Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Guess?, Inc. (NYSE:GES)

F2Q10 Earnings Call

August 26, 2009 4:30 pm ET

Executives

Paul Marciano – Vice Chairman and CEO

Dennis Secor – SVP, CFO, Principal Financial and Accounting Officer

Carlos Alberini – President and COO

Analysts

Eric Beder – Brean Murray

Omar Saad – Credit Suisse

Randy Konik – Jefferies & Co.

Stephanie Wissink – Piper Jaffray

Christine Chen – Needham & Company

Janet Kloppenburg – JJK Research

Chi Lee – Morgan Stanley

Betty Chen – Wedbush Morgan

Holly Guthrie – Boenning & Scattergood

Margaret Whitfield – Sterne, Agee & Leach

Susan Sansbury – Miller Tabak

Operator

Welcome to the Guess second quarter fiscal 2010 conference call. Before we get started, please note that the company will be making forward-looking statements during this call including comments regarding future plans and outlook. The company’s actual results may differ materially from current expectations based on risk factors included in the company’s quarterly and annual reports filed with the SEC.

Now for opening remarks and introductions I would like to turn the call over to Paul Marciano, Chief Executive Officer of the company. Please go ahead.

Paul Marciano

Thank you. Good afternoon and thank you for joining us today to discuss Guess' financial results for the second quarter of fiscal year 2010. Also joining me are Maurice Marciano, Carlos Alberini and Dennis Secor.

We are extremely pleased with our second quarter financial results. We did exceed our expectations but we also did second quarter record in both revenues and earnings. This is a significant accomplishment especially considering the current economic environment and the challenges caused by foreign currency. We believe this result clearly underscores the power of the Guess? brand and highlights the strength of the diversified business model to deliver strong results in the current environment.

Moreover, these results are a testament to the skill of our management team and their ability to quickly adapt to change and respond in a way that preserves our margin as well as well as our integrity and solid financial position. The strong steps we took nearly nine months ago concerning our inventories, our expenses and our capital with very strong discipline are clearly evident in today’s results.

The second quarter we succeeded in growing our business increasing in constant dollars by more than 9%. More importantly, we achieved that growth in a very profitable way. We delivered profit margin flat to last year and controlled our expenses very effectively. We expanded our operating margins very significantly and delivered earnings per share of $0.64, a 14% increase over last year.

Europe’s performance was key to our results. Our efforts there to deliver products earlier were very successful, far exceeding our expectations as well. Our products are hitting the market faster and positioning us to benefit from early seasonal demand.

For the quarter Europe local currency revenue increased by 35% with most European businesses posting an increase over last year. We leveraged our expense base in a significant way which drove an improvement in our operating margin.

In our North American retail business we also exceeded our expectations as we posted a modest increase in profit in spite of the negative comps. With strong inventory management and strong expense control we improved product margin and expanded operating margin from a year ago.

Regarding our international business, global expansion continued to be a major priority for us. Today’s results validate the tremendous potential of the Guess? brand on the international stage. We believe now more than ever that we can continue to gain global market share and that our brand can achieve worldwide recognition as the economy recovers. We strongly believe that our future growth must be linked to retail expansion in the global market.

Europe again is a high priority for retail expansion so we will continue to make investments there to support that future growth. By the end of the fiscal year we plan to directly operate 75 retail stores in that region. We are also making key investments to support both retail operations as well as our wholesale business in Europe.

In Asia we remain committed to develop the Guess? brand in China where we see a long-term opportunity. Our management team is in place and focused on refining our model, growing our business and improving our results in the region. Multiple challenges exist in that region so we are very conscious of any major investments.

Outside of North America we opened 62 stores year-to-date and plan to open another 49 stores by the end of the fiscal year.

Last, regarding our infrastructure we are continuing to improve our global supply chain where we are investing in strong strategic relationships and partnerships with key vendors. We are also investing in technology to support operations, enhance efficiency and improve the customer experience both in our stores and on the e-commerce sites.

We definitely feel that the conditions are stabilized in a number of ways but that doesn’t mean the crisis is over and there will be no doubt some challenges are ahead.

