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Guess? (NYSE:GES)

Q3 2014 Earnings Call

December 04, 2013 4:30 pm ET

Executives

Paul Marciano - Co-Founder, Vice Chairman and Chief Executive Officer

Sandeep Reddy - Chief Financial Officer

Michael Relich - Chief Operating Officer and Executive Vice President

Russell Bowers

Analysts

Eric M. Beder - Brean Capital LLC, Research Division

Erinn E. Murphy - Piper Jaffray Companies, Research Division

Alex Pham - Mizuho Securities USA Inc., Research Division

Janet Kloppenburg

John D. Kernan - Cowen and Company, LLC, Research Division

Jeff Black - Avondale Partners, LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Pankaj Chandak

David J. Glick - The Buckingham Research Group Incorporated

Operator

Good day, everyone, and welcome to the Guess? Third Quarter Fiscal 2014 Earnings Conference Call. On the call are Paul Marciano, Chief Executive Officer; Michael Relich, Chief Operating Officer; Sandeep Reddy, Chief Financial Officer; and Russell Bowers, Chief Financial Officer of North America Retail.

During today's call, the company will be making forward-looking statements, including comments regarding future plans and financial outlook. The company's actual results may differ materially from current expectations based on risk factors included in the company's quarterly and annual reports filed with the SEC. Please note that this conference is being recorded.

Now I would like to turn the call over to Mr. Paul Marciano.

Paul Marciano

Thank you. Good afternoon, and thank you for joining us today. We are pleased with our third quarter performance, as we delivered adjusted earnings per share of $0.42, which exceeded the top end of expectation. With the executive management team now fully in place, we made very good progress on many of our strategic initiatives during the quarter.

Overall, the third quarter, we saw stabilization of trend in most of our business across the regions. With prudent planning, we were able to anticipate and manage our resource carefully as well as our inventory, finishing the quarter with nearly flat inventory to last year. This is critical considering that we are seeing more aggressive promotional activities globally.

In North America, our retail business met expectations with comp sales down 5%. The business performed consistently throughout the third quarter. Mall traffic remained soft in both U.S. and Canada, but we were able to significantly drive up conversion in our own stores with a more compelling collection.

In the month of November, trends have improved. We were able to deliver slightly negative comp helped in part by a positive Black Friday weekend. We saw great response to our offering in denims, knit tops and handbags. Traffic trend improved from the third quarter in both U.S. and Canada and conversion continued to trend positively.

The product assortment in our stores is beginning to reflect the vision of our design and merchandising team. As we continue to innovate and refine our collection across all categories, I am very encouraged to see that our retail product strategy is improving rapidly.

Our omni-channel strategy continued to take shape during the quarter, now with 100 stores participating in -- on in-store fulfillment.

Along with some industry-leading technology that we implemented in the past year, we drove a 33% increase in our North American e-commerce business over last year.

In Europe, we made progress in our retail business, even as economic condition remained challenging. Our retail stores in almost every country saw the trend improve from the first half, led by Spain, Germany and Portugal, all comped positively. Overall, Europe comp finished down in the low-single digit, consistent with expectation.

Our wholesale business, especially Italy, continued to contract during the quarter as we expected. The decline continued to come primarily from our multi-brand customers who are having the most difficulty navigating the challenging political and economic environment in Italy and France.

In Asia, our revenue declined by 3% in the quarter, better than what we have planned. Our South Korean business grew modestly, while the Greater China business declined. We continued to see soft consumer spending in mainland China, while our Hong Kong and Macau stores remained strong and delivered positive comp.

In closing, we have a strong management team here. We have a clear understanding of the Guess? brand and history of international expansion, as well as a strong balance sheet. It is our job to extend our growth and execute our vision in existing market and deliver strong results. Next quarter will be decisive for the year result and the discipline we apply to deliver high-quality products to our consumer for this holiday.

With that, I will hand over to Sandeep to discuss the financial performance of the third quarter.

