Guess? Inc (GES) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Guess?

first quarter FY17 earnings conference call.

On the call are Victor Herrero, Chief Executive 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 short and long-term 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'd like to turn the call over to Victor Herrero.

Good afternoon, everyone.

As you saw in our first quarter earnings release today, our adjusted operating loss finished in line with the low-end of our guidance.

But our adjusted earnings per share finished below our expectations.

Sandeep will talk more in detail about the financial results of the quarter later in the call.

You have all read and heard of course about the challenges in the US retail sector.

These challenges are being experienced by department stores as well as by retail stores.

At times like this, I think that it is very important to articulate why Guess?

is different and why I believe that the negative impact that you read and hear about should not affect Guess?

in the same magnitude as many other companies.

With respect to the department stores, two things are happening.

One, their footprint is mainly in the US.

And two, business is shifting from bricks and mortar department store to online, especially online only multibrand retailers.

It is very important to note that in the US, Guess?

is not a big supplier to department stores, whether brick and mortar or online.

Wholesale revenues represent only about 10% of our total revenues in the US.

So we are not impacted very much by the shifting landscape in US department stores.

Also, we are one of the very few US-based retailers that has the majority of its revenues from outside the US.

Last year, almost 60% of our sales was generated from international markets.

In fact, in our three-year plan, we expect roughly two-thirds of our growth in revenues and roughly two-thirds of our growth in profits to come from our foreign operations.

This is what makes Guess?

very different from many other companies that you cover or that you invest in.

Guess?

is not a US-centric company.

Guess?

is a global brand with distribution in over 90 markets, which happens to be headquartered in the US.

And our business outside the US, is currently thriving.

In Europe, we have a three-year revenue growth target of $300 million.

This quarter, our retail comps were up in the mid-teens with positive comps in almost all markets in the region.

Our E-commerce business, although still relatively small, continue to grow very rapidly.

And in wholesale, the order book for fall/winter 2016, finished up 3%.

We are on track to open 45 stores in Europe this year.

10 of the 45 will be opened in Russia through our newly formed joint-venture partnership there, which I am very excited about.

We're also excited by the upcoming opening of our new 5,000 square foot flagship store at the Europeisky Mall in Moscow at the end of this week.

It will be designed in the new Guess?

Lifestyle concept.

This new Guess?

concept aims to welcome customers into an exciting and contemporary atmosphere.

The new layout celebrates the Guess?

heritage through a stunning digital videos and imagery while enhancing the focus on product displays.

White shelving along the walls hosts the brand's fashion-forward clothing while a curated assortment of handbags and shoes are featured throughout the store and accessories are displayed in sleek central displays.

To further guide our customer experience, the stores feature fully accessorized must-have looks.

I have described this in detail as all our new stores and remodels globally will have this new, fresh and exciting design.

Apart from Russia, we are opening stores in Turkey, Ireland, Finland, Sweden and Denmark.

This of course is in addition to our continued store expansion in Italy, France, Spain, Portugal, in Southern Europe, as well as the United Kingdom, Belgium, Netherlands, Germany and Poland in Northern and Eastern Europe where we still see white space.

In Asia, we have a three-year revenue growth target of $200 million.

This quarter, we had positive comps in Korea, in mainland China and in Japan.

However, revenue growth was below our expectations in greater China as we transition to a more direct model there.

We are on track to open 65 stores in Asia this year, mostly in greater China.

In the first quarter, we opened seven stores in China across Shanghai, Guangzhou, Chongqing, Tianjin and Wenzhou.

The majority were Guess?

concepts in larger formats showcasing our Lifestyle collection.

In addition, we launched our first underwear store concept at Crystal Galleria, one of the newest mall in the heart of Shanghai located in one of the busiest and wealthiest districts in the city.

So you can see why I am so excited about our international operations, which again, will continue to grow at a faster pace than our US operations.

Moving to the Americas, which includes the US, Canada, Mexico and Brazil, we have a revenue growth target of $300 million over three years.

This is the region where we see the biggest degree of risk in achieving our plan, primarily due to the challenges of the US market.

Our comps were down 3% in constant currency for the quarter in US and Canada, with unseasonably cold weather in April and continued weakness in tourist stores being the major contributing factors.

