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Executives

Paul Marciano – Chief Executive Officer

Dennis Secor – Chief Financial Officer

Michael Prince – Chief Operating Officer

Analysts

Shreya Jawalkar – Jefferies

Jeff Klinefelter – Piper Jaffray & Co.

Helena Tse – Bank of America Merrill Lynch

Omar Saad – ISI Group

Diana Katz – Lazard Capital Markets

Eric Beder – Brean Murray, Carret & Co.

David Glick – Buckingham Research Group

Dana Telsey – Telsey Advisory Group

Margaret Whitfield – Sterne, Agee & Leach

Susan Sansbury – Miller Tabak

John Kernan – Cowen and Company

Guess?, Inc. (GES) Q4 2011 Earnings Conference Call March 14, 2012 4:30 PM ET

Operator

Good day everyone, and welcome to the Guess? fourth quarter fiscal 2012 earnings conference call. On the call are Paul Marciano, Chief Executive Officer; Michael Prince, Chief Operating Officer; Dennis Secor, Chief Financial Officer; and Russell Bowers, Chief Financial Officer, North American 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, annual, and current reports filed with the SEC, including economic conditions, business strategies, results of litigation, tax and other similar proceedings and currency fluctuations.

I would now turn the presentation over to Paul Marciano.

Paul Marciano

Thank you, and good afternoon. We are pleased with our fourth quarter performance, extending our global business, and delivering record revenue even as a weak European economy continued to create headwinds for us.

We made significant progress in elevating the Guess? brand in North America Retail, where sales were up as we expanded profitability. In Asia, we gained shares with double-digit top line growth. Once again we focused on sound fundamental and solid execution. We manage our resources carefully, especially our inventories, for taking our brand throughout the holiday season, avoiding much of the massive discounting in the malls. All of that resulted in a solid financial performance, delivering earning per share of $1.05, which was within the level that we anticipate for the quarter.

Considering that what Europe went through this past holiday season, we are very pleased with these results. Our business model is (inaudible) for diversification and we enhanced that last year by developing important European markets like Germany, Russia, Portugal, Netherlands and even Finland. Our top 10 European gross market collectively grew 29%, and now represents almost 30% of our business in Europe. Strong complements to Italy, which is now less than 40% compared to 52% four years ago.

Our successes in newer market is critical to our long term strategy and they were instrumental in helping drive revenues in Europe to more than $1 billion this year considering that in 2004 revenues were only $43 million when we took over from our licensee there. The Guess? brand has become part of the retail market in Europe today. Our growth strategy in North America was focused on developing G by Guess where we see tremendous potential.

We continue to refine the concepts, the stores and the product and the customer is responding very well. G once again delivered solid positive comp. We believe we have developed an excellent niche in the G market and are making great progress. In fact, this year the brand broke even for the first time and our goal for next year is to post the brand’s first profits. In Asia, we delivered solid growth for both South Korea and China posting annual growth rate over 25%.

In South Korea, we improved productivity while expanding new doors. Our launch of G by Guess in South Korea is doing very well and we now have 47 locations. Overall in Korea we have developed a strong market share position and we ended the year with nearly 300 point of sales. In Greater China, the brand continued to develop rapidly as we expand into 63 [ph] new locations this year.

We continue to build relationships with partner to open stores in secondary cities. We also made significant progress in building up our team and infrastructure, but we will need to fully develop the market and support our partners in the future. The brand elevation was another important goal for us, as we build up our brand in equity markets comparing to other brands. By visiting our stores it should be obvious that the product has been significantly elevated.

We improved product quality, specifically in women, which translated to an AUR increase over 20% in the fourth quarter in our stores in US. We are very pleased with the customers' response to this change, especially in our dresses and denim collection and we are now focusing on accessories and men. We manage our inventory tightly and drastically reduced our markdown electing to focus on a full-price sales that were up during the year.

We enhanced the store environment with a combination of reduced stock level and new visual strategy. We also remolded 31 stores in North America and have seen improved sales. In North American retail, we managed carefully during the transitional year. Retail product margin improved and we worked more efficiently in our stores, driving sales cost rates down without affecting the customer experience. For the full-year, we expanded our retail operating margin and increased segment operating profit by nearly 10%, which is a big accomplishment given this year comps.

In Europe, we definitely are proud of many achievements for fiscal 2012. As we look back on the year, our biggest challenge certainly proved to be Europe. During the summer, as consumer reported [ph], we reported a weakening economy there. We saw the traffic fall off in early September and began to experience negative comp in our stores there. Direct marketing and digital media will be my priority going forward with social media and CRM as well, and of course, still increasing the global brand image with magazine and outdoor advertisements.

In the product, this year we plan to continue to innovate and refine our collection across all categories. We are very pleased with the progress we have made in the women's business, and our goal is to make similar inroad in both men and accessories categories as I mentioned. In North America, we feel strongly about the G by Guess, (inaudible), and as well as our Guess? concept in small format can be strong drivers of growth.

We also have plan to developing a joint venture for the right partners in Brazil, and also supporting our development in India this year. We anticipate economic condition will remain challenging. We clearly see some pockets of improvement in consumer confidence in US, but we expect European consumer, mainly in the south of Europe, to be affected in the short term by the austerity plans unless something dramatic happened with credit banking or consumer confidence there.