Sandeep Reddy

Thank you, Paul, and good afternoon, everyone. During this conference call, all of our analysis will be on an adjusted basis, which excludes the impact of restructuring charges incurred during the first 3 quarters of fiscal 2014. You can find more details on these charges and reconciliation to our GAAP results in today's earnings release.

Moving on to the results. Third quarter net earnings decreased 3% to $35 million, and diluted earnings per share was $0.42, down 2% compared to $0.43 per share in last year's third quarter.

Third quarter revenues decreased 2% to $613 million in U.S. dollars and declined 4% in constant currency.

Total company gross profit for the third quarter was $228 million, down 8%, and gross margin was 220 basis points lower at 37.2%. Occupancy deleverage in Europe and more promotions in North America were the main drivers of the margin change.

We leveraged our operating expenses, posting an SG&A rate of 29.1%, an improvement of 110 basis points over last year's third quarter. Overall, SG&A decreased 6% to $178 million. The lower rate was primarily driven by lower selling and merchandising spend in Europe and lower advertising and marketing spend.

Operating profit for the third quarter decreased $8 million to $50 million, and operating margin declined by 110 basis points to 8.1%.

We recorded restructuring charges of $2 million in the third quarter, primarily related to consolidation and streamlining of our European operations. These charges consisted mainly of lease termination payments related to the exit of certain store locations that no longer align with our strategic priorities and severance expenses. Other net income was $4 million and mostly represents gains from other nonoperating assets.

Our effective third quarter GAAP tax rate was 33% compared to 35% in the prior year quarter, in line with our guidance for the quarter and for the year.

Now I'll review our segments, starting with North American Retail.

In North American Retail, third quarter revenues were down 3% at $254 million, driven by a 5% decline in comp store sales in the U.S. and Canada, partially offset by growth in our e-commerce business.

Gross margin declined in the quarter compared to a year ago, primarily due to more promotional activities.

SG&A decreased, both in terms of dollar and rate, as a result of lower store expenses, as well as lower advertising and marketing spend. This was partially offset by deleverage due to negative comp store sales.

Operating earnings declined $3 million to $6 million, and operating margin decreased 100 basis points to 2.4%.

During the quarter, we opened 3 new stores and closed 8, ending the period with 502 stores in the U.S. and Canada.

In Europe, third quarter revenues were $201 million, representing a 1% decrease in U.S. dollars and a 7% decline in local currency.

Wholesale shipments continued to decline in Southern Europe, partially offset by growth in newer markets.

In our Europe retail business, comp store sales declined in the low-single digits but were more than offset by new store expansion and favorable currency translation.

Gross margin declined compared to last year, mainly due to a higher occupancy rate driven by lower wholesale shipments and retail expansion. SG&A expenses declined significantly, both in terms of dollar and rate, primarily due to lower selling and merchandising costs.

Operating earnings decreased by $1 million to $14 million, and operating margin decreased 50 basis points to 6.7%.

In Asia, revenues in the third quarter declined by 3% to $73 million in U.S. dollars and 6% in constant currency. In Korea, the top line increased in the low-single digits in local currency and mid-single digits in U.S. dollars, driven by store expansion as well as slightly positive comp store sales. This was more than offset by the performance in the rest of Asia, especially in Greater China where revenues were down, mainly driven by lower shipments to our licensee partners, partially offset by positive comps.

Operating earnings decreased 24% to $6 million, and operating margin decreased 230 basis points to 8.1%, mainly driven by lower gross margin.

In North American Wholesale, third quarter revenues declined 7% to $54 million. Operating earnings decreased by 19% to $12 million, and operating margin decreased 310 basis points to 22.6%. The lower operating margin is primarily driven by a higher SG&A rate compared to last year's and mainly due to deleverage.

Royalties generated from sales by our licensee partners were up 3% compared to last year's third quarter at $32 million but below our expectations. Operating earnings increased 8% to $29 million.

Now turning our attention to the balance sheet. We ended the quarter with cash and short-term investments of $360 million compared to $295 million a year ago. This comparison includes the impact of $22 million of repurchases of our stock in the first quarter of this year and a special dividend of $102 million in the fourth quarter of last year.