While I am convinced that the execution of the strategic initiative I outlined previously will eventually drive sustainable improvement productivity in the stores and E-commerce, I am continuing to monitor the performance of the Americas fleet as we execute the store expansion plan of net 15 new stores focused on Factory and G by Guess?

formats this year.

In fact, G by Guess?

was our best-performing concept for the quarter.

We have a lot of flexibility as roughly half our existing leases in the US and Canada are either expiring or have kickout clauses in the next three years should we need to moderate our expansion plan or prune the store base based on productivity of existing stores.

The timing of these lease expirations also provide us an opportunity to renegotiate lower rents to make profitable stores, which we would otherwise exit, profitable again on a forward basis.

In summary, we are confident in our ability to achieve the three-year plan and are prepared to adapt our plans over time as conditions dictate and we'll update you on our progress during the year.

Before I turn it over to Sandeep, please keep in mind my comment in our last earnings call that the first six months of this year is a transition period for our three-year plan.

We are now a little more than halfway through this transition.

Investment made in the first half of this year will start generating revenue increases in the second half and continuing into the second and third year of our three-year plan.

We are doing what we need to do and are on the right path to becoming a stronger Company and creating more shareholder value.

Sandeep?

Thank you, Victor, and good afternoon.

During this conference call, all of our comments for the first quarter are on an adjusted basis which excludes the impact of certain restructuring labor charges incurred during the quarter.

In addition, our comments may also reference certain non-GAAP measures.

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

Moving onto the results, adjusted diluted loss per share was $0.23 and includes a negative impact of roughly $0.08 due to foreign currency movement.

This compares to a diluted earnings per share of $0.04 in last year's first quarter.

Before we move into discussion of the P&L, I would like to point out that roughly half of the decline in adjusted earnings per share versus last year, was driven by the negative impact of currency and a change in the tax rate.

The negative impact of currency and the change in tax rate were both worse than our expectations.

Excluding these impacts, our adjusted earnings per share would've finished within the range of our expectations.

First quarter revenues were $449 million, down 5% in constant currency and down 6% in US dollars versus the prior year.

Total Company gross margin decreased 280 basis points to 31.8% due to the negative impact of currency and deleverage due to a decline in sales.

SG&A as a percentage of sales increased by 320 basis points versus prior-year, primarily driven by deleverage due to the decline in sales, investments in new store openings and increased advertising.

Adjusted operating loss for the first quarter was $23 million.

Adjusted operating margin finished down 600 basis points to a negative 5.1% including the negative impacts of foreign currency of roughly 150 basis points.

Moving on to segment performance, revenue for the Americas retail segment decreased 3% in constant currency and 5% in US dollars.

We finished the quarter with comps in the US and Canada down 3% in constant currency and down 4% in US dollars.

This was below the low-end of our guidance as we saw a steep decline in traffic and conversion during the unseasonably cold weather during the month of April.

Spring product in the stores significantly underperformed to cold weather product.

In terms of product comp trends in constant currency, our women's apparel category finished down as strength in knit tops, wovens and outerwear were more than offset by softness in dresses and denim.

On the accessories side, we comped positive in our handbag category, but the watch category continued to be very soft and declined quite significantly.

Tourist stores continued to underperform non-tourist stores.

E-commerce, which continues to be one of our top priorities, finished in line with our expectations as we delivered top line growth of 11%, marking the 19th consecutive quarter of growth in the US and Canada.

In Europe, first quarter revenues were down 3% in constant currency and down 1% in US dollars.

Retail comps in the region were very strong and were up in the mid-teens for the quarter.

This was within our expectations and we are pleased with the continuing strength in the business as we posted comp increases in almost all markets in the region, with Italy and Spain performing especially well.

Our wholesale revenues however, finished slightly lower than expected due to a shift in the timing of shipments.

In Asia, first quarter revenues were down 11% in constant currency and down 15% in US dollars.

In Korea, we ended the first quarter with comps up in the mid single-digits.

This is a continuation of improving trends we saw in the back half of last year.

Keep in mind that we're up against sales of G by Guess?

product that we phased out towards the end of last year.

Within greater China, sales finished below our expectations.

Mainland China finished with positive comps in our retail stores but lower than planned as we ramp up our business there.

Our wholesale business was softer than expected as we continued to transition to a more direct model across the country.