Thank you. Dennis will take you through the numbers of Q2.

Dennis Secor

Thank you Paul and good afternoon. Total second quarter revenues increased 1% to $522 million. In constant dollars the growth was about 9%. This increase was driven by Europe where revenues grew 21% despite the stronger U.S. dollar. Revenues benefited from a sales shift as we continued to distribute products earlier in Europe. The shift was higher than we previously expected and totaled $29 million for the quarter.

Total company gross profit was in line with last year reaching $232 million in the second quarter. Gross margin was 44.4% compared to 45.1% a year earlier. Product margins improved in North America and in Asia as tight inventory management resulted in fewer mark downs and less clearance. This was more than offset by the impact of the negative comps on our retail occupancy costs and the impact of the strong U.S. dollar on European product purchases which we expect to continue in the third quarter.

We managed expenses tightly and gained substantial leverage over our cost structure. Our SG&A rate improved 160 basis points declining to 27%. Total SG&A expenses decreased 4% to $141 million. Variable expenses were generally lower than a year ago despite the increase in revenues and store growth. Overhead expenses declined in the quarter as well.

For the period the company’s operating profit increased 7% to $91 million despite a negative $9 million currency translation effect. Operating margin increased 90 basis points reaching 17.4%. For the quarter we reported net other expense of $1.3 million. This primarily represents net mark to market charges on our foreign currency contract and account balances partially offset by mark to market gains on various non-operating assets given the improvement in the equity markets.

Our effective tax rate for the second quarter was 33% compared to 36% for the prior year’s second quarter and we are planning the remainder of fiscal 2010 with this 33% rate.

Overall, net income attributable to common stockholders increased 11% to $59.6 million and diluted earnings per share increased 14% to $0.64. This EPS amount includes a $0.09 benefit from the sales shift and a negative $0.06 currency translation impact.

Now I will review our revenues and earnings by business segment. In North American retail our comp store sales declined by 10.2% in constant dollars and 12.5% in U.S. dollars resulting in total revenues of $227 million, 6% lower than last year. Our gross margin was flat to last year with the improvement in product margins being offset by occupancy de-leverage from the negative comps.

Retail segment operating expenses declined compared to last year and the SG&A rate improved by 100 basis points. Operating profit reached $30 million, slightly higher than last year and the operating margin improved 90 basis points to 13.3%.

During the quarter we opened five new stores and closed three ending the period with 431 stores in the U.S. and Canada. Average square footage increased by 6.6% over the prior year’s second quarter.

In our wholesale segment revenues declined 13% in U.S. dollars reaching $63 million in the second quarter. We continued to grow our Asia business with revenue increases in both Korea and China though the strong U.S. dollar nearly offset that growth. As expected our North American wholesale business was down given lower consumer demand at U.S. department stores.

Wholesale segment operating margin increased 90 basis points reaching 15.8% in the second quarter. Improvement in product margins in both North America and Asia more than offset higher occupancy costs due to the growth of our business in Asia. Operating profit declined 8% reaching $10 million in the second quarter.

For the quarter European revenues totaled $210 million, increasing 21% in U.S. dollars and 35% in constant dollars. Second quarter sales benefited from the sales shift I mentioned earlier which was driven by the successful introduction of a pre-collection in our wholesale apparel business. Sales at our owned retail stores increased significantly as a result of new store growth compared to a year ago.

Operating earnings increased 30% to $52 million and operating margin expanded 190 basis points to 24.9%. This margin expansion was driven by effective expense control partially offset by lower product margin. As you know, during the past couple of years we have made substantial infrastructure investments and are now achieving significant leverage on those investments.

In the second quarter our SG&A rate in Europe improved by 520 basis points compared to the prior year quarter. Licensing revenue decreased by 16% to $22 million in the quarter, in line with our expectations.

Now, turning our attention to the balance sheet. We ended the quarter with cash reserves of $330 million, $35 million higher than a year ago. Since last year we have reduced our debt by $41 million leaving us virtually debt free and improving our net cash position by $76 million. For the first half of this fiscal year our operations generated $121 million of cash flow versus $116 million for the same period a year ago.