Accounts receivable was 20% lower at $259 million, and overall DSOs improved slightly compared to last year. European DSOs were flat to last year as slower payments in Italy were offset by other regions.

Inventories increased just 1% to $427 million as we continue to improve our inventory positions quarter-over-quarter.

Lastly, in the third quarter, capital expenditures totaled $15 million. For the full year, we plan to invest between $70 million and $80 million of capital, net of tenant [ph] allowances, primarily for new stores and remodels.

With that, I will turn the call over to Mike.

Michael Relich

Thank you, Sandeep, and good afternoon. Today, I will update you on our business trends and provide our outlook for the fourth quarter and the full fiscal year 2014.

Our overall earnings expectations for the year have not changed. However, we are adjusting our revenue expectations, given the improved visibility in our businesses.

In North American Retail, comp store sales were down slightly in the month of November, and we are planning the fourth quarter assuming comp decline in the low-single digits. This, combined with the impact of last year's extra week, would translate into a revenue decline in the low- to mid-single digits.

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

In Europe, so far in the fourth quarter, comp store sales are consistent with the third quarter and are down in the low-single digits. For the full fourth quarter, we expect the comps to decline in the low- to mid-single digits.

For the year, we continue to plan comp store sales to decrease in the mid-single digits.

In our Europe Wholesale business, we have completed our sales order campaign for our Spring/Summer collection, which will ship in the fourth quarter as well as the first quarter of next year. The orders, down in the mid-teens, are not as strong as we had anticipated.

Considering these factors, as well as the larger store base and the impact of last year's extra week, we expect total Europe fourth quarter revenues to decline in the high-single to low-double digits in local currency. Assuming the euro remains at current rates, this would result in a revenue decline in the mid- to high-single digits in U.S. dollars.

For the full year, we expect revenues to decline in the high-single digits in local currency and mid-single digits in U.S. dollars.

In Asia, our business performed in line with expectations in the third quarter, and our outlook for the year has not changed. We are planning for Korea to continue its revenue growth in the fourth quarter. The growth there will be offset by a decline in Greater China as we see a persistent softness in consumer demand and as we work through the impact from the steps we took to stabilize the business of our licensee partners in the last quarter.

Given these factors, as well as the impact of last year's 53rd week, we expect fourth quarter revenues for Asia to decline in the mid- to high-single digits.

For the full year, we continue to expect revenues to decline in the low-single digits.

In our North American Wholesale business, we expect revenues to decrease in the low 20s for the fourth quarter, driven by lower orders for our customers, as well as the anniversary of last year's 53rd week. This will result in a decline in the mid-single digits for the full year.

In Licensing, our licensee partners are facing a softer environment than they had expected. As a result, we are planning royalties to be down in the high-single digits in the fourth quarter. For the full year, we now expect royalties to be flat.

Turning to gross margin for the fourth quarter, we expect consolidated product margin to decline, mainly as a result of continued promotional activity in North America.

We are also planning for a higher occupancy rate, primarily as a result of lower wholesale shipments in Europe and last year's 53rd week. This would translate into a decline in gross margin for the full year.

With respect to operating expenses, we expect a flat to slightly down SG&A rate for the fourth quarter. For the full year, we expect the SG&A rate to be slightly lower.

With respect to taxes and currencies, we are planning the full year with a 33% tax rate and our guidance assumes foreign currencies remain at prevailing rates.

Considering all these factors for the fourth quarter, we expect consolidated revenues in the range of $750 million to $770 million. We are planning an operating margin between 13% and 14.5% and for EPS in the range of $0.74 to $0.84 per share, excluding any restructuring charges.

These expectations would result in full-year consolidated revenues between $2.55 billion and $2.57 billion, adjusted operating margin between 9% and 9.5% and adjusted EPS in the range of $1.82 to $1.92 per share, excluding any restructuring charges. Including the $0.09 of restructuring charges incurred in the first 9 months of the year, we expect GAAP operating margins between 8.5% and 9% and GAAP EPS in the range of $1.73 to $1.83 per share.

