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

Guess, Inc. (NYSE:GES)

F3Q08 Earnings Call

December 4, 2007 4:30 pm ET

Executives

Paul Marciano – Chief Executive Officer

Maurice Marciano –Chairman of the Board

Carlos Alberini – President & Chief Operating Officer

Dennis Secor – Chief Financial Officer

Analysts

Gabrielle Kivitz – Deutsche Bank Securities

Christine Chen – Needham & Company

Eric Beder – Brean, Murray & Co., Inc.

John Rouleau – Wachovia Securities

Holly Guthrie – Janney Montgomery Scott

Betty Chen- Wedbush Morgan Securities, Inc.

Margaret Whitfield – Sterne, Agee & Leach

Jeff Klinefelter – Piper Jaffray

Diana Katz – Morgan, Keegan & Company

Janet Kloppenburg – JJK Research

Operator

Good day and welcome to Guess’ Third Quarter Fiscal 2008 Conference Call. Before we get started I would like to remind you of the company’s safe harbor language. The statements contained in this conference call which are not historical facts including statements regarding future plans and guidance for current and future periods maybe deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those suggested and such statements due to a number of risks and uncertainties as described in the company’s most recent annual report on Form 10K and other filings with the SEC. Now, for opening remarks and introductions I would like to turn the call over to Paul Marciano, Chief Executive Officer of the Company. Please go ahead.

Paul Marciano

Good afternoon and thank you for joining us today to discuss Guess’ financial results for third quarter of fiscal year 2008. Joining me are Maurice Marciano, Chairman of the Board; Carlos Alberini, President and COO; and Dennis Secor, Chief Financial Officer. The third quarter was another record setting quarter for our company. We reported the highest revenue and earnings for any quarter in the company’s history. All our businesses around the world contributed to the strong top and bottom line growth. Our revenue increased 43% and operating income increased 45% in the quarter. Net earning reached $58 Million and increased 32% from last year. Earnings per share for third quarter reached $0.62 a 29% increase from $0.48 last year. This marked our 17 consecutive quarter of earning growth.

We continue to grow global business ahead of expectation and manage this growth with long term view and discipline. We are focusing to invest in carriers to support the rapid growth with a strong infrastructure and a great team worldwide. I will start with Europe. The third quarter was another great quarter with revenue growth up 79% to $159.4 Million. Operating profit increased to $46 Million. Revenues were ahead of expectations in every business including set of handbags, shoes, Guess apparel and the Guess [inaudible] line we acquired at the end of last year. The business alone contributed about 705 of earnings growth for European segment this quarter.

We made significant progress in Europe in the last three months. As went out last week, Massimo Macchi will join our company as president for Guess Europe in Middle East starting next week. Massimo brings great global experience in retail development, strategy and brand management in the fashion industry. He has managed and developed some of the world’s top fashion branded vision including Bulgari, Gucci and most recently Gianfranco Ferre. Massimo will be based in our new European headquarters in Lugano Switzerland. The Swiss operation now serves as a centralized platform for all our businesses in Europe.

About international retail expansion. [Inaudible] during the first quarter we opened 66 new stores including 20 in Europe, three in South America and 43 in Asia. These include seven new footwear location in Europe and Asia. In China and Korea we opened 21 retail stores for the quarter including Macaw, Shanghai, Beijing, Hong Kong and Seoul. In addition, in Southeast Asia we opened 13 new stores this quarter including five guess stores, one Marciano, three accessories and four future locations in Indonesia, Malaysia and Singapore. The strong world and international store position is well above expectation from the beginning of the year. We now expect to open a total of 197 stores for the year. At end of this year we will have 586 stores international.

Wholesale. Our wholesale segment which includes Asian operation has another terrific quarter with a 75% revenue growth. The North American wholesale business which includes US, Canada and Mexico performed very well with solid revenue growth, gross margin improvement and expense leverage. Our business in Asia performed well ahead of plans, again, and mainly driven by South Korea.

