Guess? F1Q08 (Qtr End 5/05/07) Earnings Call Transcript

Jun. 5.07 | About: Guess? Inc. (GES)
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Guess?, Inc. (NYSE:GES)

F1Q08 Earnings Call

June 5, 2007 4:30 PM ET

Executives:

Paul Marciano - Co-Chairman, CEO

Dennis Secor - SVP, CFO

Carlos Alberini - President, COO

Maurice Marciano - Chairman

Analysts:

Jeff Klinefelter - Piper Jaffray & Co.

Gabrielle Kivitz - Deutsche Bank

Eric Beder - Brean Murray & Co., Inc.

John Rouleau - Wachovia Securities

Holly Guthrie - Janney Montgomery Scott

Christine Chen - Needham & Company

Dorothy Lakner - CIBC World Markets

Brad Stephens - Morgan Keegan

Erin Moloney - Merriman Curhan Ford & Co.

Melissa Otto - WR Hambrecht & Co.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

Presentation:

Operator:

Good day and welcome to Guess? first quarter fiscal 2008 conference call. Before we get started, I would like to remind you of the company's safe harbor language, which I am sure you all are familiar with.

The statements contained in this conference call which are not historical facts, including statements regarding future plans and guidance for current and future periods, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those suggested in such statements due to a number of risks and uncertainties as described in the company's most recent annual report on Form 10-K, and other filings with the SEC.

Now, for opening remarks and introductions, I would now 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 first quarter of fiscal year 2008. With me today are my brother Maurice Marciano, Carlos Alberini and Dennis Secor.

In the last seven years, we have completely changed our business format from a US wholesale and an international licensing business to a retail direct operation in North America, Europe, and Asia and some of the strongest accessory line licensing in the world today. All this is consistent with our strategy to keep control of our brand and its destiny.

Once again, we continue our trend of an outstanding performance and record results in the first quarter. We reported record revenue and record earnings for the quarter. Earnings per share was $0.38 versus $0.23 last year, an increase of 65%. Overall, operating profit increased 69% to $58 million. Net earnings reached $35.5 million or 72% increase over the last year earnings. This outstanding performance was driven by global sales growth of 42% in the quarter to $378 million, a record for any comparable period in our company history. This is our 15th consecutive quarter with double-digit increase in our net earnings.

All our Guess? business divisions around the world performed very strongly, improving top and bottom line performance. I am pleased to report that our earnings from operation, once again, resulted in a great balance, geographically diversified brand portfolio earnings stream for the quarter.

The earnings were divided for the quarter as follows, 40% North America retail and wholesale, and 60% for Europe and Licensing. For the last 12 months ending May 5, 2007, earning were divided as 48% North America retail and wholesale, and 52% for Europe and Licensing. Our first quarter results not only clearly reflects the vitality of the Guess? brand across all regions and category, but also reflect the execution of our global strategy with discipline and consistency.

Let's start with our retail business in North America. Our products performed very well and we achieved comp sales growth of 13.6% on a top of 12.6% last year for comparable period. That was our 17th consecutive quarter of positive comp. Total retail revenue increased 19% in the period.

During the quarter all our product categories outperformed our goals with the highest percentage increase recorded by our men’s and accessory line. The growth of our men's business was driven by strong performance in knit and woolen tops while the watches, handbags, and shoes were the best performers among our license products. Our women's business also performed well, both in young contemporary line and Marciano.

Our business in Europe continues to perform well and now with the Guess by Marciano business in-house, we grew revenue by 77% comparing to a year ago, the highest revenue growth for any other businesses. Our casual apparel business in Europe were strong with excellent performance across key categories such as denim, outerwear and knitwear. We also continue to enjoy great customer demand to our Guess? handbags and footwear like (inaudible) and these drew significant revenue growth for the quarter.

Related to that, Guess? had another exceptional quarter in our licensing business division. Sell through and penetration in our retail stores in North America continue to increase year-after-year. In addition, the excellent acceptance of this line all over Europe, which I will address later contributed to very healthy revenue increase of 42% for the quarter in licensing royalties. Our total wholesale division revenue, which includes North America and Asia, increased by 77.4% in a quarter. North American wholesale business was strong in the first quarter and Asian business exceeded our plan.

In the first quarter, we achieved several important milestones in our strategy to invest in our cost structure and grow our business on a global scale. In retail, we launched our newest retail concept G by Guess in April and we now have 17 G by Guess stores opened in US. We have received very positive feedback on a new product assortment, the store design and the shopping environment. One plan to open over 30 stores by the end of the fiscal year.

In total, we expect to open 40 new stores in North America by the end of the year across all different retail concepts. We're pleased with the execution of international expansion strategy as well. Outside North America, since January 1, 2007, our partners opened 79 new stores outside US, including Europe, and 48 in Asia including 12 shops in large department stores. We are well on track to open 108 new stores we projected at the beginning of the year.

In Asia, we continue to build a Guess? presence through retail and develop a foundation for significant sales growth in the future. I was in South Korea in March to launch our direct business in this exciting market. We ended the quarter with 42 shops in large department stores and 26 free-standing stores for a total of 68 locations compared to 47 last year. We feel we have a potential to grow this business to $120 million over the next five years.

In late April, we officially introduced the Guess? brand to China with the opening of our first flagship store in Shanghai. We ended the quarter with 10 retail locations opened in China and we're extremely excited about the potential of that market. We expect to open a total of 14 stores accessories and 14 apparel stores including key locations in Beijing, Macau, Hong Kong for a total of 28 stores by the end of fiscal 2008. In respect to India, we also experienced a major penetration. We ended 2006 with 14 retail stores. We opened four stores, new one on this quarter for a total of 18 stores. We plan to open another seven by the end of the year. About Japan. We are still planning to introduce Guess? product line by April 2008 and we will keep you posted on that.

Now, I will provide you a brief update of the three main global initiatives outlined on the last conference call. The first initiative was footwear. As I mentioned, we see (inaudible) potential as $300 to $400 million business long-term and it remains one of the top priority to expand that business across the globe. In fact, Guess? footwear revenues more than doubled this quarter against last year exceeding our highest target both in US and Europe.

Our licensee Marc Fisher and his team are one of the best in the industry today. We took a first step in March to open the first Guess? footwear store in Paris. We're planning to open another five in Europe this year with our partners. And in South Asia -- Southeast Asia we are set to open nine footwear stores by the end of 2007.

In North America, we will open five to eight footwear stores in the next 12 months. And we still expect to introduce an upscale line of Marciano footwear in the first quarter in US, Canada, and Europe.

Our second initiative is our Gc watches, the Guess? collection watches. We have made our main focus on the watch category for 2007. So far, in the first quarter we have experienced strong demand for our new line of Gc watches, especially in the men watch line. We plan to double that business in 2007 in this watch category. The quality, design and Swiss-made product is putting our brand on a different scale of where we started with watches 23 years ago.