This year, we celebrate our 30 anniversary. Our success is rooted in the amazing brand that my brother and I envisioned 30 years ago. Since day one, we have remained true to the spirit of the Guess? brand to develop an assortment of product that support the (inaudible), fun, and adventurous lifestyle brands.

With that, I would like to pass to Dennis.

Dennis Secor

Thank you, Paul, and good afternoon. Net earnings for the fourth quarter of fiscal 2012 declined 7% to $96 million and diluted earnings per share was $1.05, down 5% compared to last year's fourth quarter's $1.11. Last year's EPS included a $0.05 favorable adjustment due to loyalty breakage.

Fourth quarter revenues increased 3% reaching $776 million. Growth in Asia and retail expansion in North America and Europe drove the growth, which offset negative retail comps, an unfavorable currency translation impacts, and last year's $7 million loyalty breakage benefit. Constant dollar revenue growth was 4%. Total company gross profit was flat at $338 million and gross margin declined 90 basis points to 43.5%.

Product margins improved due to lower markdowns in North America and higher European retail mix. Our occupancy rate was higher given the negative comps and retail mix and that more than offset the product margin gains. SG&A increased 5% to $202 million, and our SG&A rate increased 70 basis points to 26%.

The rate increased primarily from higher selling and distribution costs in Europe, store impairments, and increased advertising. Lower North American store selling expenses partially offset these increases. Operating profit declined $8 million or 6% to $136 million, which includes a $2 million unfavorable currency translation impact.

The loyalty breakage favorably impacted last year's fourth quarter operating profit by $7 million. Operating margin declined 160 basis points to 17.5%. Fourth quarter other net income was $6 million, which primarily relates to unrealized foreign currency evaluation gains. Our effective fourth quarter tax rate was 30.9% compared to 30.3% in the prior year's fourth quarter, and we closed the full year with a tax rate of 32.2% versus 30.1% last year. This year's full year rate includes the unfavorable impact of $19.5 million settlement charge incurred in the second quarter, and a different earnings distribution among tax jurisdictions.

Moving to segment performance, in North American Retail fourth quarter revenues increased 1% to $343 million, as we continue to expand our store base. This expansion more than offset a 5% comp decline as well as last year's loyalty breakage benefit. Operating income increased 3% to $54 million and operating margin expanded 30 basis points to 15.8%. We expanded product margins as lower markdowns and price increases overcame the effective product cost inflation, and even the prior year loyalty breakage benefit, while our occupancy rate increased given the comps.

Our expense management was outstanding as we operated with lower SG&A expenses versus a year ago, despite current quarter impairment charges and a 5% increase in store counts. During the quarter, we opened 12 new stores and closed three, ending the year with 504 stores in the US and Canada. For the full year, North America retail revenues increased 4% to $1.12 billion, comps declined 3.5%, and operating earnings outpaced revenue growth, increasing 9% to $133 million. Excluding last year's loyalty breakage benefit operating income increased 15%.

In Europe, fourth quarter revenues declined 1% to $291 million. In local currency, revenues increased slightly. Revenues from our owned retail stores increased as new store growth more than offset negative comps, which declined in the high single-digits. We ended the quarter with 179 owned retail stores. Wholesale revenues declined in the quarter, primarily due to lower accessory and GUESS by Marciano shipments and higher markdowns.

Operating income decreased by 16% to $55 million. Operating margin declined 330 basis points to 19.1%. Gross margins declined as product margin improvements were more than offset by a higher occupancy rate due to retail mix and negative comps. SG&A expenses increased to support our retail expansion, as well as higher variable and distribution – variable selling and distribution expenses and store impairment. The increased SG&A cost given the roughly flat sales drove a higher SG&A rate for the quarter.

For the full year, our US dollar revenue grew 10% and eclipsed $1 billion. Adjusted operating earnings, which exclude the second quarter $19 million settlement charge, decreased 4% to $186 million. In local currency, full year European revenues grew 5%, while adjusted operating earnings declined 8%.

In Asia, fourth quarter revenues increased by 27% to $71 million. All our businesses contributed to this growth, led by South Korea and China, as we continued to expand our distribution in those markets. Both these markets posted positive comps and double-digit revenue increases. Operating profit increased 10%, reaching $8 million, and operating margin declined 190 basis points to 11.7%.

Gross margins declined due to higher promotions in channel mix in our South Korean market, which more than offset improvements in China where we generated higher product margins from a stronger product assortment. For the full year, Asia revenues increased 25% to $251 million, and operating earnings were flat as expected at $28 million as we continue to invest in infrastructure to grow the region.

In North America Wholesale, fourth quarter revenues increased 8% to $41 million. Operating profit increased 11% to $10 million and operating margin improved 90 basis points to 23.5% as we benefited from lower markdowns and allowances. For the full year, North America Wholesale revenue increased 4% to $187 million and operating earnings increased 2% to $47 million.

In licensing, fourth quarter revenues and operating profit were roughly flat at $30 million and $27 million, respectively. These results include $3 million of previously deferred key monies [ph] as we extended our Middle East licensee agreement in the period. For the full year licensing revenues grew 5% and earnings grew 4% reaching $121 million and $109 million, respectively.