The sharp decline in tourist traffic into Hong Kong and Macau, still continues to be a headwind and negatively impacted us in the quarter.

We also experienced softness in shipments to our Southeast Asia distributors as they worked through elevated inventory levels to enter the second quarter in a more healthy inventory position.

In Americas wholesale, first quarter revenues were down 7% in constant currency and down 12% in US dollars, primarily driven by softness in the US market.

Royalties generated from sales by our licensee partners were down 14% at $22 million.

This was below our expectations for the quarter driven by weaker than planned results from the watch category.

Our adjusted effective first quarter tax rate was 19%, down from 42% in the prior-year's first quarter, due primarily to a shift in the mix of statutory earnings.

During the quarter, we incurred $6.1 million in pretax restructuring charges related to the global cost reduction plan.

These charges are all cash charges and are excluded from our adjusted operating earnings.

Moving on to the balance sheet, accounts receivable was down 10% in constant currency and down 9% in US dollars.

The decrease in accounts receivable was driven by lower shipments.

Inventories were $358 million, up 10% in constant currency and in US dollars versus last year.

The increase is driven by timing of receipts, inventory for new stores opening during the second quarter and a buildup of excess inventory in the US and Canada that we will work through.

Free cash flow was an outflow of $49 million, compared to an outflow of $2 million in the prior year quarter, a decrease of $46 million.

This decrease was driven by lower earnings, changes in working capital and additional capital expenditures.

We ended the quarter with cash and cash equivalents of $427 million, compared to last year's $459 million.

Cash less debt was $400 million, compared to $451 million last year.

Moving onto the guidance, as Victor mentioned earlier on the call, we expect that FY17 to include a transition period as we set the platform for our long-term growth goals.

The transition period is proving more challenging than we anticipated and is reflected in our guidance for the second quarter as well as our updated guidance for the full year.

Our full-year guidance assumes that the currency headwinds will impact EPS by roughly $0.12.

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

Consistent with Victor's fourth initiative to improve our cost structure, we have begun to implement a global cost reduction plan to generate future savings that we expect to fully realize in FY18.

Our outlook for the second quarter of FY17 and the full FY17, excludes any restructuring costs associated with this plan.

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

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

In the second quarter, prior to the impact of the Memorial Day weekend shift, Americas retail comps were down in the mid single-digits in constant currency.

We continue to see significant headwinds in our tourist stores.

We expect a headwind from tourist stores to continue through the first half of the year.

In Europe, our retail comps for the region so far in the second quarter have been up in the low double-digits, driven by improved traffic in conversion maintaining the strong momentum we have seen since the second half of last year.

In Europe wholesale, we are pleased to report that our fall/winter order book finished up 3% as we saw a door count stabilize and same-store buys up in the low single-digits.

This is a material shift in trend from our spring/summer book, which was down 8%.

Moving to Asia, while we still see the long-term opportunity for our brand in greater China, the ramp-up of the business has been more challenging than we planned and we are lowering our revenue projections for the year.

We expect that the growth will come more in the second and third year of our three-year plan.

As a reminder, revenue growth for the Asia segment in the second quarter will be impacted by the G by Guess?

product in Korea that was phased out late last year.

With regards to our second quarter FY17 guidance for the Company, we expect revenues for the second quarter to be up 0.5% to up 2.5% in constant currency driven by expected growth in Europe and China, partially offset by an expected decline in the Americas.

At prevailing exchange rates, we estimate that the currency will not have a material impact on consolidated revenue growth for the quarter.

For the quarter, we expect gross margins to be down, primarily due to the currency headwinds as we come up against hedges at favorable rates last year.

The SG&A rate is expected to be up in the quarter as a percentage of sales due to investments in advertising and marketing and some timing of expenses.

We are planning an operating margin for the quarter between 1.5% and 2.5%, including the impact of currency headwinds of roughly 60 basis points.

Earnings per share is planned in the range of $0.04 per share to $0.08 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 $0.06.

For the total Company, we expect consolidated revenues for the year, to be up between 5% and 7% in constant currency.

At prevailing exchange rates, we estimate that currency will be roughly 0.5 percentage point tailwind on consolidated revenue growth for the year.