In Basel, Switzerland, the largest watch event in the world, we're introducing in April the limited edition of Gc Automatic watch for the first time ever at a price of over 1000 euro a piece. The entire production was sold out to international distributors within a day. Through May, the Gc watches business is already running 70% ahead of last year.

Handbags, as a third initiative. While we're on the subject of accessories, I would like to highlight the success of the Guess? handbag category. This is our fifth consecutive year of double-digit growth of handbags. The category continued to perform extremely well in the first quarter, we have a 91% increase in 2007 versus 2006. Again, international accounted to a very large portion of this increase in sales.

As I've said many times, we believe that the world is our field in realizing that dream for global brand one day at a time. We still believe to be, more than ever, that Guess? is one of the very few very brand in the world, which has such a unique and diversified business model as a complete lifestyle brand.

In conclusion also, our results once again comes directly from the talent, passion, and hard work of our dedicated teamwork worldwide and mostly I want to thank them once again. And I would pass this now to Denis. Thank you.

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Dennis Secor

Thank you Paul and good afternoon. As Paul mentioned we enjoyed another record-setting period in the first quarter. So, let me share some of the outstanding financial highlights with you in more detail.

Total net revenues for the company increased 42.3% to $378 million in the first quarter and once again all of our segments contributed to this growth. With the addition of Focus Europe and very strong performance of the Guess? brand, our European segment contributed almost half of the company's revenue growth in the period.

Our North American retail business contributed more than a quarter of the growth fueled by our strong comp sales growth of 13.6% in the quarter, which followed 12.6% comp growth for the 13-week period ended April 29, 2006. Gross margin for the company was 44.3%, which represents a 270 basis point improvement over the prior year's quarter.

The relative growth of the company's European business, which carries higher margin coupled with better markdown controls and occupancy leverage in North America drove this gross margin expansion. In the first quarter, our total SG&A expenses were $109.6 million compared to $76.3 million in the prior year's quarter. About one-third of the increase relates to Focus Europe and our South Korea business, where we now manage full P&Ls for those businesses.

We achieved improved leverage over SG&A investments in our wholesale, European and licensing segments. We made additional expense investments in global advertising and in infrastructure to support our growing international businesses including Europe, China, and Mexico and in North America to support our new G by GUESS? concept. We also made additional investments in our corporate infrastructure to support the growth of our businesses and in performance-based compensation, which includes the impact of the new accounting rules regarding stock compensation. As a result, the company's SG&A rate increased 30 basis points quarter-over-quarter.

For the quarter, we increased operating profit by 69% to $57.9 million and expanded operating margin 240 basis points to 15.3%. There was a total favorable foreign currency impact of about $4.4 million on this quarter's operating profit compared to last year's quarter. The relative strength of the euro drove the improvement resulting in lower inventory costs and a more favorable translation of the European income statement into US dollars. Also related to currency, other expense include the charge of $1.7 million associated with the periodic mark-to-market evaluation of foreign currency contracts. These contracts were put in place to hedge against potential currency fluctuations regarding inventory purchases. Net interest income was $800,000 for the quarter compared to net interest expense of $200,000 in the prior year's quarter. This improvement was a result of the repayment of our North American debt plus higher levels of invested cash for the period. Our tax rate for the quarter was 38.7% compared with 39.8% for the prior year's quarter.

The lower quarterly tax rate is primarily due to the reduced impact of permanent differences on the tax rates given the higher taxable income in the current quarter. We are now planning fiscal 2008 with this 38.7% rate, which is 70 basis point higher than our previous expectations and resulted from our reassessment of permanent differences and earnings mix in the current fiscal year. For the first quarter, net income increased 71.9% to $35.5 million from $20.7 million and diluted earnings per share increased 65% to $0.38 from $0.23 a year ago.

Next I would like to review our revenues and earnings by business segments. Our North American retail revenues increased 19% to $179.5 million in the quarter. This growth was driven by the 13.6% comp sales increase and a 4% average square footage growth. During the quarter, we opened eight new stores and closed six under performing stores in North America.

We managed inventory sufficiently and customers responded well to our very strong product assortment. We also controlled markdowns and gave leverage over store occupancy resulting in improved gross margins. We launched our new retail concept G by Guess, and made investments in infrastructure and advertising to support this important new concept. First quarter traffic also improved in the period despite the challenging weather conditions in early April. Retail operating profit increased to $19.9 million, a 45.3% increase over last year's first quarter. Operating margin improved 200 basis points to 11.1%, primarily driven by improved product margins and occupancy leverage, partially offset by the investments we made in advertising and in G by GUESS including the pre-opening costs associated with the conversion of the existing stores to G by GUESS.

We ended the first quarter with a total of 336 stores in North America, which compares to 316 stores a year ago. First quarter European revenues increased by 77.2% to $118.9 million from $67.1 million a year ago. The addition of Focus Europe, our Guess by Marciano licensee acquired at the end of last year complemented the strong performance in both our accessories and our European apparel businesses.

In addition, our company-owned retail business in Europe continued to show strong performance both in terms of sales growth and profitability improvement. Operating profit for the European segment grew 63.6% to $27.7 million. Operating margin was 23.3%, down 190 basis points compared to the prior year's quarter. We had anticipated this change given the acquisition of Focus, which historically has yielded lower operating margins compared to our existing European businesses.

Our wholesale segment, which includes our Asian business, posted strong revenue growth and again expanded operating margins significantly. In total, revenues for the wholesale segment increased 77.4% to $59.2 million. We were in 953 doors in the US at the end of the quarter, compared to 911 at the end of the prior year's quarter.

With the addition of South Korea plus better markdown controls in North America and improved leveraging of expenses, we almost quadrupled operating profit to $10.7 million this year, up from $3.1 million in the prior year's quarter. Operating margin reached 18.1% for the quarter, almost doubling last year's 9.2%.

As Paul mentioned before, our licensing business continues to exceed our expectations with royalty growth of 41.5% in the quarter to $20.3 million, which includes the additional recognition of certain fixed cash rights payments. Remember too that compared to last year, we no longer receive licensing revenues from Focus Europe or for our South Korean operations as we now manage those businesses directly and they are not part of our licensing business units.

Now some highlights from our balance sheet. Once again, we ended the quarter with a very strong balance sheet. Cash and cash equivalents increased by $33.9 million to $189.4 million compared to a year ago. Accounts receivable increased by $80.4 million to $206.4 million compared to the prior year. The increase in our receivable investments were proportionate to the significant growth in sales of our European businesses, which now includes Focus Europe, a new business.

Inventory at the end of the first quarter was $164.5 million compared to a $108.2 million at the end of last year's first quarter, an increase of $56.3 million. This again includes the additional inventory required to support Focus Europe and South Korea as new businesses. We believe we are well positioned for the current selling season.

In the quarter, we once again delivered strong earnings and cash flows, and managed our working capital efficiently. The power of our business models to generate cash, along with effective working capital management has allowed us to fund all capital requirements and our dividend program internally. This cash flow generation power coupled with the strong capital structure, position us well for the future.