Retail. During the quarter in North America we opened 19 stores. Our North American retail business has another quarter of strong financial performance. We posted a 15.8% comp for the quarter. I strongly believe that what drove our success was our great diversifying assortment and customer acceptance of our product as well as the Guess brand integrity. Our core retail business record of solid profit growth and a profit margin expansion in that period. Our latest concept Marciano and GbyGuess which are at the early stage of development are significant long term opportunities for future. When constant adjustment of this concept and we challenge ourselves everyday to make them right for customer. As we continue to build these two division both concepts to deliver a profit margin consistent with all our retail brands.

GbyGuess, we are so far opened a total of 31 GbyGuess stores in the US. Our plan for next fiscal year is to open 10 new GbyGuess stores in the United States. Marciano, regarding Marciano, we currently have 37 Marciano stores open in North America and the line is also available in 57 Guess stores. By the end of next year Marciano should have about 52 stores in US and Canada. In Europe we have a total of 30 Marciano stores. We plan to open 10 more stores by the end of fiscal 09. We will also continue our Marciano expansion into Asia. By the end of fiscal 09 we will have 12 Marciano stores in Asia, bringing out total count to 109 stores worldwide.

Licensing. Our licensing business also had another very strong quarter with revenue increase by 33% which was driven by excellent sales of handbags, watches and footwear products worldwide. Our customers love Guess accessories on a global scale. The quality and fashion represent a [inaudible] product and position us extremely well in the current global market.

We continue to diversify earnings across the business segments around the world and our third quarter financial results are another validation of the success of this strategy. For the quarter North American was 43% of our total operating profit and Europe and licensing was 57%. For the first nine months of this year North America was 44% of operating profits. Meanwhile, Europe and Licensing was 56% operating profits. I would address licensing as a key global initiative in my closing remarks and now I would like to turn over to Dennis.

Dennis Secor

Thank you Paul and good afternoon. As Paul mentioned, we just concluded yet another period of record revenues and earnings in the third quarter. Let me know take you some of the key financial details for the quarter. Total third quarter net revenues increased 42.7% to $469.1 Million. All of our business segments contributed to this growth with roughly half the increase coming from Europe. The wholesale segment, which includes Asia and North American retail each contributed nearly ¼ of the growth. Gross profit increased by 41.4% to $218.5 Million and gross margin declined by 40 basis points. Product margins were lower, primarily in Europe. Gross margin was favorably impacted by the overall mix shift towards our higher margin European business and occupancy leverage in North American retail.

During the quarter we achieved leverage over our SG&A investment. Total SG&A expenses increased 39% to $122.8 Million. Our SG&A rate improved 70 basis points to 26.2%. About 51% of the increased SG&A investment related to new businesses and European infrastructure investments. About 25% of the increase supported the higher sales volume. About 9% of the increase supported additional advertising and existing businesses and 7% of the increase was due to performance based compensation which includes the impact of stock compensation accounting.

For the quarter the company’s operating profit increased by 44.6% to $95.6 Billion which includes the favorable impact of currency. Operating margin increased by 30 basis points to 20.4%. This quarter includes a minority interest charge of $1.2 Million no taxes and last year’s third quarter included $1.7 Million in non operating asset sales gain. Our effective tax rate for the third quarter was 38.8% compared to 35.2% in the prior year quarter. We plan to end this fiscal year with a 38.8% tax rate. We increased net income by 32.5% to $58.3 Million and increased diluted earnings per share by 29.2% to $0.62. The combined impact of last year’s lower tax rate and the non operating asset sales benefited last year’s third quarter EPS by about $0.04 per share.

Next, I’d like to review our revenues and earnings by business segment. Our North American retail sales increased 17.7% to $210.4 Million. We continued our retail expansion which resulted in a net 5.4% increase in average square footage over last year. For the period, the retail segment’s operating margin was essentially flat at 14.9%. This resulted from the leveraging of expenses offset by a decrease in gross margin. In our wholesale segment, revenues increased 75% to $76.9 Million with 2/3s of the increase coming from our Asia business. Our North America wholesale business was especially strong with solid top and bottom line growth. Operating margins for the segment improved to 22.4% this year driven by higher product margins and improved leveraging of SG&A cost, particularly in North America. Licensing revenue increased 32.6% to $22.4 Million which is outstanding, especially considering that this excludes royalties from Focus Europe and our South Korean operations.