With that, I will conclude the company's remarks and open the call up for your questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is going to come from Eric Beder from Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk a little bit about the acceptance of the new value-priced products in terms of denim? And is that driving customer traffic in the U.S.? And when you look at accessories, how do you feel the accessories business has been doing? And where do you see that going from there?

Russell Bowers

Okay. Starting with the value-priced items, it's been a big success for us. The customers are really responding to the $79 denim. We've had overall denim sales in the third quarter were much better than they were in Q2, and we saw that get even stronger in November. We had double-digit comps in November in our full price stores with denim. So that's been a big success for us as has the -- a lot of the key item programs that we put in the stores, especially in November, it's really starting to gain some steam. We're picking up business in knit tops, which has been a really difficult category for a while, and we're making a lot of headway. In the accessory category, handbags have been coming along very well for us. We had positive comps in Q3, and our full-priced stores and factory trends have also been improving and factory was actually up in November. Watches have been okay, comps were down slightly in the third quarter, kind of consistent with the store. And we're still working real hard to get the shoe business turned around. We had a lot of success with boots early and we've been chasing inventory recently.

Operator

And then our next question is going to come from Eric (sic) [Erinn] Murphy from Piper Jaffray.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

It's Erinn Murphy from Piper. Just a question, maybe for Paul, if you could address just a little bit more on the European landscape. It does sound like you're seeing a little bit of improvement relative to where we've been year-to-date but it's really Italy and France that are still soft. Can you just speak a little bit more about what you're seeing in those markets as we head into 2014? And then just, I guess, related to that, the backlog for spring seems a little bit lighter than we were thinking, kind of down low-double -- it sounds like it's down mid-teen. Is that shortfall really from those 2 markets? And is there any category specifically that could be driving that?

Paul Marciano

Yes, Erinn, this is Paul. I just came back last week from Europe. Definitely, we see a turn, especially in countries where we are not expecting that, for example, Spain. Spain, Portugal has been positive trend, Germany. But France, Italy has been still on a slow pace. France is picking up now. Italy remains the most difficult environment at the moment. And I think because of the huge debt they have about the austerity plan they have put in place, new taxes and definitely have not seen the turn in Italy coming right now. France, I was in the streets everywhere last week. And you see the shopping coming back, you see the energy coming back. Even with the new tax law they put in place, they revised this new tax plan last week and the consumer seemed to respond to it. Which was very unusual is, as you know, all the promotion and sales are very regulated in these countries. And it was the first time I've ever seen that promotion everywhere with no rules, no restriction and meaning that the customers demand that and the retailers reacted to it and that they aligned themselves not to be [ph] North America. So this is a new day of a new normal, which I never thought would happen, including stores opening Sunday, which has been a big debate in France -- which still doesn't happen in Italy and which adds 40, 50 days of business now for France. So that's what I see. But Sandeep will address the numbers.

Sandeep Reddy

Yes, Erinn, I think on the Spring/Summer '14 order book, the last time we talked to you, we were expecting to be more or less in line with the Fall/Winter '13 order book, which was down in the low teens -- sorry, down in the low-double digits. And versus our expectations, unfortunately, we've come in a bit softer and we're finishing down in the mid-teens. And the issue really has been Italy and it's largely driven by closure of multi-brand doors in Italy, and almost half of the gap that we saw came from Italy. And that follows very clear -- closely with what Paul was saying earlier.

Operator

The next question is going to come from Betty Chen from Mizuho Securities.

Alex Pham - Mizuho Securities USA Inc., Research Division

It's Alex Pham on for Betty Chen. I was wondering if you could touch a little bit on the softness that we're seeing in China, is there something else that maybe we can read into? And then I was wondering if you could also touch upon product costs, what we're seeing maybe for 2014.

Michael Relich

Yes, consumer demand -- this is Mike. Consumer demand in Asia continues to be soft, as Paul had addressed in his opening comments. And in the last call, we talked about steps we took to shore up our franchisee base. Because of that, we've had actually weaker shipments to our franchisee partners. But if we look at our comps in Greater China, actually, they're soft in China but it makes up -- they're offset by strength in Macau and Hong Kong. In terms of the product costs, I think Russ can address that.