To summarize then, for the full fiscal year, consolidated revenues grew 8% reaching just under $2.7 billion, an all time record for our company. With lower markdowns, retail mix and strategic price increases, we overcame significant cost inflation and drove consolidated product margins higher. That was offset modestly by a higher occupancy rate resulting in a 50 basis point decrease to gross margins. With an adjusted SG&A rate that increased slightly we delivered an adjusted operating margin of 15.5% down 80 basis points from last year. Adjusted operating earnings increased 3% reaching $417 million.

For the fiscal year, net earnings on an adjusted basis decreased by 2% to $283 million and adjusted EPS also decreased by 2% to $3.05 per share. For the full year, the favorable currency translation impact on adjusted EPS was about $0.09 per share.

Now turning our attention to the balance sheet, our cash flow this year was very strong. Operating cash flows were $364 million, up 5% from last year. We invested $112 million back into our business in net capital expenditures to support global store growth and infrastructure improvement.

During the fourth quarter, we invested $92 million to repurchase 3.2 million of our shares at an average price of $28.60, and we ended with a strong financial position with nearly $0.5 billion in cash, virtually no debt, and additional credit capacity and access to capital. Accounts receivable declined 5% over last year to $341 million.

Overall, our DSOs were slightly lower compared to last year end due to improved North America collections and mix. We have experienced some slowing of European collections and we have been successful in increasing our insurance coverage. At year end, roughly 57% of our global receivables were supported by insurance coverage, bank guarantees and letters of credit up from 48% last year. At year end, 70% of European receivables were covered. Inventories increased 12% to $329 million and finished goods units increased 15%.

About half of the inventory growth was driven by our European business to support the higher store base, as well as the impact of changing demand. The other half of the growth supports our Asian and North American businesses, where inventories are generally aligned with sales expectations. Our Board of Directors has approved a quarterly cash dividend of $0.20 per share on the company's common stock. The dividend will be payable on April 13, 2012 to shareholders of record at the close of business on March 28, 2012.

So now, Mike will give an overview of our recent business trends and provide our outlook for fiscal '13. Michael?

Michael Prince

Thanks Dennis. Now let's discus our outlook for both the first quarter and the full-year of fiscal 2013. On a global basis, our brand remained strong and the business continues to grow despite macro conditions in Europe. For next year, we are planning modest top line growth.

As to earnings, at the upper end of our guidance we expect EPS to be roughly flat to last year when you normalize for increased advertising and marketing investments and the negative impact of the euro. This also includes about $0.03 to $0.04 benefit from the 53rd week and the impact of last year's share repurchase. Additionally, we will continue to focus on our long term strategies of improving product, increasing retail profitability, developing new markets, and building a world class management team.

In North America retail, we will continue last year's strategy focusing on better product, lean inventory, tight markdown management, and increased full price selling. Overall, we remain committed to our long-term goal of improving profitability, while elevating and protecting our iconic brand.

Thus far in the quarter, we are experiencing comps that are down in the mid-single digits. We are not planning that this trend will improve until we fully anniversary our new strategy. Based on that, along with the largest store base, we expect first quarter revenues to increase in the low single digits. For the full year, we are planning mid-to-high single digit top line growth, fueled by new store expansion.

We are planning full year comps to be flat to down in the low single digits. We expect them to improve as we progress throughout the year, particularly in the second half when we can benefit from our increased marketing efforts, new product initiatives, and accessories demands, and are up against progressively easier comps. In North America, we plan to open about 35 new stores, with roughly half of those stores being G by Guess, which continues to scale and perform well.

Moving to North America wholesale, our brand performed very well last year, with improved productivity at both Macy's and Bloomingdale's. For fiscal 2013, we expect that department stores will continue to manage inventories tightly, looking to improve their churns. Also, we expect to sell into fewer doors this year given the changes we made last year, to exit lower performing doors that were not brand appropriate or financially accretive. Current orders are up in the mid-single digits, and we are expecting first quarter revenues to be down in the high single digits. Primarily due to the anniversary of lower door counts and the timing of the shipments, for the full year we expect revenues to be roughly flat.

In Europe, our development strategy will continue to be balanced across different geographies and channels. We plan to grow in Northern and Eastern Europe, also expected declines in the south. We plan to continue to opportunistically open our own stores and work with licensees to open Guess? branded stores. During the year, we plan to add about 90 stores in Europe, about a third of which will be owned and operated directly by us. We also expect that our retail stores will operate with mid-single digit negative comps, as we anniversary a harder comparison in the first half of the year and an easier comparison in the back half.

In our Wholesale business, backlog is currently down in the mid-single digits. We are expecting that this business will be down in the first half of the year given last year's comparisons, with opportunities to partially offset that with growth in the second half. We expect jewelry shipments to be down significantly in the first quarter, given the changes we made to our distribution last second quarter. Based on this, we are planning first quarter euro revenues to decline in the mid single digits.

Given the weaker euro compared to a year ago, we expect first quarter US dollar revenues to decline in the low teens. For the full year, we expect euro revenues to increase in the low single digits. Assuming the euro remains at its prevailing rate, this would result in a US dollar revenue decline in the low single digits.