Revenue for the Europe segment increased 78.8% to $159.4 Million. All of our businesses in Europe grew with Focus Europe hosting its best performance since our acquisition. Operating earnings increased 47% in the period and our operating margin was 28.8% in Europe. We see this year’s operating margin for this business in the 22% range and believe this to be a sustainable level considering our current business mix and investments in infrastructure.

Now, I’ll turn our attention to the balance sheet. We ended the quarter with $191.9 Million in cash compared to $180.2 Million a year ago. Accounts receivable increased by $122.9 Million to $296.6 Million compared to the prior year. About 90% of the increase supported the substantial growth in Europe plus the new Asian operation. As a result, most of our receivables are now denominated in foreign currencies. The impact of currency, primarily the strong Euro resulted in an increase of about $27.5 Million in receivables. Overall, base sales outstanding improved slightly. Historically, the third quarter represents the peak of our receivable cycle and we expect strong collections in the fourth quarter.

Inventory reached $223 Million an increase of $78.4 Million or 54%. Nearly half the increase relates to our new businesses. Almost 20% of the increase relates to our core European businesses and the remainder relates to the expansion of our North American business. We store a substantial portion of our non US product in US dollars and therefore have benefited from the stronger Euro and Canadian dollar. This should contribute to improve margins when this inventory is ultimately sold. Currency translation increased ending inventory by $12.2 Million compared to the prior year. All in all we now expect our inventory position at the end of this fiscal year to be between 25-35% higher than at the end of last fiscal year. And, I’ll turn the call over to Carlos.

Carlos Alberini

Thank you Dennis and good afternoon. I will first address our outlook for the remainder of this fiscal year. Our business remains strong across all of our segments. Our retail business in November continued the trend of previous quarters and delivered double digit comps. Based on this trend and our conservative forecast for this holiday season we continue to expect a comp increase of mid single digits for the fourth quarter which should result in a 13% comp for the full fiscal year and a total annual revenue increase of about 16%. Based on these expectations, we are increasing our consolidated revenue guidance for this fiscal year to a range of $1 Billion $680 Million and $.7 Billion. We remain comfortable with a full year operating margin guidance of 17.5% that we provided in the last conference call. As a result, we are raising our EPS guidance to a range of between $1.93-$1.96 this year.

Now, let’s talk about our outlook for next year. We are planning net year’s consolidated net revenue to be in the range of $1 Billion $970 Million and $2 Billion $50 Million and expect to increase operating margins slightly to 18%. We expect diluted earnings per share in the range of $2.35-$2.45 and we are planning next year with an effective tax rate of 37%.

Regarding quarterly earnings, our business model and mix continue to evolve and operating earnings and margin performance our becoming more consistent among quarters. For next fiscal year we expect the first and second quarters to deliver similar operating margins and for the third and fourth quarters to deliver similar operating margins between them as well. This should have the greatest impact on the third quarter which has historically been the highest margin quarter as we continue to adjust product flow and shipments among months in Europe. We are pleased with this development which is a direct result of our business diversification effort and last year’s fiscal year end change. As you may recall, one of our objectives with the change was to provide with more consistent quarter-to-quarter comparisons.

Next fiscal year we plan to continue to invest in retail expansion in North America and Europe and in our infrastructure. We expect to close the current fiscal year with capital expenditures of about $94 Million net of 10 of allowances. For next year, we expect our capital expenditures to be approximately $126 Million net of 10 of allowances and depreciation and amortization to be about $57 Million.

For fiscal 2009 we plan to expand our retail square footage in North America by more than 10%. We are planning retail revenues to increase in the mid teens and for comps to increase in the low single digits. We are planning operating margin for the retail segment to reach about 15.5% net year which is about a 50 basis point improvement over our current fiscal year’s expectations of about 15%.