For the full-year, we expect gross margins to be down slightly to flat as the foreign currency headwinds are expected to be offset by better IMUs.

The SG&A rate is expected to be up for the year, due to investments in advertising and marketing to fuel our top line growth, as well as a reset of planned incentive compensation versus prior-year levels, partially offset by a slightly over $10 million of savings driven by our global cost reduction plan.

We have updated our expectation on the full-year tax rate from 34% to 36% based on a change in mix of projected statutory earnings.

We are planning an operating margin between 3.5% and 4.5% including the impact of a currency headwind of roughly 40 basis points and our guidance assumes foreign currency to remain roughly at prevailing rates.

Earnings per share is planned in the range of $0.55 per share and $0.75 per share.

The earnings per share guidance includes a currency headwind of roughly $0.12 per share.

CapEx for the year is expected to range from $90 million to $100 million, net of tenant allowances.

The Board of Directors has approved a quarterly dividend of $0.225 payable to shareholders of record at the close of business on June 8, 2016.

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

(Operator Instructions)

Erinn Murphy from Piper Jaffray.

Great, thanks.

Good afternoon.

I've got a couple of questions.

I was hoping maybe first Victor, for you to talk a little bit more about the store opening plans that you have particularly for the US?

I think last quarter, you talked, particularly for the longer-term, you're really planning to accelerate the store growth in this market.

And now it sounds like, while you are still opening new stores this year, you are reserving the right to perhaps revisit some of those kickout clauses, those lease expirations, to potentially slow that growth rate if and when you need to.

So maybe just help us a little bit more about what some of those thresholds are that you are monitoring in the stores if you start to further refine that growth strategy in the North American fleet?

Thank you.

For the stores that we are going to open in North America, basically as I mentioned in my call, is going to be in two, G by Guess?

and Factory and we will concentrate the openings there.

And regarding your second question, I agree with you that all this lease expirations and kickouts that we are going to have for the next three years, we have to take this as an opportunity to renegotiate with the landlords and engage that finally.

We will not make any compromises in terms of the rent.

That we feel comfortable to pay for those rents or will close some of the stores.

But this I think these renegotiations that we are going to face for the next three years are going to -- we have to take it as an opportunity to try to reduce the existing rents as much as possible.

Got it.

But then maybe just help us understand some of those internal thresholds, or where comps need to really be to think about potentially changing that growth strategy.

If you can't get comps to, let's say, a low single-digit positive territory, or does it have to be higher to rethink about some of the of your --?

Erinn, this is Sandeep.

What I think is important to note is what Victor talked about is renegotiating rents to change the economic structure completely of the store.

Even if it's a profitable store, we want to basically see if we can get it even more profitable and if it's a loss making store, see if the rent can actually take it to profitability.

So from a threshold perspective, the thresholds we are really looking at are more of what I talked about last time for new stores.

Where we have a certain threshold of four wall profit that needs to be generated within a couple of years and also, we need to make sure that we have a payback on this store in a two-year to three-year timeframe.

Krista Zuber from Cowen and Company.

Good afternoon.

This is Krista Zuber on behalf of John Kernan.

Two questions please.

Could you share with us the performance of your various licensed categories?

You touched on a little bit on watches here in Q1.

And has your thinking changed at all with respect to your outlook for -- I think you said on the last call, negative mid single-digit growth for FY17 and licensing and then flat licensing revenue by year three of the plan?

And then I have a follow-up thanks.

Krista, I think when you talk about the licensing, the accessory segment was really what drives the licensing segment a lot.

We spoke about the Americas specifically on the call.

And here, what we saw was bags were fine, but really, we saw watches decline quite significantly.

And so really for the quarter itself, we actually came in lower than we expected on licensing, driven really by underperformance in watches.

But looking into the full-year guidance, we updated the guidance for the full-year to be down in the high singles as opposed to down in the mid-singles.

And I think it's driven a lot by taking into consideration the watches softness that we saw.

Okay, thanks.

And then with regard to cash flow, I realize you don't guide specifically to the metric.

But on the last call, Sandeep, you commented that the cadence of free cash flow would be hampered in year one in part due to the step up in CapEx.

And then as you build over years two and three of the three-year plan, how are you thinking about that now given results to date?

And can you just touch a little bit on the funding for the dividend this year?