Before I hand the call over to Carlos, I want to reiterate that creating shareholder value continues to be one of the most important objectives for our company. As we announced in the earnings release, our Board of Directors has approved a quarterly dividend of $0.06 per share, which will be paid to shareholders on July 6.

And now, I will turn the call over to Carlos.

Carlos Alberini

Thank you, Dennis. Let me now provide you with an overview of our guidance for the second quarter and the current fiscal year. Starting with North America and retail, we are very pleased with the performance of this business during the first quarter. We feel strongly about our product assortment and market position, and we're confident in our plans for the upcoming months.

We will continue to grow our business in a controlled manner. We don't want to be overconfident and we will continue to focus on expense and inventory levels with a goal of optimizing margin performance in every period. Our sales trends have remained strong in May. Accordingly, for the second quarter, we are raising our comp sales growth expectations to the mid-to-high single digit range and now expect total retail sales to grow between 9 and 11% in the period.

We plan to continue to invest in advertising to support our retail business and in our infrastructure as we continue to roll out our new G by Guess concept. For the second half of the year, consistent with previous guidance we are planning retail comps in the low to mid single-digits. For the full year, we now expect overall retail revenue growth between 9 and 11% and an operating margin of about 15%.

In the wholesale segment, we anticipate overall revenue to increase about 40% during the second quarter. This growth will come primarily from our Asian businesses especially from our South Korean operations, which will be fully incremental this year.

North American wholesale should also be up slightly for the quarter. For the full fiscal year 2008, based on the strength of our wholesale business, we are raising our wholesale revenue growth expectations to a rate of between 35 and 40%. We expect operating margin in the wholesale segment to be about 16% this year.

In Europe, we are planning revenue growth for the second quarter of between 90 and 100%, which includes Focus Europe. This very high rate of growth assumes the early shipment of accessories products in the period which traditionally would have been shipped in the third quarter. For the full fiscal year 2008 we are increasing our revenue growth expectations to a range of 50 to 55% and continue to expect an operating margin for this business in excess of 20%.

As Paul shared with you earlier on the call, our licensing segment continues to deliver outstanding results that have exceeded our expectations. We experienced significant organic growth across our major product categories particularly in our handbags and footwear line. For the second quarter, we are planning this business with revenue growth between 10 and 12%.

For the full year, given the strong performance in the first quarter, we now expect licensing revenues to grow in the low-teens versus our previous expectations for our low-single-digit increase. Again, this increase is net of the impact of the Focus acquisition and our South Korean business and it includes the additional recognition of certain fixed cash right payment.

We continue to expect capital expenditures for the full year to be above $85 million net of allowances and now we expect depreciation and amortization to be about $46 million. Taking all of these factors into consideration, we are now raising our expectations for consolidated results for the second quarter of fiscal 2008. We are increasing our expectations for revenue to a range of 335 million to 345 million, operating margin of about 14%, and diluted earnings per share in the range of $0.31 to $0.33 per share.

Today we announced that for the five-week transition period ended February 3, 2007, our revenues totaled $136 million. Net earnings were $8 million and diluted earnings per share were $0.09, better than our previous guidance of $0.06 to $0.07 for the January 2007 period and a significant improvement over January 2006 when we just broke even for the period. These results are relevant to assess this year's fourth quarter expected performance.

Taking these results and our first quarter performance into consideration for the full-year 2008, we are now raising our expectations for consolidated revenue to a range of $1.51 billion and $1.56 billion. Operating margins will be about 17.5% and diluted earnings per share in the range of $1.75 to $1.80 per share.

Thank you very much. And with that I think we are ready to open the lines for your questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time if you wish to ask a question, please key star followed by one on your touchtone telephone. If your question has been answered, or if you wish to withdraw your question, please key star followed by two. Again ladies and gentlemen, press star one to begin. Your first question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed.

Jeff Klinefelter - Piper Jaffray & Co.

Yes, congratulations everyone on another fantastic quarter.

Paul Marciano

Thank you.

Carlos Alberini

Thank you, Jeff.

Jeff Klinefelter - Piper Jaffray & Co.

Great to see. Just a couple of questions. One would be on the Marciano Europe or Focus acquisition, I know you have been talking consistently about, at least in the first year, it being slightly dilutive to op margins and as we see that showing up in the 23.3. I am just curious if you could provide some guidance as to what you think the sort of dilutive impact will be for the year in total and, kind of, is there any seasonality to consider here by quarter? And put another way, you know, without Focus, what was the European wholesale op margin in Q1?

Carlos Alberini

Yes, I think that Jeff -- this is Carlos, you are absolutely right. We did anticipate this dilution. We are tracking pretty much on plan, we're very pleased with the business. And I think that if Focus hadn't been part of the mix, you would have seen a margin that was pretty much consistent with what we had experienced in the past. And with respect to the seasonality, I think you are going to see the same type of dilution for the rest of the year and for the full year as a whole.

Jeff Klinefelter - Piper Jaffray & Co.

Okay. Thank you, very helpful. And then second question will be on the China stores. I know you are just getting into opening these and you have just recently opened the India stores, but I wonder if you could give some perspective on kind of the store model, as you open these stores, how it compares to your own -- your limited number of owned stores in Europe, and maybe even the US, I mean what are the economics behind it, and what's the profitability or, sort of, a maturity that you are anticipating for these new stores in these new markets?

Paul Marciano

Yes Jeff, its Paul. We just opened like only four weeks ago. And we are right now, in fact I am going back in six weeks there. We are right now on the middle of opening all these doors. And we will not be able to give you a clear reading until at least the third quarter conference call, like in October, most likely, something like that. Right now we have absolutely no specific information to give you.

Jeff Klinefelter - Piper Jaffray & Co.

Now, I guess more specifically, I didn't ask that right, in terms of the real estate costs, as it relates to some of the other markets, in Europe for example, you know that some of the real estate can be very expensive in city centers, what has been your experience so far as you have been looking at opening up your owned stores here in China?

Paul Marciano

Most of them, I mean, for example, would be more similar to the same format of US, which is (inaudible). And so, there is no CapEx, an issuance CapEx. And except just building those store and that's identical to here except that the cost of construction is way less than what it is in America. And that's of course do not bear fruits right now, we don't have that much reading because it's only five weeks.

Jeff Klinefelter - Piper Jaffray & Co.

Right. Exactly, thank you, that's very helpful. The last question --.

Paul Marciano

It's very less capital intensive, that's what we experienced in France, in Italy, in England, that's for sure.

Carlos Alberini

And Jeff, just remember that we are looking at this whole region as a business unit. So, the couple of stores that will be opened that are freestanding stores are just flagship locations to really represent the brand properly. But a lot of the doors that we are going to have are in major department stores.

Jeff Klinefelter - Piper Jaffray & Co.

Okay. So you are counting those doors in the major department stores?

Paul Marciano

Of course.

Carlos Alberini

Yes, because that is the format that works mainly in Korea, Japan, and China. As you know, it's like the concentration of the brand is inside the department stores.