Our North American wholesale business has performed well in fiscal 2008 with modest top line growth and effective expense management. We are planning next year for this business to expand door count slightly in order to yield a similar operating margin to this year’s level. The main contributor to the growth in the wholesale segment will continue to be our new Asian business. Overall, we see revenue growth in the mid to high teens for the wholesale segment for fiscal 2009 and for operating margins to decrease slightly due to the further investment that we plan to make in Asia.

Europe continues to be a critical part of our international expansion strategy. We plan to continue to invest in the region and infrastructure including the Lugano headquarters and in retail expansion. We are also acquiring back the license of Guess Kids in Europe. This business should be accretive to next year’s earnings. We are planning next year’s Europe revenues to increase in the 25-30% range and as Dennis mentioned, we expect our operating margin to be in the 22% range.

Our licensing business continues to perform above our expectations this year and we plan to increase licensing revenues in the mid single digits next fiscal year and for this business to maintain its current operating margin performance.

Thank you very much and with that I will turn the call back to Paul. Paul?

Paul Marciano

Thank you Carlos. I would like now to update you on a few global key initiatives that we spoke about this past year. The first one was footwear. We continue to invest in that category and the results are very apparent. For the quarter, our North American footwear business increased by nearly 50% comparing to the same period last year. This year we have opened five footwear stores in Europe and four in Asia, bringing our current footwear store count to nine stores. Next year, our goal is to open seven in North America, eight in Europe and five in Asia totaling 29 footwear stores by the end of fiscal year 2009.

Our second global key initiative is GS Watches. Our goal this year was to double the size of the business and we have already reached that goal. For the quarter, our global Guess Collection watch business has increased by 118% comparing to the same period last year. The retail price range from $200-$1,400 on these Swiss made watches.

Our third global key initiative related to handbags. We had tremendous growth on this third quarter as well. The business was up 32% in America and our global handbag category was at 60% year-to-date.

Now, for next year, we have three key goals. First, we will continue to invest in North America retail expansion as Carlos mentioned. We plan to end this year with 380 stores in Europe, Canada and Mexico. Our goal is to open 68 stores in fiscal 09 which will included 18 Guess stores, 12 Marciano, 10 GbyGuess, 15 accessory stores, seven footwear stores, as well as six new stores in Mexico. A second initiative would be Europe. Europe is about two years ahead of original plan. We believe that we can grow that business between $700-$800 Million and a Million [inaudible]. The key challenge for us is to penetrate north of Europe successfully. To achieve this we have secured executive and [inaudible] in key cities such as London, Düsseldorf, Paris in addition to Barcelona, Milan and [inaudible]. Our third goal relates to Asia. We are consistently focusing on this new market. We have a strong and fresh future and key opportunity for strong growth. We want to continue to invest in key strategy location and build our retail stores organization. We will also continue to focus in emerging markets such as India and Russia which remain key territories for Guess brand in all categories.

We feel that our business model and diversification of our products in different parts of the world give us significant advantage in a market to have stable and strong earnings growth going forward. It is clear from our report today that the globalization of the Guess brand has put our company in a different pace and [inaudible] opportunity for many years to come and to execute.

I want to say thank you to our team around the world for all their effort and hard work that went into making this year the best year ever, once again. Thank you and we are ready for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen 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 the question please key star followed by two. We request that everyone limit themselves to just one question so that we can accommodate as many people as possible. If time permits, we will be happy to take the following questions. Again, ladies and gentlemen please key star one to ask a question. Your first question comes from the line of Gabrielle Kivitz with Deutsche Bank. Please proceed.

Gabrielle Kivitz – Deutsche Bank Securities

Good afternoon and congratulations on a strong quarter in a very challenging environment.

Carlos Alberini

Thank you Gabrielle. How are you?

Gabrielle Kivitz – Deutsche Bank Securities

Great. My first question is, I was hoping you could talk a little bit more about the merchandise margin declines in the Europe business and the US business. And, just maybe also give us a sense of what we should be expecting in term of merchandise margins going forward from both of those businesses. So, a little bit of color from the recent quarter and how we should think about that going forward. Thank you.