Thanks so much.

Yes, Krista, when I talked about that last time, it's only been eight weeks and nothing is really changed that materially for the structure of the cash flow.

So altered insignificantly over a three-year time period.

I think it's a little bit more pushed into years two and three obviously, given the trends that we've seen in first quarter and what we've seen so far in Q2.

But overall, we feel very confident in this three-year plan generating enough free cash flow to cover the dividend.

You see our balance sheet; we've got a very solid balance sheet and a strong cash position, as well.

This is an investment year and we have the reserves to be able to actually drive through this investment year.

Janine Stichter from Jefferies & Company.

Hello, this is Janine Stichter on for Randy Connick.

I was just hoping you could give a little bit more color on what you think is driving the trends in Europe?

It seems like you saw a nice acceleration there and it's held into Q2.

Do you think it's product marketing, or more just the environment?

And then, we're also interested specifically in what you think caused the inflection in the order book?

And lastly, on Europe, if you could comment on the promotional environment there?

Even though sales were better.

It just seemed like you saw some additional promotions that you mentioned in the gross margin commentary.

I'm wondering if you just see that stabilizing going forward?

Thanks.

Yes, our business in Europe is, for the first quarter of this year, is a positive news, because basically regarding retail stores, we are comping mid-teens up.

And in wholesale basically, the order value for fall/winter 2016 is going to be up by 3%.

So the recent cause of this, I think, there are several reasons.

And starting from wholesale, I think that the product, I think that we improved the product that we are offering to our wholesale partners.

And then regarding the retail, as well as, basically, several things.

We are having a more comprehensive collection in our stores, and at the same time, we are trying to improve our comps by generating more traffic and as well by trying to outfit the collection as much as possible.

And trying to have a more comprehensive collection and try to -- that our product is the main driver of our growth.

Any comments on the promotional environment?

I think from a promotional environment perspective, the nice thing about Europe is we typically have two clearance periods by season and most of the promotions are limited to that period.

What we are doing as a Company is looking to actually maximize our full price sales during the rest of the season and really concentrating on clearing through inventory during that clearance period.

And so from a gross margin perspective, this is very -- this is the way we are managing it.

And the really good news is we are not in a promotional period right now so far in the second quarter.

But we are trending in the low double-digits, which is showing the consumer understands the cadence of how we actually are pricing the product and carrying through our inventory.

We are coming back on the promotional cadence to our traditional model of promotional cadence in Europe, which is twice a year during the seasonal sales, we will be on promotion.

It is not during a normal or regular season.

We try to do or to be less promotional as possible.

I just wanted to add one thing on a question you asked on the order book inflection and what drove it.

I've been saying for the last year or two that retail is going to be a leading indicator of what happens in wholesale.

And sure enough, we've been seeing very strong comps for almost a year now in Europe, and the wholesale book has followed.

I think it's just the lag factor that you see with wholesale; but, ultimately, the same trends will play out.

Dana Telsey from Telsey Advisory Group.

Good afternoon, everyone.

As you talk about occupancy costs and the opportunity to adjust rents, what is the opportunity there?

How much of the store base and what type of leverage do think you can get in terms of lowering the rents?

And then as you think about the gross margin, how are you thinking about merchandise margin going forward and the difference between Europe and North America and what is happening in China in wholesale and retail?

Thank you.

So I think from the occupancy cost and improvements in rent, it's going to be a case by case store by store discussion.

It really depends on what those economics end up being for us to know what the impact.

And so, at this time, we really don't have any further guidance to give on that.

But we just know there's an opportunity because we have so much flexibility in the portfolio in the US and Canada.

Moving onto the gross margin opportunity itself, I think this really ties into some of the things that Victor's talked about in the supply chain previously.

We believe that there is tremendous opportunity longer-term for us, based on the priorities he outlined on previous calls, as well, which is to strategically basically lineup a very strong supplier base and then work with fabric platforming opportunities and ensure that we actually drive the IMU improvement.

That IMU Improvement is already embedded in the guidance that we provided for this year in our gross margins and I'm talking on a global basis, it affects both US and Europe.

And over the course of the three-year plan, we continue to work on this.

Right now, we really don't have IMU improvements embedded.

But it is something we are going to continue to work toward.