Accounts receivable increased 2% or $5 million to $297 million compared to the prior year. In constant dollars receivables increased by 9%. The increase in receivables is primarily due to the revenue increase in our European business which is mainly a wholesale business. Roughly ¾ of our receivables support our Europe business.

Overall, DSO declined slightly compared to the same period a year ago. During the period we managed overall credit risk prudently and tightly including the use of outside insurance programs. At the end of the quarter about 55% of our receivables were supported by insurance coverage, bank guarantees and letters of credit.

Our inventory management was once again very strong. We ended the quarter with $259 million in inventory, slightly lower than a year ago. During the quarter we invested $20 million in capital expenditures net of tenant allowances primarily to support our retail expansion in the United States and Europe and investments in our infrastructure in all regions.

Finally, we announced today that our Board of Directors has approved a 25% increase in our quarterly cash dividend to $0.125 per share. The dividend will be payable on September 25, 2009 to shareholders of record at the close of business on September 9, 2009.

With that I will turn the call over to Carlos.

Carlos Alberini

Thank you Dennis. Good afternoon. I will give you an overview of our outlook. Consistent with previous calls today we will provide revenue, operating margin and EPS guidance for the current quarter. We will also update you on how our business has been trending and other factors that will affect our financial results.

In North American retail ever since last year’s post-holiday season we have managed our inventory levels very tightly ensuring that both the integrity of our brand and our margin structure were protected in this environment. As we were planning this year’s business we anticipated a slowdown in consumer spending and adjusted our inventories and purchase plans accordingly. This action resulted in strong margins for the period and enabled us to maintain our current lean inventory position.

Over the last several months we have learned more about what is motivating customers in 2009. Today customers spend less time in the malls and shop around events. They are looking for compelling value but as always they demand great products. We are responding accordingly and have made adjustments to our promotional calendar that we hope will allow us to benefit from the peak traffic periods, improve our conversion rate and ultimately begin to reverse the negative comp trends.

In addition, we have identified trendy products and have made investments in those categories which we feel can help drive our sales for both back-to-school and holiday as well. Our month-to-date comp performance in August is down in the negative high single digit range which is in line with our overall expectation for the third quarter. Based on this assumption and our store growth we are now expecting third quarter total revenues in the retail segment to decline in the low to mid single digit range.

In Europe for the third quarter we are expecting revenues in U.S. dollars to decline in the mid to high teens range. This decline represents the impact of the shift that Dennis mentioned partially offset by our revenue increase in our retail business as a result of new store growth. Our business has remained healthy in Europe but our backlog is currently flat to last year. The backlog for fall/winter 2009 is down as a result of the shift while the backlog for spring/summer 2010 is up reflecting this year’s earlier sales campaign.

I will now address our wholesale segment. We continue to expect that our North American wholesale business will contract in the third quarter. Our current U.S. backlog is down almost 17.5%. In Asia we expect our business will grow in constant dollars in the third quarter by over 30% with much of that growth being offset by currency. All considered we expect revenues for the entire wholesale segment to be down in the mid single digit range in U.S. dollars and this is for the third quarter assuming the currency remains at current levels.

In our licensing business we expect our third quarter revenues will decline in the mid teen’s given our most recent trends and the ongoing impact of the economic conditions on our licensing partners. This expectation would result in total company revenues between $455-485 million in the third quarter. We expect that gross margins will decline in the third quarter compared to a year ago. Our goal in North America is to maintain product margins at last year’s levels though the negative comps in retail will result in occupancy de-leverage.

In addition, the sales shift in Europe will result in a relatively lower mix of European business in the third quarter compared to last year. This will have a further negative effect on comparative third quarter gross margins as European sales carry higher margins than our other businesses.

Regarding expenses, assuming the current exchange rates continue we expect third quarter expenses to be slightly down compared to last year’s third quarter levels.