Paul Marciano

That's concession.

Carlos Alberini

Yes, they are concession. We don't call that shopping shop, they are concessions.

Jeff Klinefelter - Piper Jaffray & Co.

Thank you, that's helpful. My last question is on licensing. Clearly very, very strong performance in the first quarter, stronger than anticipated at least your original plan, where -- can you break down a little bit more on where that upside is at, is it primarily -- is it coming equally out of handbags and footwears or coming out of a particular region or market?

Paul Marciano

I will tell you that the three big categories will come out again, will be a demand of handbags with enormous. So, a push in watch business, which we went on a different price range and different quality and different territory for us. Watches have been showing enormous increase and don't forget that business is already 23 years old. And now, the new star is the footwear, footwear is leaps and bound, we now partner with Marc Fisher and -- which the quality and product and design and fit is outstanding and the customer is responding to it, that's what it is. So, these three categories are driving the entire growth of licensing business right now. And it is not in US, it is everywhere.

Jeff Klinefelter - Piper Jaffray & Co.

Okay. If you were to have upside in the next few quarters, I mean, granted you should approach it conservatively in terms of guidance, but if you were to have upside in Q2 through Q4, what would likely -- would it continue to be the same kind of key three categories that are just selling through faster than you are currently planning or anticipating at retail?

Paul Marciano

Well, double digit will be anticipated. But if you tell me, it is between 10 and 20 or 30, I cannot tell you that, because we have to look also about all the categories we might get weaker or also to control well that the product of these accessories in demand are not diluted, we are very tight on making sure that the product goes in the right door. So a 10 to 12 to 13%, we feel comfortable with that.

Jeff Klinefelter - Piper Jaffray & Co.

Okay. Thank you very much again, and good luck.

Paul Marciano

Thank you, Jeff.

Operator

Your next question comes from the line of Gabrielle Kivitz with Deutsche Bank, please proceed.

Gabrielle Kivitz - Deutsche Bank

Good afternoon and congratulations on a very strong quarter. So, two questions here. First question is on the Asia business. It is obviously very exciting to see you going after this opportunity, especially based on the success that you've had going after the Europe opportunity. I was hoping you could talk about some of the relative opportunities and challenges in Asia in total compared to the Europe and US businesses. Just specifically, any dynamics that affect the margin structure and growth opportunities for the Asia business versus Europe and the US. Margin structure of your Europe business is obviously very different from your US business. And I just wanted to better understand where Asia is expected to ultimately fall relative to the US and Europe, and then I have a second follow-up question.

Dennis Secor

Gabrielle, just on the numbers, in the past we have said that we did not expect the Asian opportunity to deliver the kind of operating margins that we are experiencing in Europe. Actually, we talked about an operating margin overtime in the mid-teens. So, that's kind of our expectation. Like Paul said, we do not know much about this other than what we are learning through our -- beginning with South Korea and so forth. So, it is early to confirm whether that operating margin is realistic, but that is where we have our eyes in the future.

Paul Marciano

And if we can add something on that Gabrielle. Again, Asia is a very large focus for us especially in 2007 and 2008 coming up but it presents incredible opportunity mainly about -- as the Korean market, which we have been present for 18 years as a licensee. So, it's not a market that we don't know, we do know that market, but now operating directly it's a different approach, that's one. Two is, we have Japan that we have the licensee as well for like 22 years, two different licensee, and part of the strategy as we did in Canada and Mexico and Korea and Europe, we took back that licensee and decided to go directly. Japan will be a very big drive for the next three to five years if we took it well, so potential can be enormous also as well. Japan could be maybe the fourth or fifth most important market for us around the world. And finally, don't forget we are well-established in South-East Asia, meaning Singapore, Malaysia, Indonesia, Taiwan and Thailand, and there we have been there for 17 years also. We have more than 60 doors I think today, maybe 65 doors, 65 stores, free standing stores, and but it's not as profitable as it is in Europe, because don't forget in Europe we are operating directly. So that is a balance of earning between direct and distributors.

Gabrielle Kivitz - Deutsche Bank

Okay. Thank you. And so Carlos, a mid-teens operating margin, that obviously is lower than Europe, but that is higher than your domestic wholesale business, correct? The margin structure can be higher than your domestic wholesale business.

Carlos Alberini

Actually, what we are seeing with our domestic wholesale business is a stronger number. So, it's right in the same kind of territory. Of mid-teens, we will be very happy if we can really find so much growth with that kind of operating metrics, very, very happy.

Gabrielle Kivitz - Deutsche Bank

Great. And then the second question is on the Europe business. Since the acquisition of the European license, have you had an opportunity to assess the business? Do you have an idea of how much incremental margin opportunity there would be now that you're running that business directly? How long do you think I guess or how long and can you get back to that 25% operating margin, how long would it take? And do you think there is incremental opportunity? I heard what you said, without Focus acquisition you would have been flat but are there opportunities to improve the margin at the Focus business, and could you theoretically surpass the 25% operating margin overtime?

Carlos Alberini

That's pretty ambitious goal, Gabrielle. We have said in the past that we definitely saw opportunities once we are running this direct toward margin expansion in that business. But we are not counting on a pretty significant expansion in a very short period of time. We started with the integration of the business. We are very happy. We just integrated the systems side and the logistics side. We are very pleased with the rate of growth of that business, which had a very good first quarter. But all that being said, in order to get to the big drivers of operating margin expansion including sourcing and so forth, it's going to take a while.

Gabrielle Kivitz - Deutsche Bank

And could we expect to see margin increases in the Europe business when you anniversary the acquisition?

Carlos Alberini

For that particular business, yes, we should.

Gabrielle Kivitz - Deutsche Bank

Okay, great. Thanks very much.

Paul Marciano

Thank you, Gabrielle.

Operator

Your next question comes from the line of Eric Beder with Brean Murray & Co., Inc, please proceed.

Eric Beder - Brean Murray & Co., Inc.

Good afternoon.

Paul Marciano

Hi, Eric.

Eric Beder - Brean Murray & Co., Inc.

Great quarter. Can you talk a little bit of how Marciano did this quarter, Nicole contemporary space, I know some of your competitors had so much challenge there?

Paul Marciano

Yes, we're very pleased with the results of Marciano, Eric. We had a very good quarter, as you know, just about a year ago we had the changes in direction and leadership and we are anniversarying that. The team has done an outstanding job and we have been able to even increase AUR in that business. Business has run very cleanly and we feel that there is tremendous opportunity in the future precisely because we see that we are very well differentiated relative to the competition.

Eric Beder - Brean Murray & Co., Inc.

Great. In terms of denim at the Guess? stores, we've seen more premium denim and really kind of coming out quicker and quicker like almost every month, a new buying of premium denim. Can you kind of talk about that? How has been the response into dyed denim for you guys in terms of this quarter?