In Asia, our fiscal 2013 growth will be driven by continued expansion and our goal of driving productivity improvements. For the first quarter, we are planning revenue growth in the low teens and for the full year, we expect revenues to increase in the upper teens to 20% range. This year, we plan to continue to invest in our infrastructure in Asia, particularly in China. We want to replicate the success of the growth [ph] in Europe by developing many of the same operational capabilities that supported our business there.

In our licensing business for both the first quarter and full year, we are assuming that royalties declined roughly 10%, mainly due to overall macro conditions.

Now turning to gross margins, the overhang of last year's product cost inflation will continue to impact the early part of this year. That pressure should abate somewhat, given some relief in cotton prices. However, we expect that relief will be offset by the cost of goods impact of a relatively weaker euro, versus the year ago.

Along with the impact of mix, that should result in consolidated product margins that are roughly flat to last year throughout much of the year, given comps and retail mix we are planning with a higher occupancy rate and therefore lower gross margins during the year. The pressure on gross margins should be most significant in the first half of the year.

For SG&A, we plan to make a substantial investment in marketing and advertising this year to support the initiatives that Paul discussed earlier. Given those investments and the comp trends we're anticipating, we are planning this year with a higher SG&A rate compared to a year ago.

Therefore, our expectations for the first quarter are for revenues in a range between $560 million and $575 million. We expect operating margin between 6% and 6.5%, and EPS between $0.25 and $0.28. We expect the greatest impact to the operating margin decline will come from the higher SG&A rate. For the full year, we are planning for revenues to grow to a range between $2.74 billion and $2.78 billion, operating margin in the range between 12.5% and 13%, and EPS in the range between $2.50 and $2.65 per share. Our guidance assumes that currently prevailing exchange rates persist for the balance of this year.

The combined impact of currency assumptions, increased marketing and advertised investments should unfavorably impact this year's earnings by between $0.35 and $0.40 per share. We anticipate that the earnings headwinds rate will be most significant in the first quarter, as we will not have anniversaried either the European downturn or the changes in our distribution.

We expect the earnings decline rate to gradually lessen throughout the year as we begin to lap last year's European performance in the middle of the year, and finally lap the weaker euro, again, based on our prevailing rate assumption near the end of the year. We see the first opportunity for modest earnings growth in the fourth quarter. We are planning with an expected tax rate of 31.5% and expect to invest between $130 million to $145 million in capital, net of tenant allowances, primarily for new stores and remodels. Our EPS guidance assumes no additional share repurchases in the year.

With that I will conclude with the company's remarks and open the call up for your questions. Before doing so let me remind everyone to please limit themselves to one single-part question. If time permits, we will allow people to ask a follow-up question. Operator.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Randy Konik with Jefferies. Please proceed.

Shreya Jawalkar - Jefferies

Hi guys. This is Shreya Jawalkar filling in for Randy. How are you?

Paul Marciano

Good, thanks. How are you?

Shreya Jawalkar - Jefferies

Good, thanks. I just wanted to ask you about North America, you did mention that the business is starting to feel better. I was wondering if you could elaborate more on that, is this a 1Q event, and also if you can provide some intra-quarter trends during 4Q?

Dennis Secor

Yes, it is starting to feel better. A lot of it is based on what we did in Q4. We improved the women's product, which was a really big priority for us. That's where we really focused our efforts on really improving the assortment. And second, we really continued to drive full-priced selling.

All year along, our full-price selling got stronger for us, and we're really happy with where that was in Q4, and you know, looking forward, we think that we've really got some opportunities as we anniversary all the markdown improvements and price increases to drive better comps.

Shreya Jawalkar - Jefferies

Okay, and then also if you could just elaborate a little bit on the SG&A investments that you mentioned, what kind of programs that you'll be investing in?

Michael Prince

Yes, this is Michael. On the marketing piece, as Paul mentioned, we've going to increase our marketing efforts in SG&A. When you think about the marketing investments, we're going to invest obviously with the brand starting to anniversary. As he mentioned, more targeted social media, more relationships with influencer and bloggers, and also you know reminding people about our strong heritage in denim.

Shreya Jawalkar - Jefferies

All right. Thank you.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed.

Jeff Klinefelter - Piper Jaffray & Co.

Yes, thank you. I just wanted to ask a little bit more about Europe, given the sensitivities in that marketplace today. Dennis, I think you mentioned you were down high-single digit comp in Q4, Michael I believe you mentioned that your guidance here is down mid-single digits starting in Q1. Just curious if you are starting to see any sort of stabilization or what's embedded in that change in guidance trend. And then a little color between north and south, any sense for how that comp in the fourth quarter split between the northern markets and southern markets?

Dennis Secor

I mean – this is Dennis. As we talked about, we experienced a negative comp in the high singles in the fourth quarter. If you go back remember in the third quarter, we were in the low teens. And actually the quarter-to-date results so far, the first quarter is actually an improvement. So you've seen our progress still negative but progressively improved over time.

So the way we are looking at the rest of the year is that we are going to see headwinds for the first half of the year, but we'll finally anniversary the lower environment from last year, which should give us some opportunities towards the back half of the year. Having said that, however, the overall assumptions for the year are still to be down.