Russell Bowers

Yes. So our product costs were down slightly in the third quarter and we expect that to continue a little bit in the fourth quarter. Next year, we're still finalizing a lot of our plans, but we're really happy with what we're seeing with the spring costing. And we've got a -- we're really working on the supply chain team and we want to be even more aggressive with getting improvements in the back half. But it's still a little early to say how we're going to be for the whole year.

Operator

And our next question is going to come from Janet Kloppenburg from JJK Research.

Janet Kloppenburg

I wanted to -- I wanted maybe for you to discuss your North American comps. They're getting better. It sounds like Black Friday was good. My observations were that you may have been more promotional this year over last, although the product looks a lot better as well. So I'm just wondering how the returns would fare when you consider perhaps some margin pressure offset by improving sales trends. And Paul, I just wanted to clarify the European wholesale trend. Could it be possible that wholesale orders are going to be up in some markets in fiscal '14, like Portugal, Spain, Germany and offset by continued declines in Italy and France? Could it be possible that the product line is strong but it's just the demand and some of these macro pressures, the European markets will hold off, turn up there? And lastly, Sandeep, if you could discuss the opportunity for continued cost reduction and cost containment as we go forward. And if I could sneak in, if Mike could talk about supply chain initiatives, that would be great as well.

Russell Bowers

Janet, this is Russ. I'll talk a little bit about that North America first in November as our business improved quite a bit. I mentioned the denim earlier but another thing that's really paying off for us is our reduced SKU count and some of our deeper buys. And I think as you alluded to, the store looks better. I think that we've got a stronger point of view. And the knits have been giving us a significant improvement recently, and we're looking for that to continue. For Black Friday specifically, we were very happy with that. We were up on Black Friday itself and we were up over the long weekend as well. And just to kind of qualify that, we kind of read in the Thursday night sales as part of Black Friday. We kind of looked at it as one longer day -- I know some people looked at it differently. We had -- our promotion, we tested promotions during the third quarter. And so what we did on Black Friday, we -- it was a lot more profitable than what we did last year. And there actually was very little margin dilution. And what little margin dilution we had was really the result of us running it for a few extra days than we did before.

Sandeep Reddy

Yes. And Janet, this is Sandeep. I'll take the question on the wholesale shipments and expectations. I think what we are seeing in Europe is we expect Russia and Germany to continue to grow. As we've talked about previously, they are growing and that trend is expected to go on. Eastern Europe also is an opportunity for us to keep growing. The reality is all these, while they are opportunities, there is definitely softness in Southern Europe. And when I say Southern Europe, I'm talking about the wholesale market, whether it's in Italy, France or Spain or Portugal. All of them are in fact [indiscernible] of multi-brand doors, okay?

Janet Kloppenburg

Okay. So we should -- so Sandeep, then we should expect that region to really be under pressure, at least through the first half of next year?

Sandeep Reddy

Yes. I think we've talked about the Spring/Summer '14 order book. And just so you know, it sits in the first quarter of next year. So already by giving you that projection you get a sense of what the trend is expected to be in the first quarter. And well, I think for the Fall/Winter order book, by the time we talk to you next, we'll have some visibility into that and then we could give you better indication of where we're going.

Paul Marciano

And Janet, it's me, Paul. Just to comment. I wanted to complete what Russ was talking about November. We saw that big turnaround, mainly about unit [ph] Velocity but also to mention the knit top and sweater, big turnaround story there on the sexy knits date night tops. We had a fashion key item in depth [ph] and this one was driving the comps. We wish we had more fashion sweater. We were a little bit short on that. Dresses, we have excellent business in November, mainly driven by body-con. And of course, actually, our dress is all over the windows. We have right now one single dress that has been doing a lot of business. We wish we had more. Men's business has been really strong in November in all markets. I can tell you now that the misses -- that what we missed, footwear has been challenging for us. We underinvested, we believe, in boots and booties and -- but we have reorders coming right now next week. We were a little bit short on that. And sweater, Canada, we were a little bit also -- our business was soft on that because we under bought, we believe. But we had a clean -- clear balance question of inventory and we are very happy to be just 1% inventory, almost flat inventory in Q3. The environment is extremely promotional. And the last place we want to be is to be heavy in inventory right now.