Now with respect to earnings, overall we expect third quarter operating margin to be around 14% and diluted earnings per share between $0.46 and $0.49. This assumes no material mark to market charges. For the full fiscal year we are still expecting that our capital expenditures net of tenant allowances could reach up to $90 million.

In closing, I truly believe we are running our business well, managing our costs and cash flow aggressively, strengthening our customer relationships and capitalizing on our strong landlord and vendor partnerships more than ever. Our team is strong and highly committed to take the company to a new level of growth and profitability. We have $330 million in cash and no debt and expect this cash reserve to grow considerably by year-end. We are constantly assessing growth opportunities and see a bright future in front of us as the global market continues to open wider.

This crisis has helped our team to work more closely together, to think more strategically and creatively to win in this challenging marketplace. Today’s results demonstrate our team commitment to winning.

I will now turn the call back to Paul for closing remarks.

Paul Marciano

Thank you Carlos. To conclude, in the last three decades the Guess? Company has survived two downturns because we have never, ever doubted our confidence in our brand, in our people, in our strategy or in our products. When you add on top of that passion, trust, teamwork and enthusiasm you can face pretty much any challenge, any competition, any crisis. Even with all that mentioned, we continue to question that same belief every day and every month and ask ourselves, “What if?” That is what keeps us alive.

Thank you. I will now turn to questions. Please operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Eric Beder – Brean Murray.

Eric Beder – Brean Murray

Let’s talk a little bit about the U.S. stores. Could you talk a little bit about the comps for U.S. for Q2 was it the same throughout both Marciano and G by Guess and the Guess comps or was there significant variation between those? If there were, what were the different drivers in those units?

Carlos Alberini

We do not address comps by division. I can tell you there were some variations between brands. The retail comps were probably the most significantly down and it was driven by traffic in the malls. We believe the traffic has been the main driver for the comp decline. That has been pretty consistent throughout every month of the quarter.

Operator

The next question comes from the line of Omar Saad – Credit Suisse.

Omar Saad – Credit Suisse

I want to understand a little bit better the Europe and the pull forward of shipments. What kind of customers, is it across the board in Europe? Is it purely a timing issue where they are trying to get goods in early? Is there a question or changing of underlying demand level there? Do you see any patterns? It seems pretty lumpy. Last quarter you had a pull forward in the fourth quarter. Help us understand this dynamic. What is the underlying kind of business reason why this has been lumpy for this quarter?

Carlos Alberini

This is something we have been really doing and have been very successful so far. We have been trying to really move the business into the earlier quarters for both the first six months of the year and the second. The idea here is to have a much smoother calendar with operating with four seasons the way we operate in the states. Over there historically the market has operated with two seasons that shift at the beginning of each of those six month periods and we have been trying to really change that business model because it would help the opportunity for early demand being satisfied. It would open the opportunity for reorders later in the season and it moves the investment in inventory for both our customers and ourselves.

We are very pleased with the fact we have been able to move a lot of the business from third quarter into the second being very successful and very profitable. The change we think it has been very effective. We feel that we are reaching now a level where we are comfortable with the way the business is running. The last change has been more impactful on the apparel business which was the last big business we wanted to effect this change. So it is across the board. We are offering this pre-collection line and people love the product and want it in earlier. We ship, fortunately we have the product in the warehouses and we were able to ship accordingly.

Operator

The next question comes from the line of Randy Konik – Jefferies & Co.

Randy Konik – Jefferies & Co.

Can you give us a little color on performance in the European continent and give us a bit more granularity on what you saw in the quarter?

Carlos Alberini

As you know, Italy is the most significant market for us and the most developed market. The penetration for the second quarter compared relative to a year ago was identical, about 46% of total sales. In France we gained some share growing by about two points. The whole Spain area was slightly down. We think that is a direct result of what is happening in the economy there. The U.K. was up again, gaining some share. Germany was about flat. Some of the Eastern countries for which our business was down relative to the total.

Operator

The next question comes from the line of Stephanie Wissink – Piper Jaffray.

Stephanie Wissink – Piper Jaffray

Could you talk a little bit more about your Asian business in follow-up to the last comment. Do you see a lot of opportunity there? Your store plans for that region?