Paul Marciano

Our denim business was good, but it was primarily driven by basic products. So, premium denim was a little more challenging for us, but this is the way we planned it too. We did have a significant increase planned on the basic category, it's because we felt that we had missed that opportunity about a year ago at this time. And the customer has responded very well. In fact we were able to raise opening price points from 79 to 89 very successfully. We are pleased with the denim business. It's definitely something that is -- we're going to continue to watch it and we have put a nice inventory investment in this category because we continue to see an opportunity to grow.

Maurice Marciano

The denim business in this quarter, this is Maurice. The denim business in this quarter is still have been at double-digits. So, we are very pleased with it.

Paul Marciano

Men and Women

Maurice Marciano

And the big contributor for us in both, you were talking about Marciano, in both Marciano and in Guess? has been the dress business. It has been a very strong category for us, has more than doubled compared to last year.

Eric Beder - Brean Murray & Co., Inc.

And finally, the G by GUESS? stores, you did 17 this quarter, you mentioned that now you are doing more than 30. When do these all open and what's the kind of initial reaction been to these stores?

Paul Marciano

We opened the first one, I think, April 8, so it's like barely six weeks. And I think that again by the third quarter, we will have a chance to give you a better reading about how the reaction of the customer is. We know that the demographic -- already we see the customers who have been coming in is between 16 and 28. But we have repeat customer base, we have a -- there is a portion of the stores of G by Guess, not new stores that have been converted. So, it's not like 17 new doors. And I think that we will give you more intelligent answers at the end of the third quarter when we have a grasp of full six months of business.

Maurice Marciano

With respect to when the stores open, Eric, many of the stores open in the third quarter, some in the second quarter, as we see we are opening and then there is about, maybe a handful in the fourth quarter.

Eric Beder - Brean Murray & Co., Inc.

How many did you end Q1 with?

Maurice Marciano

17. But most of them, like Paul said, most of them were conversions.

Eric Beder - Brean Murray & Co., Inc.

Okay. Guys, a great quarter and congratulations.

Paul Marciano

Thank you Eric.

Operator

Your next question comes from the line of John Rouleau with Wachovia Securities. Please proceed.

John Rouleau - Wachovia Securities

Hi, guys. Great quarter. The business is so diverse now, I have a hard time focusing my questions.

Paul Marciano

We do too.

John Rouleau - Wachovia Securities

I know. I don't know where to start. So, nice job obviously. Men's, it's been strong for a while now and you guys are kind of unique from a product perspective in the mall these days. I guess I asked you to talk a little bit more about men's. Do you have the amount of square footage that you need to really drive that business in the stores? What's really driving men's? How are the margins behind men's? Let's just talk more about men's.

Carlos Alberini

We're super excited about men's. With respect to the States, men's occupies about 20% of the floor and we are very pleased with the contribution. The margins have been very healthy in the business and we have seen now for more than five years, a constant growth in men's which has been great. We always look at allocating more space if we see that that category deserves a bigger space within the stores. And I think that has been a good formula for us. We have done it with accessories, we have done it with every category that outperforms its base. Maybe the number is a little more than 20% right now. We have seen growth in every category, not only denim that Maurice just mentioned, but also woven tops has had a tremendous quarter, knit tops and as you know it is difficult to see these two categories to register significant growth concurrently, but they have this bad season. Shorts had a tremendous quarter as well. And I think that it has a lot to do with us being very, very unique in the market.

John Rouleau - Wachovia Securities

Yes, I would agree. So, I know you touched on Marciano, you said that that business has improved. Is this kind of safe to assume that that business is now comping positively and kind of contributing or closer in line to what the stores are doing?

Carlos Alberini

Marciano had a very good quarter and you have to keep in mind here that we have taken the Marciano product out of many of the Guess? stores. So, the comparison is somewhat difficult to do on an apples-for-apples, but it is true to assume that Marciano comped at double digit in the first quarter as well.

John Rouleau - Wachovia Securities

Okay. Regarding the shoes, hoping that you could just -- I think you're testing a few independent shoe stores, if you will, a couple in Europe and maybe one or two in North America. Is that -- are you operating those stores in that, is that store on your balance sheet and what are the kind of economics given that that's a license category for you?

Paul Marciano

Okay. If I can answer you that?

John Rouleau - Wachovia Securities

Thank you Paul.

Paul Marciano

The stores opened today are done by a third-party outside US. The one we will operate directly will be done on a joint venture with (inaudible) and his team who have been basically for me the best in the country for many years. We've nine west retail operation as far as retail. And they were given by this team. So, we don't have open one yet in US, but five to eight stores is a conservative number of retail footwear store that will open within 12 months. Outside US, we do not intend to open for now in Europe any store directly. In Asia, we can tell you also that we're going to do a joint venture with a partner in China to open retail footwear store in China throughout the country, but again it would be a partnership. And for example, the one that I mentioned nine of them opening in Southeast Asia would be done by our existing partner for 17 years in Singapore, will open all these footwear stores which I will visit also in six weeks.

John Rouleau - Wachovia Securities

So, in the markets where you are doing a joint venture in US and Asia, on a sale of a pair of shoes there, how does the revenue recognition work? I mean, do you collect the licensing of royalty and then some percentage of the profitability on the JV?

Paul Marciano

It will be a straight partnership. So, we will consolidate. We will be the majority shareholders.

Maurice Marciano

Similar to what we're doing in Mexico where we have majority ownership and therefore --

Paul Marciano

So, it will be on the top line and bottom line.

Maurice Marciano

And then you have a minority interest coming up.

John Rouleau - Wachovia Securities

Got it. Good. Switching topics a little bit, on the topic of expenses or expense leverage, I know this year there was some talk about starting to leverage expenses a little bit more than maybe in the past because of the upfront investments are starting to subside a little bit. Without going into too much detail, is that still pretty much the plan for the remainder of the year, the back half of this year or has that changed a little bit given some of the additional investments with the footwear and maybe G by Guess and some other areas?

Carlos Alberini

That's a good point John. We did not expect, coming into this year to see significant leverage on SG&A because of all the new growth initiatives that we have in place. When you consider the new Focus acquisition, the additional expense to open and run South Korea, the additional expense to expand our infrastructure in Europe, G by Guess is a new initiative. Mexico continues to be a new initiative as well. There are significant areas of investing here and we did not expect that this year we will have significant leverage and that's still the way we're looking at this year.

John Rouleau - Wachovia Securities

Okay. So, the operating margin gain comes primarily from a gross margin increase rather than expense leverage?

Carlos Alberini

On the mix. Europe has been growing at a faster rate bearing a higher margin, of course, it is impacting our operating margin profitability as well.

John Rouleau - Wachovia Securities

And then one last one. Regarding the -- I know this year you're starting to collect some, I guess, upfront licensing income for a lack of a better way of describing that resulted from the renegotiation of some of your licenses last year. I think the watches is the biggest component. My question is, does that basically flow into the quarters evenly throughout the year or was there more of it kind of in the first quarter or how should we look at that?

Dennis Secor

No. It's been throughout the year.

John Rouleau - Wachovia Securities

And it's more on year one than it is kind of years two and three or is it -- ?