Janet Kloppenburg

And the marketing looks terrific, Paul. Great progress there.

Paul Marciano

We focused a lot in denim, denim and denim.

Sandeep Reddy

So Janet, I just want to follow up on the discussion on Southern Europe. We talked about the wholesale markets being tough. We've seen interesting trend in the retail directly of operating retail stores where comps [ph] improved in Spain, Portugal and Italy, and we've seen the trend going -- come in Q3 and continuing into Q4. So that's something for you to note, that there's a divergence in trend between wholesale multi-brand and property retail.

Operator

And then our next question is going to come from John Kernan from Cowen.

John D. Kernan - Cowen and Company, LLC, Research Division

The competitive environment in North America is obviously evolving pretty significantly. You've reduced SG&A dollars at least $40 million year-over-year. CapEx is down pretty significantly from where it's been historically. Is there a risk you aren't investing enough in marketing, in omni-channel, in supply chain, given kind of the evolution in the competitive environment here? Are you worried about that? And then as we look into 2014, are there more marketing and SG&A reductions, to the point where we could potentially see SG&A dollars decline again year-over-year? And then I have one follow-up on the Licensing business.

Paul Marciano

About -- this is Paul. About the marketing, we don't receive [ph] until next year a flat investment in marketing. We have a lot of effort on -- mainly now social media, the CRM and all that category, which is not under the marketing budget. And definitely, we continue [indiscernible] action. But if you open any magazine of fashion, clearly, you will not see a slowdown in our presence in magazine in North America or in Europe or in Asia. Maybe less billboard, maybe less bus shelters. But clearly, our presence for 30 years has been and will always be heavily present in print magazine, besides the digital advertising and Internet.

Sandeep Reddy

Yes. And this is a follow-up on the question on whether we think we're making enough investments. Absolutely, we are. I think the intention of this year was to prune our cost structure to actually be able to fund investments. And we continue to do that, whether it's in the form of resourcing our supply chain organization or we actually talk about putting money into new, growing markets like Japan and Brazil, where we've already been investing during the course of this year and we will continue into next year.

John D. Kernan - Cowen and Company, LLC, Research Division

Okay, that's helpful. And then the Licensing business is obviously an amazing business for you guys, and I think at this point it's now making up the majority of your operating profit. So can you talk about how your licensing partners by specific categories feel about heading into next year? And how many more licensee stores -- I think you're up to 862 at this point. How many more of those stores do you think that you can -- the brand can support globally?

Paul Marciano

I think it's a mix of -- we have franchisees, we have joint venture stores. For example, if you take Portugal, Canary Islands, south of France, these are joint venture which are consolidated in our numbers. We consider that as directly operated. And then you have the franchisees like Southeast Asia and Europe. We continue to see an average a year between 100 to 150 stores opening a year -- on a regular year. And then you see also some closure, mainly south of Europe of credit issues, like in France and Italy again and again. That will offset that maybe by 50 doors a year. So net could be 100 stores, I'm talking franchisee and joint venture. And what was the rest of the question?

John D. Kernan - Cowen and Company, LLC, Research Division

I guess, how do your licensing partners feel heading into next year?

Paul Marciano

Yes. About -- for example, if you take handbags, handbags will be -- we look at improvement and going on positive in next year. Watches has been in a negative trend this year, but we see also a turnaround here on this month of November and improvement. They were negative but improvement. And then you have also the shoes. We just procured yesterday, in fact, all the summer and next fall shoes. We are extremely pleased and are ready to invest much more heavily for the next back-to-school delivery. We feel strong about that. Belt and jewelry is minor for us. I mean, the 3 big categories, these are handbags, watches and footwear, which represents, I would say, 80% of our license business. So in general, we see definitely an improvement throughout not only our stores but throughout also the wholesale business for the licensees.