In addition to that, I would like to say about supply chains, all the initiatives that we are adding so many initiatives, and I want to share with you several initiatives that we are trying to implement at this moment, like for example, since I arrived to Guess?

For example, is reducing the calendar, trying to potentiate, as much as possible, an open to buy.

As well trying to optimize our sourcing country's portfolio.

So, it means trying to be much more not so dependent on for example China, and trying to open new markets or new sourcing markets that we believe we can get really good price without jeopardizing our quality.

Thank you.

Brian Coronia from Wunderlich Securities.

Yes, good afternoon.

This is Brian Coronia on behalf of Eric Beder.

We had two questions.

The first one being a little bit more short-term than the second, a little bit of a longer-term outlook.

In the short-term, looking into the fall and winter season, somewhat related to the previous question on gross margin, any clarity or insight you could give in terms of what you are expecting on the pricing front both from what you're expecting your pricing strategy to be, and any insight you might be having in terms of either the pricing strategies or the promotional activities of your competitors?

And then following that, I have the longer-term follow-up.

So, I think from a gross margin perspective, we basically embedded, in the US and Canada especially, nothing more promotional than last year.

I think we're expecting to be roughly equivalent.

So, that is what is assumed in the gross margin projections globally, not just in the US and Canada actually.

And regarding our pricing strategy, we are trying to always be very consistent with the price that we have in the Americas, and basically try to do price alignment in all the markets.

We just opened, for example, several markets where we try to be always and use US as a benchmark for other markets.

Great, that's very helpful.

And the my follow-up in terms of the gross margins, as well as overall operating margin over the long-term, related to the supply chain initiatives that obviously you have spoken about on recent calls.

In terms of an achievable lead time on a product basis, any clarity you could offer in terms of how you are looking at that and how it might've changed over recent quarters, as well is if there is any disparity between the lead times both domestically or in foreign markets?

Regarding the lead times, I think that we have to split it into two.

The first one will be the tradi-- , or the formal collection that we'll have a specific lead time.

But at the same time, we have to take into consideration the open to buy.

And open to buy basically what we are trying to do is have a newness on a monthly basis during the normal season into our stores or into our partners.

So this is important to take into consideration.

It is not as much thinking about the traditional lead time that you have to do the collection itself.

It is that we are leaving as much as we can in open to buy in order to shorten the lead time for that open to buy.

Omar Saad from Evercore ISI.

Thank you, thanks for taking my question.

Victor, I wanted to ask you when you first came on board in the early months you talked a lot about product, the opportunity to improve the product and focus on product and the process behind design, product development, go to market strategy.

I'd love to get your updated views on how that process is coming along.

Maybe some examples or anecdotes of where you have been able to improve the product and seeing results at the consumer level where they're responding?

And where else can the Company work to improve on the product side of it?

Thank you for the question, because I think it's a very relevant question.

Basically, we continue 100% concentrated on improving our product.

And basically, one of the reasons as I mentioned before, of the increase of order value in Europe wholesale is basically because I believe we are upgrading and elevating our product, and we are taking a lot of initiative in order to do that.

And basically, the product before, I think that we were pushing several categories.

Like for example, denim, dresses and knit tops.

And right now, what we are trying to do is outfitted collection.

It means basically, we are producing in product a whole collection with inside the collection we have trends, we have all the things that they must have that we have to have in that particular collection.

And at the same time, what we are trying to do is express in our stores or in our shop-in-shops in wholesale, they are trying to be very outfitted.

It means basically, you can be dressed or you can leave our stores dressed from top to bottom.

It means you can buy several items at the same time and always constant for example, whenever we do our visuals, broadly you went to our store lately, I think that you can see that we are presenting or we are doing a visual merchandising much more commercial than before.

And not how you say, not doing marketing on one particular product category.

More as a collection as a whole.

So this is a very important point that we believe we will continue doing this.

Because at the end, for us, what is important is expressing inside the store and showing in the windows what we are able to do in product.

Thank you, that's very helpful.

And just one more follow-up on Europe.

I want to make sure I understand the differential between the trends you're seeing in your own stores, which are obviously very good, and the wholesale business is just a matter of a time lag from retail to wholesale.

Did I understand that correctly?

Exactly.

And not only that, we are experienced I think more or less are in the same path.