Carlos Alberini

With respect to Asia you heard Paul’s remarks, we are taking that territory in a very cautious way. We launched the brand only a couple of years ago. Talking about China specifically we have made pretty significant progress in penetrating some of those markets. We have a combination of strategies with key stores and cities and then we are working with our partners throughout China as well. So our plan to open stores in overall Asia are significant when you combine all the efforts with our partners. We are not opening significant stores directly right now.

Operator

The next question comes from the line of Christine Chen – Needham & Company

Christine Chen – Needham & Company

I was wondering if you could talk a little bit about product; what worked well for you during the quarter both in the U.S. as well as in Europe if it is different and in Asia. Geographically in the U.S. what were your stronger regions?

Carlos Alberini

With respect to the North American business, YV was the best performer throughout the store followed by accessories. Our men’s business was the toughest one, I think like in general the operating environment we are in right now. Within YC, we did very well with denim. We did very well with sweaters and knit tops. Many categories here we were very lean with inventories and we were able to chase product throughout the period. Even non-denim pants also did well for the quarter as well.

Accessories had some categories that did better than others; handbags, watches, and there were some categories that were a little more challenging for us like jewelry but that business is turning around pretty nicely right now. Things were a little more difficult for us were basic denim in YC and in men’s we had a more challenging environment with knit tops and woven tops.

Guess by Marciano had a much better quarter than we had seen and overall what drove that business was sweaters, dresses, pants, skirts and accessories. We launched the new line of handbags which was very successful. The great thing about the Guess by Marciano business is that our margins were significantly improved as our inventory was in great position throughout the period relative to a year ago.

Footwear was a little bit weaker than the rest of the store. I am talking about overall footwear but we have made some adjustments to both the product assortment and the pricing which we think are going to be very positive going into the second half of the year.

Christine Chen – Needham & Company

Geographically?

Carlos Alberini

With respect to geographies there were two areas that were very tough for us. One was the Southeast because we think some of the tourism and some other events taking place in that area have impacted our business negatively. The West Coast was very difficult. We are seeing some signs of improvement in our business in August and it has been better than what we experienced in the second quarter. We see some improvement in those areas as well. Overall the strongest areas were the Southwest. Canada also had a much stronger second quarter than the rest of the chain, the Northeast was strong relatively speaking though I am talking about still negative and the Midwest also had a better quarter than the rest of the regions.

Christine Chen – Needham & Company

You called out, have you seen more crossover shopping since you switched the name to Guess by Marciano?

Carlos Alberini

Yes, as you know we also combined the two lists of customer loyalty lists and that has been a big success for us. Our traffic has increased tremendously in our Guess by Marciano stores as we are benefiting from the strength of the Guess? brand. Now what we are doing is changing the assortment so that we can really satisfy the needs of the customer that is also looking for other pieces in the line like denim.

So we have strengthened the offering of denim and some of the other more casual pieces. We will still carry some dressy in the stores as well. It has been very successful. We think we still have a way to go because the conversion has not followed the traffic so there is still a lot of opportunity to convert more and improve the overall performance of the stores.

Operator

The next question comes from the line of Janet Kloppenburg – JJK Research.

Janet Kloppenburg – JJK Research

Just to talk about the U.S. market a little bit more, I was wondering you said that August has been a little bit better than the second quarter trend. Do you think there has been any pressure because of calendar shifts and would you expect that the business might see a better September than August?

Carlos Alberini

Actually as I am sure you have heard we are expecting the overall quarter for third quarter for retail will be pretty much in line with what we have experience so far in August. We are expecting much weaker numbers in the upcoming months. The reason we are thinking about this is we do believe there is going to be a late Labor Day of course. There is a movement. Last year Labor Day was this weekend. We do anticipate that is going to impact August sales negatively and the reverse is going to happen in September. That is the expectation. Also the fact that we are up against weaker numbers.