Operator

And our next question is going to come from Jeff Black from Avondale Partners.

Jeff Black - Avondale Partners, LLC, Research Division

Could you maybe talk about what's going on with the new merchants in the apparel division in the U.S. and how you're managing that business going forward and sort of what are the opportunities into '14 on the apparel design production side?

Paul Marciano

Yes. That, if you heard the comment just before about November, this was really the first month where we could see the first impact of our head merchant, Hillary, where we saw some really big turn and also much more strong confidence in assortment and SKU plan. We saw positive comp coming. We have 25% less assortment in our stores in North America. But it's kind of dying, of course, so we left. But also, the focus and clarity of the selection of denim and buying conviction, which came with it, clearly was shown by the number of products we have been selling in certain specific categories. In one style, I think there was almost 10,000 units in one style sort of one week, which is an unusual number for one SKU for us because we are such a large lifestyle brand with many categories in accessories and apparel in men and women. We see every single week and every single month improvement week after week in North America in the -- the best way is to go and visit the stores, I think. That the best test is to go and get a sense, when you go in a store, what is your impression comparing to 6 months ago or comparing to a year ago? About the design, the design you see also, you're going to see a much more clear point of view as what Guess? brand is and working very closely with the head merchant, and of course, with myself. But also production, I think Mike will address that about the supply chain and global sourcing.

Michael Relich

Supply chain is a core initiative for us. Our goal is to build a world-class supply chain organization. And along those lines, we just hired a chief supply chain officer who's got extensive global experience and special experience in denim. So we think that we have a big opportunity to reduce costs, increase IMU and shorten lead times. I mean, right now, we have pretty much original sourcing structure. We think there's a big opportunity to aggregate demand -- especially when raw materials drive better pricing -- aggregate demand along key categories such as denim and also reduce our factory base. And then provide supply chain visibility with our biggest partners so they have visibility into our projections, et cetera. And that will help drive efficiency. So we're really excited about making inroads in this area.

Paul Marciano

And to add something to that, we think that we are again in a denim and [indiscernible] cycle and this is definitely our landscape. We know that landscape really well and -- but what we saw a little bit as a surprise for us was the fashion denim. Fashion denim has not been as strong as we thought. And we were a little bit over-assorted at the beginning of Q3. We corrected that. And clearly, again, you will see a reduction of fashion denim offering and much stronger presence of the $100 denim and under that where we have double-digit comp every single week over the last few weeks now.

Operator

And then we have a question from Dana Telsey from Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

When you talk about the opportunities that you have with cost reduction, IMU increases and shortened lead times, which one is there the most opportunity in? And as the gross -- as the operating margin has suffered over the past 2 years, where do you see it getting back to? I think the peak was around 17%. Where are we going back to and over what time frame?

Michael Relich

Okay. Well, we think there's opportunities obviously to reduce cost and shorten lead times. We just hired this new chief supply chain officer. He's only starting on Monday. So we're currently putting together a plan. And when that plan materializes, we'd be more than happy to share it with you. With respect to the operating margins, we don't provide guidance on operating margins going forward. Right now, we'll do that next year when we're -- and when we're ready, we'll be more than happy to share that with you.

Paul Marciano

Dana, this is Paul. Of course, the 17% that you talked was at the peak when also we were less operating on the direct stores operation. So if you look at that, that was when we had maybe 300 stores directly operated at the time. So I think a more realistic goal will be around 14% in the next maybe 2 years as a goal, 2.5 years, 3 years. More than 17% -- 17% would be a long shot.

Dana Lauren Telsey - Telsey Advisory Group LLC

Yes. And when you talk about increasing IMU and shortening the lead time, how much do you want to shorten the lead times on? And is there a category where you can get the biggest benefit? And on the increasing IMU, the same thing, which categories could you see it and how much?