But what we are seeing in wholesale is taking a little bit more time.

That's the only thing.

But as you mentioned, I think we are experiencing really good comps in Europe and the point is not only that I believe that this is going to continue for the future.

I think we will continue with these positive comps in the retail and we will see much positive comps in the wholesale in the near future.

Do you have any initial thoughts or early views on maybe why the improvements in product and that total look merchandising in the stores maybe isn't translating as strongly in the North America market?

In a way, I think they are different markets.

Also, I think the US at this moment is very challenging in general.

This is one of the reasons.

Rest reassured all the initiatives that we are doing in Europe, we are doing in the US, even more elevated I will say.

It's a question of time that I will see results in the US.

And I'm very excited what is happening in Europe, but it's not reflecting in the US.

But definitely rest reassured that we are doing exactly the same thing as we are doing in Europe at this moment, we are doing even in a more extreme way in the US.

Basically, visual merchandising, replenishment, assortment, allocations, all the initiatives that we believe is the right path for us, in order to be successful and in order to start seeing some positive comps in the US, we are doing as well in the US the same way as we are doing in Europe.

Betty Chen from Mizuho Securities USA.

Thank you.

Good afternoon, everyone.

Thanks for taking our question.

Following up on Omar's earlier question about the Americas.

Can you talk to us about any regional variability in the quarter, or in the first quarter that is since there were some really erratic weather patterns throughout the country?

And also related to that, can you remind us what percent of the Americas business would you attribute to be tourist related and whether the underperformance of those tourist stores has varied at all from prior quarter patterns?

Thanks.

I'm going to answer to the first part of the question and Sandeep will answer on the second one.

Regarding the first question, I think that what is important and that you should keep in mind that right now, our allocation is not US.

Our allocation is what we are selling in that particular store in LA, comparing with the particular store in New York.

And it's based on demographic behavior of each of the stores.

So at the end, what is important to know is that we are trying to tailor-made the product for each of the stores and also each of the cities and each of the regions.

And Betty, just following through on the tourist versus non-tourists, we haven't really specified the number.

Obviously, it's material enough for it to drive the comp and that's why we're calling it out as a driver.

Things have been tough.

I think consistently tough and we were expecting it to be tough in the first quarter as well.

And we expect this to continue and to at least the end of the first half.

So, let's see because that's when we lap the tourist drag at the experience from last year.

Sandeep, at least were those tourist stores underperformance in line with what you thought?

Broadly, yes.

My follow-up question if I could, is, I think you called out G by Guess?

and I think factory as some of the areas for focus.

Can you remind us of their productivity measures, or profitability, or what are you seeing in those concepts that seems to be outperforming a little bit from the rest of the portfolio?

From a profitability perspective, the thresholds that we apply basically apply to all the concepts that we're looking at for new stores or renewals.

And so for these particular stores, these particular concepts, they're obviously more profitable concepts, and we're able to get stores that are hitting our thresholds both from a four wall perspective, as well as a payback perspective.

And that's why we're looking to focus on expansions on these concepts.

On a commercial point of view, I think both concepts have a lot of potential in the US and Canada.

That's why we decided that I think we should concentrate more on the expansion of those two formats instead of the other formats.

That's why we are trying to develop both formats.

Dan O'Hare from Bank of America Merrill Lynch.

Hey, good afternoon.

This is Dan O'Hare on behalf of Robby Ohmes.

The G by Guess?

format performed the best in the quarter.

What is driving the success there and how are the trends different than in the other Guess?

formats like Guess?

and Marciano stores?

And why is the G by Guess?

format the focus of your expansion plans?

And then I have a follow-up.

Thanks.

We're happy that they perform well during the quarter, because if we believe that has a great potential.

This is basically a reassurance for us that the G by Guess?

is going to have the potential we think.

At this moment, we have a few stores in G by Guess?

which you cannot compare with the other formats, because the other formats are bigger.

But at the same time, we are performing very well in the quarter and we believe that G by Guess?

with this split between men's and women's, which is basically the penetration of both at the same, I think is a very -- has a potential on a commercial point of view and on a product point of view for the US and the Canadian market.

Got it.

I noticed that you called out that you are opening your first underwear store and I was wondering what drove that decision to launch that format?

It's our first underwear store in mainland China.