Janet Kloppenburg – JJK Research

Also on the sourcing front, you have a lot of supply chain initiatives that are helping your product margins. I am wondering above and beyond that if you are witnessing more advantageous pricing from your vendors or if you are switching to different vendors because of more advantageous pricing? If that could help product margins, my question is if you are seeing it how long before we might see the benefit coming through the gross margin line?

Carlos Alberini

Last year coming into the end of the year we were seeing pressure on product margins as I am sure you remember. Since then we have been working very hard with our suppliers and I think as Paul made a comment regarding this strengthening our relationships and really controlling the vendor base. All this effort is ongoing but the great thing is we are already seeing some impact on our IMU and the great thing is we have been able to do what we needed to do from a pricing standpoint and remain very competitive putting more quality into the garments and better fabrication in many cases and still being able to really see an improvement in IMU going into the second half of the year. So we are very pleased with what is happening on the supply chain side.

Operator

The next question comes from the line of Chi Lee – Morgan Stanley.

Chi Lee – Morgan Stanley

Could you provide us with a little bit more detail in terms of how much progress have you made on the vendor consolidation and how much potentially more you have to go for the balance of the year?

Carlos Alberini

It is not going to happen in the balance of this year. I can tell you globally we have reduced the vendor base by about 20-30%. We want to go another 30%. So it is not going to happen by the end of this year. We are looking at this project as a 1.5 to 2 year project.

Chi Lee – Morgan Stanley

That 20-30% reduction achieved thus far is that relative to the end of last year or is that the year-ago period?

Carlos Alberini

No it was right at the end of last year when we started the project.

Chi Lee – Morgan Stanley

You mentioned the ability to chase a lot of goods during the quarter. Can you talk about what you are seeing from an excess capacity perspective? Have you seen any of that excess capacity go away from the end of the first quarter or are you still seeing a lot of availability out there?

Carlos Alberini

You mean product availability?

Chi Lee – Morgan Stanley

In terms of your vendor base, excess manufacturer capacity.

Carlos Alberini

No we always have the opportunity to really chase goods. Our people are pretty much experts when it comes to it. That is the way we have operated. We want to be on trend and every time we get an opportunity we go after that. In many cases it depends on whether we own fabric or whether we can get together with a specific vendor on that project. There is a lot of planning that goes into this even when you are acting based on the current trends. We have not had issues in finding the types of product we are looking for. I think capacity is quite aligned with demand right now.

Operator

The next question comes from the line of Betty Chen – Wedbush Morgan.

Betty Chen – Wedbush Morgan

I was wondering if you can address the European business. I think you had commented earlier it had seen significant expense leverage are you are starting to lap a lot of the investments made last year and really the last couple of years. How should we think about that either in Q3 or the balance in the second half of this year as we continue to anniversary some of those investments even though I know you said in the third quarter there would be some impact on margins because of the shift into Q2 as well as the product mix.

Dennis Secor

The way I would look at it for the year, overall I would expect to see pretty strong leverage in the European business on their own expense base. The shift helps the second quarter so it might be difficult for us to achieve that in the third. Overall, I would expect to see nice expense leverage from the European business for the year.

Betty Chen – Wedbush Morgan

Going into the first half of next year would we continue to see some of those benefits before we anniversary the initial benefit?

Dennis Secor

Yes we started seeing some improvement starting in the fourth quarter of last year so next year we should be fully comparable.

Carlos Alberini

Let me add to that, I am sure you heard Paul made a comment, in Europe we are investing in several areas that include building a strong infrastructure for running the retail business which was a very small retail business up until recently but now we are adding several stores. Also we are strengthening the team that runs the whole jeans wear business. This is going to require some investment. I think yes there are a lot of infrastructural investments we already made we can leverage but at the same time there are some others we will need to continue to make to position the business there in such a way that we can continue to grow at the rate we want to grow.

Betty Chen – Wedbush Morgan

On that can you give us any color around where these stores are geographically located and the timing? I know that by the end of the year we are looking at 75 openings. Should we expect that to be equally spread out between Q3 and Q4?

