward?

John, this is Sandeep.

So I think you're right.

The licensee store base has contracted bit.

I think it's a bit of a different story in Europe where we actually had a lot of licensee partnerships, especially in southern Europe, where when the crisis came on into 2011, you saw a lot of them getting squeezed for liquidity, and many of those stores ended up closing because of that.

And in some cases, because we saw that it was good for the brand to make sure we retain the store, we actually bought back the stores from the licensee to retain the sales and the business.

And apart from that, I think in China, it's a little bit more new, it's less mature than the European region.

But I think as we are ramping up on our expansion plan over there, we are just reevaluating whether it makes sense to be in a licensee relationship on retail.

At this time, there are no further questions.

Thank you ladies and gentlemen.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.