Michael Prince

Yes, Jeff when you think about the first half of the year like Dennis said, you know, we had good comps in Europe, so you are comping a harder comparison for the first half this year.

Jeff Klinefelter - Piper Jaffray & Co.

Thank you. That is helpful. And I think Paul mentioned, I think in his prepared comments that you are watching closely European consumer confidence is going to remain a challenge, and I would concur the austerity measures and things haven’t really probably fully been felt yet. What are contingency plans, how do you manage into that kind environment? And then just one other thing on Korea, impressive results in South Korea, hearing about a lot of challenges in the fourth quarter and even into the first quarter in that market. So it seems that you are outperforming the competitors. Could you provide a little bit more context around that as well? Thanks.

Paul Marciano

Yes. Between the North and the South in Europe, you clearly see a big difference. It goes from attitude and consumer reaction to all these austerity plans. The austerity plans in place in Italy and in France, and of course, Greece, we know about, is – I mean, they are pretty impactful. And when you see what happened with gasoline in Italy, with the gasoline in France, I mean, the jump was gigantic, up 20% cost.

So that has an impact directly to the consumer there. In the North, we don't see that negative reaction as we can see the sensitivity [ph] in the South. And I think that now, it seems slowly but surely, the banks are getting to some kind of agreement with the IMF, and if it is happening and it's concretized and we see a final point to that, we will see a big reaction to the market in the next 12 months.

But on the short term, we see – I go there every four weeks, and you see that nervousness on the street, everywhere, in restaurants, everywhere. You can feel it and touch it. Then, you go to Germany, and you don't see the sense of that. The north of Europe, you don't see a sense of that. So we clearly are sensitive to say, we have to be in touch with reality, and we know that 2012, which means '13 for us fiscal, we have to be careful and we have to be watching there constantly.

About Korea, you mentioned Korea I think we have been performing basically now, on a fashion when we became number one brand in the last two years. But we had some adversity in the economy and the currency as well. But we continue to operate aggressively, to open stores aggressively, and from the underwear to the G by Guess and the Guess? store and now we are preparing the brand let's say for opening in Japan next 12 months. It would be the first store we open, we hope in the next 12 months in Japan.

Dennis Secor

Yes Jeff, going back to what Paul said, you remember in our Q3 call, we said in Europe we are going to control what we can't control, and you are seeing us watch inventory very closely. We are watching AR very closely. We are making sure we partner with the best banks in Europe to mitigate risk. So anything we can and will control, we are.

Michael Prince

It is still also – it is still mainly a wholesale business, so we have got the spring summer orders in. We are about 80% to 85% done with fall winter. So we have got pretty good visibility over those sales through the first half of the year.

Jeff Klinefelter - Piper Jaffray & Co.

Great. Thank you very much.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Helena Tse with Bank of America Merrill Lynch. Please proceed.

Helena Tse - Bank of America Merrill Lynch

Hi, guys. Just wanted to know, can you discuss in more detail your inventory at year-end, particularly in North America retail segment, where is inventory on a square footage basis and how are you thinking about that throughout the year?

Dennis Secor

In North America, we are really happy with our inventory position. On a per square foot basis, we are down in the low-single digits, and we think that where we own it, it is in the categories that are performing pretty well. Going forward, we are happy with where that is overall.

We do see some opportunity to go a little bit deeper in certain items that we really believe in. This past year, you know, we made a lot of changes with the product, and we made changes in pricing as well, and we learnt a lot after we saw the customer response. So we think we can do better.

Michael Prince

Yes, and just from a global perspective, we thought we got our inventory in check right now. We are up about 12% year-over-year. Part of that is to basically fund our retail store growth. The other part is in Europe, you know, you have with the macroeconomic conditions and a few extra cancels and less reorders, you had a little bit uptick in Europe, but what we do with that inventory? We keep in the warehouse.

We sell it through our outlet channel. They liquidate and distribute through it in basically a six-month period, and it is very profitable and brand accretive, and the model is built for that. So when we look at inventories now going through kind of the remainder of the year, we feel good about where we are at on our inventory position.

Helena Tse - Bank of America Merrill Lynch

Great, and then in regards to the comp trends, in your fourth quarter comp, can you just give us what the split was between AUR and traffics, and then also as you go through the year maybe discuss what your AUR assumptions might be for the first half versus the second half as you sort of lap, I guess the brand elevation and the start of the new assortment that you rolled out this past fall?

Dennis Secor

Yes. As Paul mentioned, the AUR was up over 20% in our full price stores for Guess? It was in the single digits on our moderate price brands. Traffic was tough for us. I mean we walked away from a lot of the markdown business. We have a lot of competitive customers out there that were driving traffic through big promotions and we chose not to participate in that.

So that was a drag on us, and we knew that also conversion will be difficult, because when you do big promotions like we did a year ago, it is the easiest time to convert customers. So we suffered on that, but we've certainly seen that really stabilize for us in Q1.

Helena Tse - Bank of America Merrill Lynch

Okay. Thank you.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed. Ms. Telsey your line is open. Ms. Telsey your line is open.