But as you may know, we have several underwear stores and we are very successful in Asia with that particular product category.

We believe that this underwear category could be very successful and has a lot of potential in mainland China.

Got it.

Thanks so much.

David Glick from Buckingham Research.

Thank you.

I just had a follow-up, Sandeep, on the balance sheet and cash flow.

I was just wondering how you think strategically about your cash and cash flow, vis-a-vis your CapEx and dividend funding needs?

Have you considered repatriating some of your international cash?

And do you think about since most of your growth and CapEx requirements are in international markets, do you look at your cash balance as primarily funding growth internationally, and funding the dividend with the strong licensing cash flow, which is US-based?

And you know very well that our balance sheet has a significant amount of cash in it, but a lot of the cash is overseas.

As you again said, most of our growth is focused on international expansion, so that's quite convenient because the cash is already overseas.

From a US perspective, we basically see that our cash needs are being met with what cash we're generating over here, be it licensing or other businesses.

So we haven't really contemplated any kind of repatriation because our cash is sufficient for our needs right where it is.

Dorothy Lakner from Topeka Capital Markets.

Thanks and good afternoon, everyone.

Just wanted to follow-up on China.

Obviously, you've talked about the opportunities that you see there.

You did have some challenges in this quarter.

So I wondered if you could just provide a little bit more color on the retail side of things, why things came in a bit below your expectations and caused you to lower your growth expectations?

And then on the wholesale side, talk about what is going on there.

And switching to Americas wholesale.

I know it's a small component, but it does seem like you do expect some improvement for the year as a whole.

And just wondered what is driving that?

For China, for China retail, what I can tell you is that basically it is a matter of timing.

And definitely, we will continue I think we have positive comps during the quarter in mainland China, but it's softer than we anticipated.

The reason why is because we're in the process of trying to adapt to the new -- we are pushing retail versus wholesale at this moment and basically this is taking a bit of time.

But at the same time, we open a lot of stores in several cities of China, which is -- I mean the receipt of the brand is quite positive.

At the same time, I think it's a question of timing.

Right now, we are -- all the profits on operational point of view, we have the accountability, and before we were having several partners that they were working with us on all these.

It's a little bit softer, but it's still very positive and we will continue working in order to improve this.

And I hope that they say the results in China, particularly in retail, we'll continue to accelerate on a faster pace.

Regarding the wholesale in China, basically what we are trying to do is moving some of the stores from our existing partners to retail.

So this is taking a bit of time, but definitely, I think is according to our strategy of going much more into a direct model in China.

So it's just a period of adjustment in other words.

Exactly.

And on the Americas wholesale, just as a reminder, the US Canada and Mexico and Brazil in that category -- in that segment, sorry.

And so the US is actually been slightly better, but I think the really important thing to note is that Canada and Mexico is now doing very well within the Americas wholesale segment.

They have had been doing well since the beginning of the year and that trend is continuing.

Okay.

Great.

Thank you.

(Operator Instructions)

Bridget Weishaar from MorningStar.

Hello, thanks for taking my question.

I'm wondering if you have done any research into brand perception and core demographic group?

And I'm wondering if it is the same globally?

Basically what I'm trying to get to, is are product fixes enough and the brand is strong and people will come back, or do you have to change your brand image as you reposition yourself over the next three years?

Thanks.

Brand perception for me what is important, is whatever the customer perceives at one point of time in one particular place.

So I mean it will depends.

Definitely our brand perception is different between what let's say, Los Angeles and in Shanghai or in London.

But definitely we are not -- I think the Company feels very comfortable with the brand position that we are having and basically with the DNA that we have been having for the last 50 years.

And definitely, we will continue on this path and we will continue -- what we have to try to do is basically elevate our product without -- and trying to continue working in a comprehensive collection and an outfitted collection, more than a trying to develop or trying to push one particular product category.

Thanks.

And then on the wholesale side, you discussed the rising trend in pure play E-commerce.

Is that true globally and what are your thoughts in dealing with pure play E-commerce retailers?

I think this is a particularly I was mentioning in the US.

I don't think that this is happening somewhere else.

Maybe a little bit in Europe, but not in Asia.

I think where it's very strong and this is happening big time at this moment is in specifically, in the US market.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.

[CX1]44:15.