Dennis Secor

No, no the issue is that we stepped up only on one because the watch licenses became, the new terms came into effect this year. You have that step up over last year in terms of the recognition of that revenue. But that said, it's just that you're not going to see an incremental over that.

John Rouleau - Wachovia Securities

Okay, but it's constant throughout the four quarters. So, we didn't see something special in the first quarter?

Dennis Secor

No.

John Rouleau - Wachovia Securities

Okay. Great, thanks guys, keep it up.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Holly Guthrie with Janney Montgomery Scott. Please proceed.

Holly Guthrie - Janney Montgomery Scott

Thank you. And let me add my congratulations.

Carlos Alberini

Thank you Holly. How are you?

Holly Guthrie - Janney Montgomery Scott

I'm well, thank you. Just a question on the mix in Europe. I guess going back a couple of years, it being I think mostly of leather goods and then you guys layering in your jeans business and now the Focus acquisition. Could you talk about the mix currently between all those businesses in both retail and wholesale and where you think the mix will evolve and eventually get to in Europe?

Paul Marciano

Well, I think it's pretty much similar to what we experienced in US. I think it's pretty well balanced. You have a very strong surge in accessories, essentials we have in US. The watches are experiencing even a much bigger expansion in Europe than it is in US. The denim is comparable growth even also bigger than in US. So, because it's kind of a new market for the brand there, we've been really operating directly in the last two and a half years, we have been there for the last eight years, nine years. But really the strength of the brand has been cumulating of a combination of factors from accessories and denim and GUESS? by Marciano coming at the same time and opening so many freestanding stores in different countries, but the recognition has been tremendous to have crisscross all the brand as an opportunity for every licensee and division. So, there is no such difference between the perception of the brand, expansion in Europe compared to America, except that the price of GUESS? product in Europe is much higher than it is an America.

Carlos Alberini

Now, Holly, with respect to the numbers, this place -- our accessories business this year would probably surpass our denim business because now we are adding the new category of footwear as part of that.

Holly Guthrie - Janney Montgomery Scott

Okay, great. Thank you, Carlos. And then, in the first quarter, I think you said that the increase in the SG&A expense, about a third of that increase or I guess it looks like that the SG&A increased about 33 million. So, I am assuming around 11 million came from Focus and South Korea. Was any of that 11 million, sort of, a one time sort of start up, or should we expect Focus and South Korea to continue to impact the SG&A expense going forward, in that kind of magnitude?

Dennis Secor

I wouldn't consider those, those are one-off expenses. Relative to last year, we now own those businesses. So we have taken on that full SG&A investment for both Focus and for South Korea.

Holly Guthrie - Janney Montgomery Scott

I didn't know if there was any element of an initial start-up or some sort of just one-time cost, but no, that's just a full-on expense for the business?

Dennis Secor

Of course, you have the ramp-up expense and definitely we incur some expenses to launch the brand like Paul was in both China and South Korea for a very significant event to really present the brands to those two territories and those were unusual expense.

Holly Guthrie - Janney Montgomery Scott

And that was the big expensive party?

Dennis Secor

Yes.

Paul Marciano

It was indeed.

Dennis Secor

The big issue here too is that we are still starting the business, so the revenue part of the equation was very lacking relative to the expense that we incur, and that should change significantly overtime.

Holly Guthrie - Janney Montgomery Scott

Okay. Thank you so much.

Paul Marciano

Thank you.

Operator

Your next question come from the line of Christine Chen with Needham & Company, please proceed.

Christine Chen - Needham & Company

Thank you. Congratulations on another fabulous quarter.

Paul Marciano

Thank you, Christine.

Christine Chen - Needham & Company

Just a few questions. With respect to the guidance, are you taking into account any shift of back-to-school out of Q3 into Q2, a lot of your competitors have spoken about that shift and can you quantify that? And then I wanted to ask a little bit more about G By GUESS? and Marciano.

Paul Marciano

Yes Christine, we do anticipate that there is going to be a substantial -- a meaningful shift from third quarter into second quarter and some of the drivers for that is what you mentioned, the back-to-school issue. But in addition to that, we have our own strategy to ship a lot of products in the accessories business in Europe early, which traditionally would have shipped in the third quarter, now it will ship in the second quarter. So, our earnings should benefit from that in the second quarter and as a result of that obviously those earnings would not reoccur in the third quarter. And that is one of the reasons why our expected results for the second quarter are strong as they are.

Christine Chen - Needham & Company

And then I know that it's still early, but as far as G by GUESS?, have you seen any difference in performance between the conversions at the factory stores versus the conversions at the regular mall stores?

Maurice Marciano

It's too early. Like Paul said, only a few days open and we only had a few stores that were open for that period. So, it's just very early to tell. I think we're going to learn a lot more in the next few months.

Christine Chen - Needham & Company

In licensing, are there any categories that you aren't in, that you'd like to be in as far as product categories still?

Maurice Marciano

But it's down the line, we're not in rush for that. We think that at one point or another, we used to have a license like 10 years ago, which was a home collection -- but if we do it, we want to do it the right way, the proper way and if we find the right product assortment and manufacturer the way we want to do it, we would do it. That's one. Lingerie, underwear is definitely something we are looking to that, but we are still debating to do that directly or as a license. But we are pretty much a complete lifestyle right now, and after all, our stores is full and we want to maintain a clean presentation. So we have to consider what impact you will have if we add any more products about to get the bigger box in the future. So right now we are so busy everywhere to just simply grow and expand existing products that we have that unless it's an exceptional opportunity, we are not going to rush on anything.

Christine Chen - Needham & Company

And then with respect to Guess by Marciano, which is the Focus product, I started noticing a few items being sold in, sort of, the Marciano section of certain US stores. Is that a test, is that just location-specific?

Maurice Marciano

You must be visiting quite a few stores, because it's only in very few stores.

Christine Chen - Needham & Company

I do go to quite a few stores whenever I get a chance. I bought one of the items.

Maurice Marciano

And that's one of the things we're doing right now, because as you know, unfortunately the dollar is very weak right now. And euro is so strong, but to import anything from Europe costs a lot. So we want to see how the market is reacting to such a price tag on the shirts, on the pants, on the sweater made in Europe or Eastern Europe, so we are testing little bit, but we see the line is such a beautiful line, contemporary line. We see that definitely Guess by Marciano at one point and another, will enter the US market a year from now, two years from now. We don't know until we have the right strategy, we will not rush again, because we have so many different things to take care right now. We need full time and attention. It would be blended with Marciano, it would be part of Marciano, it will be Guess by Marciano with Marciano and maybe a section for men as well.

Christine Chen - Needham & Company

Got it. Congratulations. And good luck for the second quarter.

Maurice Marciano

Thank you, Christine.

Operator: Your next question comes from the line of Dorothy Lakner with CIBC World Markets. Please proceed.

Dorothy Lakner - CIBC World Markets

Thanks. And congratulations everyone.

Carlos Alberini

Thank you. Hi, Dorothy.