Paul Marciano

Maybe we can move on to the next, and she can get back in line.

Operator

All right. Your next question comes from the line of Omar Saad with ISI Group. Please proceed.

Omar Saad - ISI Group

Hi, thanks guys. Good afternoon.

Paul Marciano

Good afternoon Omar.

Dennis Secor

Hi Omar.

Omar Saad - ISI Group

I was wondering – you sounded pretty positive on the G by Guess developments Paul in your comments. Can you just update us on where we are with that – with the store counts there, what your kind of store opening plans are for that business near-term, medium-term, long-term? Do you think there might be an international opportunity, especially as you think about some of the macro issues in Europe and some of your other markets?

Dennis Secor

Okay. You know, starting with G, I mean G had high single-digit comps consistently all year. So, we're really happy with that trend. The customer is really responding to what we have to offer. On top of that, we also had markdown improvements throughout the back half of the year that was really encouraging to have both comps and markdown improvements.

And so we were able to mitigate the cost increases with G by Guess, which was really challenging for us in that moderate space. For store counts that we plan to open more G by Guess stores this year than we've ever opened. The majority of our stores that we're opening up this year will be by G by Guess, it is 20 plus stores. Long-term opportunity we certainly see it as a multi-100 potential store concept. And international Paul you want to add something?

Paul Marciano

Yes. International, Omar, we have been opening now stores, in of course Korea, which I mentioned in the call, we have 47 locations now. In Philippines, we have like nine stores. In South Africa, we opened like five stores. But don't forget that South Africa and Philippine and Korea, they are doing their own manufacturing locally because the import duties are tremendous.

Europe for now is no, Middle East for now is no, Canada, not yet but strong possibility, and Latin America, possibly. We want to address properties of US market, which we have only lacked now. I mean it is 65 doors?

Dennis Secor

65.

Paul Marciano

Yes, and we plan to grow, I mean rather rapidly to 150, 200 stores in the next three years we think, three to four years. So, we are very, very excited about that.

Omar Saad - ISI Group

Thanks, Paul, and any update on China and the business, and how you are trending [ph] there and how you're looking to the opportunity and what you learn as you build the infrastructure?

Paul Marciano

Yes. China, we are totally, I mean well above plan that we had. We put a conservative plan the last two years ago for the simple reason that in view of the vast territory that it is, we wanted to put realistic plan and not overly confident, overly aggressive plan, and then we find out we cannot make it. No.

So, we are – in fact, we had our first conference in November, last November, and it went extremely well. So once we continue to pick the pace, I mean the growth will be between 20%, 25%, and over the years we might increase 30%, 35%. Once we really have all the pieces in place of management, support, marketing, brand recognition, all that. But again, China you cannot look at the short-term. Everything, everybody, every brand is looking at long-term what we're doing – what we are doing, what we are doing.

Michael Prince

Yes, Omar, I would just add to that that we've been investing in infrastructure that’s still part of the plan this year, but our goal this year by the time we get to the fourth quarter if everything goes according to plan, and we hit our top line we hope to see some leverage in the fourth quarter that we can then carry on into fiscal '14.

Omar Saad - ISI Group

Thanks guys. Good luck.

Paul Marciano

Thank you Omar.

Michael Prince

Thanks Omar.

Operator

Your next question comes from the line of Diana Katz with Lazard Capital. Please proceed.

Diana Katz - Lazard Capital Markets

Hi, thank you for taking my questions. For the overall company where is marketing spend as a percentage of sales going for this year and where was it last year?

Dennis Secor

Last year I think it was about 1.5% of revenues. We haven’t specifically talked about the growth, but we expect to see a pretty significant increase in both the advertising and the marketing investments that Michael and Paul both talked to. If you look at that $0.35 to $0.40 range that we shared, very round numbers, it is probably roughly half of that.

Diana Katz - Lazard Capital Markets

Okay, thank you. And then what is the exact, I guess, the EPS jewelry impact in the first quarter?

Dennis Secor

First quarter it is about $0.06.

Diana Katz - Lazard Capital Markets

Okay, and then my last question was just on the segment model for the year, should we plan any of the geographic segments to show operating margin expansion for the full year?

Dennis Secor

Well, first of all the advertising investments are going to affect everybody, but if I exclude that I think if we can hit some of our plans in North America and really manage the expenses tightly as we have been there is an opportunity there. It is going to be challenging in Europe with the weaker euro and the way that the economy is behaving right now.

In Asia, what I alluded to just before is that our goal would be by the time we get to the very end of the year we could start to see some leverage, but probably translates into a bit of a headwind for the full-year.

Diana Katz - Lazard Capital Markets

Thanks very much. Best of luck.

Paul Marciano

Thank you.

Dennis Secor

Thank you.

Operator

Your next question comes from the line of Eric Beder with Brean Murray. Please proceed.

Eric Beder - Brean Murray, Carret & Co.

Good afternoon.

Paul Marciano

Hi Eric.

Eric Beder - Brean Murray, Carret & Co.

Could you talk a little bit about, when we look at the changes in North America, how have you – you impacted with less discounting in the second half of last year, what is the next level you want to take it to kind of in this year in terms of both discounting and product?