Carlos Alberini

When you say where you know we have said the key areas we were targeting include France, Spain and we continue to open stores in Italy. We are opening several stores in the U.K. and a couple of stores in Germany as well. Our plan there is to really go into many of the under-developed territories and we want to do that with the right representation of the brand. There is nothing better than our own stores to do that.

Paul Marciano

The majority of the 49 stores remaining for the year will be mainly concentrated in France and Italy.

Betty Chen – Wedbush Morgan

I was wondering if you could give us any color around inventory. It was very clean coming out of the quarter. How are they positioned whether it is the European segment versus wholesale or the retail channel?

Dennis Secor

The retail inventories are roughly flat which is very nicely aligned with our expectation for the upcoming quarter and that includes investments we have made for the trending products that Carlos mentioned. Asia the inventories are up very slightly while we see the business growing faster than that. That is really a result of our continuing to improve our inventory management there. The European inventories are down slightly in the quarter and that includes the additional inventory to support the earlier spring/summer collection this year.

Operator

The next question comes from the line of Holly Guthrie – Boenning & Scattergood.

Holly Guthrie – Boenning & Scattergood

A quick question on the comment you made about North American retail and hoping to reverse the negative comp trend and looking at the trends you are seeing in how consumers are shopping around events. I know you said your inventory would probably be flat and that kind of answers one of my questions but if I could just get a little bit more, in the past you have had some very successful events and you kind of managed your inventory around those events. With the success you have had in the past and your recent read is that what we might look for around the critical holiday period, those types of events we have seen in the past?

Carlos Alberini

What we are seeing is the customer today is definitely more motivated to spend in certain times. We are really positioning our business so we can go after that business during the high peak traffic times. For that we are positioning our inventory, positioning our people in the stores and giving a better service level and investing in payroll. More importantly it was great we launched the customer loyalty program where we have We have 1,750,000 people right now. We are marketing directly to those people to invite them into the stores and giving them enhanced benefits relative to the rest of the people who walk into the stores to shop.

We just ran an event last week and it was very successful and we think that is the way to win in this type of environment. We will continue to do that within reason and really control how we promote as opposed to just going into a plain mark down cycle like we have done in the past. Especially last year in the fourth quarter so we see a lot of opportunity in the way we are running the business today relative to what we have had in the past.

We also launched G by Guess loyalty program in July. We already have over 50,000 names in that list as well so in the future we think there is an opportunity for that chain as well.

Operator

The next question comes from the line of Margaret Whitfield – Sterne, Agee & Leach.

Margaret Whitfield – Sterne, Agee & Leach

I was wondering if you could comment on what you are seeing in terms of the response to back-to-school. You have upped the denim, you lowered certain price points and made it more casual. If you could give us some insight into what changes you have in the offing for holiday and if you are seeing similar trends in Europe, have you done the same thing with upping the denim, lowering price points, etc.?

Carlos Alberini

When you say lowering price points in some cases we increased price points based on what we saw in how the customer was reacting. A good example for that is in some of the dresses and Guess by Marciano. So we went after each of the product categories and did what we thought was right based on what the customer was looking for.

We see a lot of opportunity in denim. We continue to see it. There are opportunities in non-denim, dresses and sweaters. We have positioned the whole assortment toward the trends we saw earlier in the year plus the rock and roll vibe you saw in the stores now. We feel we are very well positioned. The handbag assortment was also very strong. Footwear was another category that the whole assortment and pricing was evaluated and changes made.

We think that there is a lot of opportunity in front of us. This impacts not just our Guess? stores or the Guess? brand but also the Guess by Marciano brand and the G by Guess brand and even in our factory outlet division we have improved assortments as well.

Paul Marciano

If I can just give you the right information about denim, in fact the non-premium denim in men’s and women’s the price did not decrease. In fact we are increasing. The average price of non-premium last year was $88 and this year is $92 for women. For men the average non-premium last year was $97 and this year is $106. On premium we lowered a little bit. For men it went from $160 average to $155 so it is nothing. For women it went from $153 to $137 as an average price. So the prices are pretty [there].

Margaret Whitfield – Sterne, Agee & Leach

I think what you are trying to do is gain share from the retailers selling denim over $200.