Dorothy Lakner - CIBC World Markets

A couple of questions on systems. Maybe Carlos if you could update us on what's going on with markdown optimization, and also I think you had said on the last call you were going to implementing the PLM in the men's business, I wondered if that happened and how it's going? And then, just a question on the guidance for the second quarter with North American wholesale business up only slightly, I wonder if there is a comparative reason for that just why you are saying up only slightly after the first quarter they had? And lastly on Holly's question, just a precision Carlos, did you mean that accessories would surpass the denim business in terms of penetration, is that the whole company that you're talking about worldwide?

Carlos Alberini

Yes, let me address that the first Dorothy. I was talking about our European business, which is where we were I thought it was Holly's question, and now that business we always look at those two businesses as two separate parts of the whole, one being the denim business, which is what we acquired back in January of 2005. The other part is the accessories business, which includes now handbag and also footwear to small leather goods. That's what I meant. That business is going to surpass denim this year.

Dorothy Lakner - CIBC World Markets

Okay. All right. Perfect.

Carlos Alberini

Going back to the systems question, Dorothy, we are implementing markdown optimization and we are very pleased with the initial results of this. We have mentioned in the past we did some tests towards the end of last year and now we have rolled out a good part of the software to our retail business. So we have a few of the merchandise categories under that. And I think you saw some of the product margins has been pretty impressive in the quarter in addition to the same-store sales growth that we experienced, so we're very happy with the results.

Dorothy Lakner - CIBC World Markets

But as you continue to roll that out, we should see greater impact as we move forward?

Carlos Alberini

Well, we have attempted to quantify that in our guidance and as we said, we do anticipate that the operating margin of the retail business should grow about 15%. With respect to PLM, we are on target, we are very pleased with the software, it has been operating well. And you are right, we did implement it in men's first, and that's where it is. And we have a full roll-out plan for this year and we don't see any impediments to meet those times. And then with respect to wholesale, the issue that we are facing is, last year in the first quarter, there were significant closures as a result of the Federated/May integration. At that point, we lost a lot of business because of that phenomena. And this year, in the first quarter, which was very healthy, we were up against those diminished or lower number. So, the growth that you saw in the first quarter, is not entirely accounted there, we are expecting to repeat in the second quarter and going forward.

Dorothy Lakner - CIBC World Markets

Okay. Perfect. And then did I hear you talking about opening of intimate stores?

Paul Marciano

Not at all, you misheard.

Dorothy Lakner - CIBC World Markets

But maybe some day.

Paul Marciano

Maybe someday, we are not ready for that.

Dorothy Lakner - CIBC World Markets

Okay, you are a little busy for now.

Paul Marciano

Little bit.

Dorothy Lakner - CIBC World Markets

Okay. All right, thanks.

Paul Marciano

Thank you.

Operator

Your next question comes from line of Brad Stephens with Morgan Keegan. Please proceed.

Brad Stephens - Morgan Keegan

Congratulations guys on an outstanding quarter.

Paul Marciano

Thank you.

Brad Stephens - Morgan Keegan

Couple of questions for you. First of all, Dennis, maybe could you walk me through your inventory right now. Obviously you have a lot of momentum, but given it's up 50 some percent, can you kind of walk us through the buckets of that increase?

Carlos Alberini

Yes, let me just address that briefly, this is Carlos. Our inventory was up about 52% and a little bit less than half of that increase was all related to new businesses. And as you know, we have pretty significant new businesses that came on the picture. One is South Korea, Hong Kong, we are putting a significant investment in the whole Hong Kong and China expansion, Mexico, and more importantly Focus Europe, which was again a completely new business. In addition to that, we have some investments that we made to open the G by GUESS? stores, of course, and all that would represent the new businesses. Keep in mind that because many of this businesses were -- did not have any inventory, we have to fill those channels. So, it required a significant investment in inventory that you haven't seen much in terms of revenue for it.

Brad Stephens - Morgan Keegan

So, going throughout the remainder of the year, we should expect to see inventory growth running a bit above the rate of sales for probably the next four quarters then?

Carlos Alberini

Exactly.

Maurice Marciano

If I can give you an example, if you heard on the last conference call, we mentioned that for 2008 fiscal, we will have a goal to double the watch business of Guess? Collection. I can tell you for example that our inventory is up 70% on that category but our sales also are up 70% on that category. So, we beefed up inventory significantly because we believe on our products. It is one of the components about things that we'll see right now. On what we believe, we are financing that business.

Paul Marciano

And that brings up a very important point, we have run this business looking at inventories and really investing in those categories that really offer a significant potential. We have always done that for the last many years. We have done that once again, and that addresses the remaining of the inventory growth. Most of that growth is for, obviously, existing businesses and it has two parts. One is the fact that we have been increasing prices, so obviously in order to keep the same number of units, we needed to make an additional inventory investment. Our units are pretty much in line with what we saw in the first quarter. And then the other big issue is that we saw some big opportunities in classification of that needed additional inventory, and we have been investing in those. One of them, I think Maurice mentioned, dresses. Our dress business is on fire. So, we made an additional investment in dresses. Handbags, again, a business that is on fire, we made an additional investment on that. Somebody asked about Marciano, this business has outpaced our expectations so we've made investments, additional investments on that. Shoes is another category and even basic denims that we touched on previously. So, all this inventory is based or it is positioned with those categories.

Brad Stephens - Morgan Keegan

So, Dennis, if I kind of look at the end of the year, working capital is probably going to be used in excess of $50 million this year, will that be a fair assumption?

Dennis Secor

Working capital 50?

Brad Stephens - Morgan Keegan

I would come up with a 60 roll.

Dennis Secor

Hang on, one second.

Brad Stephens - Morgan Keegan

All right. Let me ask another question while you look that up. Second, the wholesale business, incredible operating margin performance. Can you break out the gross margin versus SG&A there?

Carlos Alberini

We do not do that, we do not provide that and now it will be somewhat confusing because you have, in addition to this domestic wholesale business in Canada, you also have the Asian business. So, it's a very difficult thing to dissect and mix.

Brad Stephens - Morgan Keegan

Okay. The retail business. A lot of -- given the comp and what a lot of retailers saw in April, can you give us some color on how the quarter flowed and how you feel about quarter-to-date, obviously you've given us guidance, but just what you are seeing out there as we've heard mall traffic has slowed a little bit?

Carlos Alberini

Well, we had a great first quarter. Of course, you know on the month of March because of the Easter shift it was even stronger, but we were very pleased with the quarter overall. We saw traffic being up, our conversion was up too, we really are very pleased with the overall results. And the other great thing is that it happened consistently across all regions in the country. I mean, I think every single region in the quarter was up in double-digits for us. So, you can imagine, I mean, it's just difficult to find this kind of consistency across the board. And with so many engines driving the growth, meaning a lot of our merchandise specifications did well. With respect to May, we said that the momentum continued into May and we are not reporting monthly comps, but it is suffice to say that we raised guidance because we feel very strong about the quarter.