Paul Marciano

Clearly, again, denim. We are -- in fact, yesterday, we had a large meeting about that. We're going to shorten lead time by many weeks, mainly also because the competition had been cutting the lead time. IMU, we are seeing some improvement again. But the lead time is more important for us right now to be lower and lighter in inventory and be able to move on a faster pace to have latest trend, emerging trend and have open door [ph] to be able to react to any last-minute trend. On the IMU, I think that clearly -- if we have a better supply chain on less vendors and more focus on assortment between fashion and basic -- fashion basics, I think the IMU should definitely improve.

Operator

[Operator Instructions] And then our next question is going to come from -- I apologize when I try to pronounce this, Mr. Chandak from B. Riley & Co.

Pankaj Chandak

This is Pankaj Chandak for Jeff Van Sinderen. So you're clearly seeing very strong reception for $79 entry price point denim. Now does that change your thinking about selling your $130 full priced denim? And maybe you could give us some color around the performance for premium denim in Q3 and in November.

Russell Bowers

Yes, so this doesn't change our perspective about selling the $138. There's still an appetite for that, for the higher-quality denim in our stores. So it's something that we still plan to offer. However, we are skewing some of that buy at the higher price points to the under $100 price points, as Paul mentioned, because we're able to turn that product a lot faster. So it has -- some of that business has moved towards the lower price point. But as I alluded to earlier, the overall denim sales are still up quite a bit as a result of that.

Pankaj Chandak

Okay. So I think when Paul mentioned the fashion denim, was that the full priced denim?

Paul Marciano

Yes. And it's not only the $79 denim. You have the $89 and $98. So it's all the jeans under $100. A lot of them -- a lot of the sales are $89 and $98. The entry point is $79. But what we had a year ago was a very, very large selection of jeans between $128 and $168. We reduced that offering and extended our offering at the $100 and below. And clearly, that was the right decision and the right strategy and the customer definitely reacted very strongly to that.

Pankaj Chandak

Got it. And if I could do a quick follow-up. How would you compare your Black Friday promotional levers this year versus last year? Anecdotally, right, we noticed a 40% sale on the entire store.

Russell Bowers

Yes. Last year, it was 30% off of regular price and it was 40% off of markdowns. But because we skewed more of that business towards reg priced stuff, we didn't lose any margin on Black Friday itself compared to a year ago. So we were very happy with the result. So it was something we had tested earlier in Q3, so it gave us a lot of confidence.

Operator

And our next question is going to come from David Glick from Buckingham Research.

David J. Glick - The Buckingham Research Group Incorporated

Most of my questions have been asked. I just had a question, however, about the trends in November in North America. If I'm not mistaken, you're reporting on a 4-5-4 basis so you're a week ahead of last year. It sounds like you made some progress over Thanksgiving. I assume that was on an apples-to-apples basis. But I just -- as I understand the 4-5-4 calendar, the November trend should be significantly above December, given the 6 fewer selling days in fiscal December. So I just want to understand how you're looking at that November result and how you'll be thinking about the plan relative to December, given the sort of calendar anomalies this year.

Russell Bowers

Yes. So in our guidance, we're guiding it down low-single digits. So we do expect some softness during the first half of December. And that's really a trend we've seen over the last 3, 4 years and we do expect that to continue and for a lot of the customers to show up at the last minute before Christmas and even that last week of December. So that dynamic is embedded in our guidance.

David J. Glick - The Buckingham Research Group Incorporated

Okay. And so you did benefit in week 1 from the, I guess, the Hurricane Sandy, compare in November?

Russell Bowers

Yes, we did.

Operator

We have no further questions at this time. I will now turn the call back over to Paul Marciano.

Paul Marciano

Thank you. Thank you for all being part of our conference for the Q3. Of course, we are all focusing now, praying that the weather will be helping us also, that we don't have another surprise for Q4. But we feel very good, we feel very strong and that even for spring, the spring coming up, we feel that the cycle will be in our side now on the denim and we're excited about that. We're excited about what we have seen coming up already. And we will talk to you on closing year, which will be in March, I believe March 14. Have a great holiday, have a great New Year and Merry Christmas also. Thank you.

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