Paul Marciano

Yes. You are right.

Carlos Alberini

Also you mentioned Europe and we have made significant progress on what we call the global line. Doing a lot of common styles between the two. We have a lot of the denim you see in the North American line is now shared to a certain extent with the European and with great success.

Margaret Whitfield – Sterne, Agee & Leach

I was wondering if you might have another shift in Europe in Q4 from Q1 with spring. Any comment?

Carlos Alberini

As you heard, our backlog is up for spring/summer and it is primarily because of the earlier sales campaign so there may be a little bit of a shift. All we can do is give you as much visibility as we have by the time that we give you guidance for the fourth quarter.

Operator

The next question comes from the line of Betty Chen – Wedbush Morgan.

Betty Chen – Wedbush Morgan

Is there any color you can offer on how we should think about currency impact in the third quarter and I think originally we were thinking perhaps by the fourth quarter it could actually become a benefit as we lapse some of the changes last year.

Dennis Secor

You still hit the nail on the head. That is exactly the way to be thinking about it. If you assume that currency stays relatively stable to where they are right now. We are talking about translation but you see a very roughly neutral, maybe down about $0.01 in the third quarter and then again if they stay flat in the fourth quarter meaning flat to where they are now there is your opportunity and that could be like a $0.03 or $0.04 improvement on translation.

Operator

The next question comes from the line of Stephanie Wissink – Piper Jaffray.

Stephanie Wissink – Piper Jaffray

One follow-up on your European business. I think Dennis mentioned the product margins were down and I think that was a theme in the last quarter as well. If you could just give us some insight on your focus there to improve those over time.

Dennis Secor

That product margin issue is really driven by currency so what we said was that we have been buying at a relatively weaker Euro environment. We would expect because the inventory we sell in Q3 was inventory we bought in Q2 so we expect that impact to continue in the third quarter and then once you get past the third quarter then there is the opportunity to start neutralizing that.

Operator

The next question comes from the line of Susan Sansbury – Miller Tabak.

Susan Sansbury – Miller Tabak

At the beginning of the conference call Paul made a comment about store plans for Europe, which I missed. The incremental 49 stores you are going to open in the back half of this year, is that greater than you originally expected going in relative to your last quarter comments about your re-evaluating the new store plans?

Paul Marciano

Not really. The variation is minimal. We are planning to open 49 stores by the end of the fiscal year. I think the original plan was maybe 55 or 56 maybe. There were some opportunities that came along that were not in the plan and we were definitely trimming stores where didn’t feel like they were AAA stores that we passed on earlier on. Right now I cannot give you the names but some major brands are closing stores and some opportunities are coming out of nowhere and we have to act immediately because we are not alone in these locations. So these were not in the plan. So we added locations we were not planning a lot in certain cities and certain countries.

Because the opportunities came because XYZ decided to close a number of stores in Europe and another company comes in with another closing of stores so we have a new round of stores we didn’t plan. We cannot let that pass by and say no we have a plan and we are disciplined. We go with opportunity.

Operator

That concludes the Q&A session. I would now like to turn the call back over to management.

Paul Marciano

Thank you for all the questions for this conference. I wanted to conclude and tell you two things we did not mention here. One is we continue to look at and evaluate and clearly have decided that G by Guess which is only two years old will continue to expand we are looking to open up to 150 stores in the next 2-3 years. The Guess Accessory stores we plan to look at stores opening at least another 250 in the next 3-5 years. Right now we have 190 Guess Accessory stores right now.

These are the two big projects we are working on. As Carlos mentioned just before we are building an entire retail structure for Europe to assert the right support for all the stores we plan to open in Europe, Eastern Europe, Russia, all the countries around including Turkey. We have many, many countries that we are way under penetrated in and of course Germany and England.

So those are the three big things I wanted to mention before we close. Thank you very much. We look forward to talking to you in November for the third quarter.

Operator

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Guess?, Inc. F2Q10 (Qtr End 08/01/09) Earnings Call Transcript
This Transcript
All Transcripts