Dennis Secor

Yes. I think we are happy with where we were from a markdown level. I don't see us driving substantial improvements in markdowns during the second through the fourth quarter. So, our opportunity for markdown improvement will be in Q1, where we still had a lot of markdowns last year.

Michael Prince

I think the other thing I would point out, last year, the focus on the brand elevation was really centered on the women's business. So this year, we are looking to elevate the accessories business to catch up with where we took women's.

Paul Marciano

And I think the best way to check that is to just visit the stores, and you will see quite a change on product and display merchandising. That speaks louder than any speech.

Eric Beder - Brean Murray, Carret & Co.

Sure. Could you also give us an update on the online business and how is that doing and where you think that's going to go going forward?

Dennis Secor

Yes. We made a lot of improvements in the online business during the second half of the year. We really invested in better photography and better merchandising on the sites about mid-way through the year. It resulted in revenues being up over 20% in the fourth quarter, which was our best performance all year. And it's a big initiative for us this year to continue to drive that business and to better integrate it with the activity that's going on in our stores.

Operator

(Operator instructions) Your next question comes from the line of David Glick with Buckingham Research Group. Please proceed.

David Glick - Buckingham Research Group

Yes, good afternoon. Just back to the advertising, just a philosophical question, it looks like you are going to be somewhere in that 2.5% to 3% range based on the significant increase this year. I think when you still compare that to many in your peer group it is still on the lower end. Definitely it sounds like a very sound strategy to do what you are doing. I am just wondering kind of where you see this level going over the next couple of years, is this kind of a one year increase and then we should start to see the benefits on the top line as we get into 2013, or do you think this is kind of learn as you go over the next couple of years, and really reinvest in marketing of the brand?

Paul Marciano

Yes, this is Paul. I think the 1.5% you mentioned is kind of little bit misleading, on a sense that we have basically half of our worldwide business done by the licensees’ products, and all licensees products have a minimum of 3% to 5% obligation to spend in advertising all over the world for distributors. So the actual door number and all that in percentage would be much more in line on a 3% than 1.5%. 1.5% is what we do corporate, and when you go to handbags and shoes and eyewear and watches, each of them being distributed by license by distributors have now a cascade of different campaign in all different countries around the world, so that's one.

Two, the reason also is that the expansion we had in our last three year international to establish anchor showrooms and anchor station from China to Europe to all that was a major part of the CapEx and that's also, now it is done. We're not going to do that again. So, of course that free up much more capital to be in marketing, advertising and digital media. So clearly you'll not see an increase and then a decrease next year after that. You'll need to be opposite. It should go to continue to increase steadily every year.

David Glick - Buckingham Research Group

Thank you.

Operator

Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone.

Paul Marciano

Good afternoon Telsey.

Dana Telsey - Telsey Advisory Group

Hi, can you talk a little bit about do you see 2012 laying out compared to 2011, last call you talked about the big challenges in Europe on the consumer side, how are you thinking about in 2012, does it differ by region, and then also as you think about the wholesale business and the retail business here in the US is there differences between product acceptance and how do you think about pricing? Thank you.

Paul Marciano

Yes, this is Paul, Dana. I think personally I still continue as I mentioned just before, the pictures and landscape clearly is different of last year. For me I see an improvement in US coming slowly together and not only related to the stock market, but also to the fact about the banking and many, many and, of course, the jobs are increasing, but Europe honestly, if you're familiar with Europe it is a big question mark.

This announcement that the whole Greek crisis is resolved and we're done with that, I still don't believe it, and I'm still nervous about. And that's why we concentrate so much in North Europe, we're way, way less affected to that and Eastern Europe. In fact, as we speak, we're establishing a base in Eastern Europe, which we never had as a base to open rapidly some stores in all over Eastern Europe.

Central Europe is a question mark. Italy for me I'm still nervous about. Of course, Greece and Spain needless to tell you what is the unemployment there. So that is still the shadow I see in 2012 unless something drastic happened with credit banking. Nobody can go to the bank, I'm talking as an individual, and get a loan about anything, nobody.

So that is – if that open up, this would change completely the landscape of the consumer confidence. Then Middle East, we have no concern. In fact, we think that Middle East is going to grow much more. And Asia, in Asia we have the Southeast Asia with extremely strong with our distributors.

We have China, which I addressed before, and Japan we have not touched, and India now we have a plan of opening 50 stores in the next three years on the top of the 25 we already have. So we have covered pretty much a lot. The last piece missing, of course, is Latin America. So, this is where we are in a nutshell about what we expect.

Dennis Secor

Okay Dana, regarding wholesale, wholesale is performing better for us than our stores, and really the biggest difference we see is the traffic. The product is and the changes we made in the product are getting exposure there to a pretty wide variety of customers, and they're really responding well to it.

And the second difference is the promotional activity is apples-to-apples with last year as well. The pricing, it is the same pricing in wholesale as it is within our retail stores. So that's not a factor for…

Michael Prince

Yes, Dana, that's why we see Paul's marketing initiatives so important for this year to help drive that traffic to the stores. So that's what a lot of that money is going to be used for.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Margaret Whitfield with Sterne, Agee. Please proceed.