Brad Stephens - Morgan Keegan

Okay. And then, last question before I get back to Denis here. Looking for corporate overhead expense, managed very well. Is there a chance -- how should we think about at the rest of the year, your prior guidance was 80 to 90, but if we keep at this rate, it is going to come in substantially below that?

Paul Marciano

We have been running pretty much in line with what we expected and actually because the performance has been ahead of our initial expectations since those earnings numbers are higher than what we had originally expected on guidance. So, I don't know exactly what you're looking at Brad, but last year in corporate overhead we spent $57 million. This is on a recash basis for the 2006 year and we anticipate that the numbers are not going to be significantly higher than that. Of course they are going to be higher, but not significantly higher than that this year.

Brad Stephens - Morgan Keegan

And Denis on the working capital?

Dennis Secor

Yes, your estimate is such a good estimate around 50.

Brad Stephens - Morgan Keegan

Right, congratulations.

Dennis Secor

Thank you.

Operator: Your next question comes from the line of Erin Moloney with Merriman Curhan Ford & Co. Please proceed.

Erin Moloney - Merriman Curhan Ford & Co.

Hi, good afternoon guys.

Maurice Marciano

Hi. How are you Erin?

Erin Moloney - Merriman Curhan Ford & Co.

I'm doing good. Thank you. Just a couple of quick questions. I was hoping that your North American retail division, I was hoping you'd give the store count by division at the end of the quarter?

Paul Marciano

Okay, you have 196 Guess jean stores, seven accessory stores, I am talking North America. You have 104 factory stores, and you have 29, let me see, I think, from Marciano, I think -- I have it here 29, but may be -- let me restate some of the numbers because we have different retail accessory stores into one bucket versus another one. The way you are used to seeing it, we had 179 retail stores, 95 factory stores, 29 Marciano stores, 16 accessory stores and 17 G by Guess stores. So a total of 336 stores.

Erin Moloney - Merriman Curhan Ford & Co.

Okay, great. That's really helpful, and then, I believe Paul you mentioned earlier in your commentary that you are planning on 40 new stores in '08, does that include the 30 openings of the G by GUESS?, and then I was curious how many closures you have planned?

Paul Marciano

Okay. The 40 and new stores are all concepts mixed, and don't forget that the 30 of G by GUESS? are made of 10 new doors, 10 factory converted in G by GUESS? and I gave you a wrong number, and 10 retail converted in G by GUESS?, that's the 30 doors.

Carlos Alberini

That's correct. Let me just say one thing. The 40 stores that Paul was referring to are additional stores over the first quarter, where we opened already eight.

Paul Marciano

The total addition for this year is 48 stores.

Erin Moloney - Merriman Curhan Ford & Co.

Okay. Great. And then the closures?

Dennis Secor

Closures, we closed six in the quarter.

Carlos Alberini

But then we will close another, I think it is something like five or six.

Erin Moloney - Merriman Curhan Ford & Co.

Okay, great. Thank you very much.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Melissa Otto with WR Hambrecht & Co. Please proceed.

Melissa Otto - WR Hambrecht & Co.

Hi, congratulations on a great quarter. Lot of exciting stuff happening. I have a question on the Japan business, I know it is a little bit premature to comment on it, but we do feel quite a number of US brands aggressively going after the Japanese market, and I would like to hear you comment more strategically, more long term, what are you seeing happening in the Japanese market that gives you the confidence that over the next three to five years it could be a big driver to earnings?

Paul Marciano>

Well, if you look at the map, what we have been doing the last few years, we took back the control of Korea, we took back the control of China, we ended the license -- we did not renew the license of Japan. And obviously all that, as a part of a bigger picture for us, it took us few years to take control of our brand in the whole region and also as you know, we are very well penetrated in Southeast Asia. So, to be around all that region and not addressing Japan is definitely a very, very important market for us. We, in fact, have the licensees in footwear and watches and handbags. We will make the entrance by holiday of this year, and we plan definitely to be our self in apparel and retail also in Japan by April 2008. It is a long-term plan, we had, as I mentioned before, two licensees, long-term licensees and we didn't have the result that we expected not only the side of finance, but mainly about the brand positioning, the brand execution and that was like all the American brands the biggest restriction we had is we need to be doing that ourselves. We have a team on premises there in Japan. So, Japan could be a very important contributor to the future of the brand Guess? in all Asia.

Melissa Otto - WR Hambrecht & Co.

Do you see that coming through in both wholesale and retail?

Paul Marciano

Yes, the same as Europe.

Melissa Otto - WR Hambrecht & Co.

I see. Any comment on opportunities that you see in specific department stores there or any structural changes that you think are creating opportunities or making it easier to do business there?

Paul Marciano

I will have a better reading, I'm going to spent five days in August. We have the whole team of Guess? from here and from Asia. I will have a better reading about -- to answer you that on the next conference call, but right now we are going from scratch. And this is exactly a clean slate that we're going with.

Melissa Otto - WR Hambrecht & Co.

Terrific. Congratulations once again.

Paul Marciano

Thank you.

Operator

And your last question comes from the line of Margaret Whitfield with Sterne Agee. Please proceed.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

Congratulations. Two quick questions. What is the effect of the 53rd week on the fourth quarter last year? And for Maurice, dresses and denim for women are strong, any fashion changes coming around for back-to-school or later in the year that you can see now?

Maurice Marciano

Yes. this is Maurice. Hi, Margaret. The biggest trend that I can see for women is that we're going much more into the 70s, which means very wide-legged jeans, you know, they are coming slowly, but they are coming for sure. And with the waist a little bit higher, okay? So, I see that coming back and that goes very well with all the trend that we have right now for the tops, the long tops, knits and all that. And so, I see a very strong trend coming up in all that look and that probably is going to go all the way to spring of next year with very bright colors and all that.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

And dresses, will they remain strong?

Maurice Marciano

Excuse me?

Margaret Whitfield - Sterne, Agee & Leach, Inc.

Will dresses remain strong with the --?

Maurice Marciano

Yes, definitely. It goes very well with all that trend here.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

Okay. And the 53rd week?

Carlos Alberini

Yes, we think that the impact of the 53rd week is about 4 to $5 million in revenue. And you can -- of course this is a time where we have some clearance. So, the margins of those sales are not going to be that significant. But nevertheless, you can use that number tomorrow.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

So, nothing else really affecting the fourth quarter comparisons other than the extra week last year?

Carlos Alberini

That is correct. And keep in mind the numbers that we shared with you today of January this year. I mean, we are very pleased with the kind of performance we had in January, which was $0.09 ahead of last year's or the previous year's earnings for the month.

Margaret Whitfield - Sterne, Agee & Leach, Inc.

Thank you very much.

Maurice Marciano

Thank you, Margaret.

Carlos Alberini

Thank you, Margaret.

Paul Marciano

Thank you very much. I think that concludes our conference call for the first quarter. And we will keep you posted about progress we're making, and thank you very much and have a good evening.

Operator

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.

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