Margaret Whitfield - Sterne, Agee & Leach

Yes, given your focus on Northern and Eastern Europe, could you discuss the breakdown of store openings in Europe, both Southern, Northern, as well as Eastern, and could you break down the comps in Q4 at North American Retail between women, men's and accessories, as this sounds like women's was the strongest by far, and what you plan to do in the other two areas?

Michael Prince

Yes. So, just in terms of the store openings, you heard us say that about a third of the 90 will be stores that we're opening. The biggest market there that we want to invest in is Spain. We're going to open our stores there. That country performed well last year. It comped positively in the fourth quarter, it comped positively for the full year, and there has been a lot of challenges in Spain.

So I think that tells you something about how the brand is doing there. Germany is another market where we want to open our own stores, not quite to the level of Spain, but we're going to open a fair number of stores there. Russia, no, these aren't our stores. Russia is a market where we're going to be working with partners to develop stores in that market. Portugal, another market where we're going to be opening.

Dennis Secor

Yes, the comps in our full-priced stores, women's was the best performing category, and accessories and shoes were the lowest performers we had, shoes, in particular that was one area where we really cut back our buy. That was something we identified early on that we really needed to clean up the markdowns. So we made a lot of progress there on markdown.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of Susan Sansbury with Miller Tabak. Please proceed.

Susan Sansbury - Miller Tabak

Thanks very much. Dennis just a couple of clarification points, the jewelry impact in the fourth quarter and for the year?

Dennis Secor

For the fourth quarter it was fairly modest. I don’t actually have that at hand. I think the first quarter I said was 6, and the third quarter of last year I believe was 8.

Susan Sansbury - Miller Tabak

First quarter of 2012 is going to be 6?

Dennis Secor

Yes.

Susan Sansbury - Miller Tabak

Okay. So you don’t have, just talking, and you don’t have a total – an impact for the total year?

Dennis Secor

I don’t have it, but the third quarter was the biggest quarter. It is much less impactful than the fourth.

Susan Sansbury - Miller Tabak

Okay, all right. I appreciate it. Thanks so much.

Paul Marciano

Thank you.

Operator

Your next question comes from the line of John Kernan with Cowen. Please proceed.

John Kernan - Cowen and Company

Good afternoon guys. Thanks for taking my question.

Paul Marciano

Thank you and welcome.

John Kernan - Cowen and Company

Want to ask you about how you feel your inventory level or inventory levels are in the wholesale channel within Europe, and are you worried a similar issue, similar to what happened with jewelry could happen in another category with your wholesale partners, and then I have a couple of follow-ups. Thanks.

Michael Prince

Yes, John, this is Michael Prince. Yes, we are watching as I mentioned earlier the inventory levels very closely. And as I mentioned the cancellations were up a little bit, pre-orders were down a little bit, but we feel like the inventory levels are in check.

And as we said we – if you think about our ability to manage inventory in Europe, we do have the outlet channel, which liquidates through the product, and it is only at about 50% consumption right now. So we have the ability even to take on more inventory if we needed to. But right now, when you look at the accounts we are working with all over Europe, we feel like the inventory levels are reasonable considering where the accounts are.

Paul Marciano

And if I can add to that, this is Paul. Jewelry, it was a very specific situation where there are two distributors, who basically had 72% of business of jewelry between two countries, Italy and France, and that is 72% of the world’s total business of jewelry. And when this crisis hit in Italy and France, this planned austerity and all that, these two countries were hit the hardest.

And of course, one of the first thing I think people cut was unnecessary – it maybe in their mind to see the last thing I want, first, I want the bag, first, I want the shoes, and jewelry, if I can afford, yes or no. And that's the way we looked it at. But that was the only category where you can find any product of any licensee, where you see a concentration of 72% of business in two countries. We are sure that this will not happen again that we have such a concentration in two countries.

Michael Prince

Yes, and the other thing is you can think about our wholesale accounts, we've had relationships with these accounts, they have been accounts for many years. For the licensing business, I think we've taken over roughly year and half ago. It was the new business that we took over on the wholesale side. So, you know, I agree with Paul. We've got a good handle with these relationships, and don't see this happening again.

Operator

At this time, I'll now turn the call back over to Paul Marciano for closing remarks.

Paul Marciano

Thank you. We feel we are all very confident of all the steps and strategy we are executing, and we will continue to push forward with our brand in mind up and foremost. To conclude this year, we are extremely proud of what Guess? has become that none of this could have been possible without the contribution of our amazing team of creatives [ph], associates, managers and partners around the world.

I want to thank them for continued support. We accomplished a lot this year, and we have so much to do yet. I am confident also that with this great talent we can continue to be the iconic global brand that has been here for the last 30 years, and would be here for the next 30 years.

For the next earnings release, it would be at the same date of our three days conference of One World One Brand in Los Angeles. We have all the partners, licenses, creative team and management with more than 1000 participants. So I won't be able to be on the conference call, but Michael, Dennis, Russ Bowers, and our Retail President, Nancy Shachtman, will join you, and of course I will meet you in the next one. Thank you again, and we will talk to you next conference call. Thank you.

Operator

Ladies and gentlemen, that concludes today's presentation. All parties may now disconnect. Enjoy your day.

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