Dennis Secor

Sure. Let me start by talking about the European business. I would start by saying that our European business has become very complex and in any one quarter we’re impacted by a lot of moving parts. There’s currency impact, there’s business mix, you know, Focus has a different margin profile than the rest of our European businesses. We have product mix issues. We told you last time that the change in our business model would move from handbag shipments in the third into second quarter. Footwear had a higher penetration this third quarter than a year ago. And, we’ve made a lot of investments. We’ve talked about investments in infrastructure and we had some one time charges related to that. So, in any one quarter in Europe there’s a lot of moving parts that have impact on both gross margin and our operating margins. So, you know, the way that we’re looking at this business is not so much on a quarterly basis, you know. For example, last year’s third quarter operating margins expanded by a full 12 points. That was 10 points over the average for the year. So, we’re looking at this business on an annual basis. I said in my prepared remarks that we’re looking at it to deliver operating margins in the 22% range. That’s down about three points from our performance last year and the way I would look at that is about one of those three points come from the impact of the Focus business and two of the three points come from the impact of the infrastructure investments that we’re making.

Gabrielle Kivitz – Deutsche Bank Securities

Okay. And, on the merchandise margin portion of it specifically? Should we not be thinking about that quarter-to-quarter? I guess I ask this because, when I look at your total results and I see, you know, gross margins down for the first time, we haven’t really seen that in a long time. So, I’m just trying to get a handle on that.

Carlos Alberini

Gabrielle, its Carlos. What justifies or explains the difference for the third quarter was a mix of different businesses and if you look into what drove that small decline was primarily the performance of the European segment which experienced a very different mix for this particular quarter with some of the things that were just mentioned. So, also if you look at what happened a year ago in the third quarter in Europe and using the recast third quarter we were up like 12 points. That’s 12,000 basis points. So, obviously, that quarter was somewhat unique and we are looking at what should be the ongoing expectation for the total business. With respect to our business in North America, our margins are really, really strong and if anything, we expect that in the fourth quarter we’ll see an increase in margins. So, we are not, we think that this is just related to that change in the mix.

Gabrielle Kivitz – Deutsche Bank Securities

Okay. And so, were the gross margins for the US business, excluding GbyGuess and Marciano, were the gross margins up for that domestic business?

Carlos Alberini

Yes. Once you consider occupancy costs which we show as part of costs of goods sold.

Gabrielle Kivitz – Deutsche Bank Securities

With the occupancy they were up? So, without the occupancy the merchandise margins were down in North America?

Carlos Alberini

Well, if you consider, if you take all the new businesses meaning Guess, I thought that was what you asked, the margins were up.

Gabrielle Kivitz – Deutsche Bank Securities

Okay. And then, if I could just ask a question on the wholesale, the North America wholesale business, was surprisingly stronger than I expected it particularly what we’re hearing from other wholesalers domestically. Just wanted to understand and get some color there and see what we should be expecting from that going forward. I know it’s a small piece.

Carlos Alberini

We are very pleased with our wholesale business and we were, you know, just very excited about the performance in terms of both top line, bottom line, the margins were very strong and we continue to see very healthy business there. Now, of course, we are anticipating very modest growth for next year but, we think that up margin is sustainable.

Gabrielle Kivitz – Deutsche Bank Securities

Thank you and good luck for the rest of the year.

Paul Marciano

Thank you.

Carlos Alberini

Thank you.

Operator

Your next question comes from the line of Christine Chen with Needham & Company. Please proceed.

Christine Chen – Needham & Company

Thank you. Congratulations on yet another fabulous quarter.

Paul Marciano

Thank you Christine.

Carlos Alberini

Thank you.

Christine Chen – Needham & Company

I wanted to ask you a few questions. One, I know that there’s been some concerns on some part about the investments that you’ve made on sweaters and coats and I wanted to see how that’s been performing both in the third quarter and in November so far. And, if you could just expand a little bit about the performance of GbyGuess.

Carlos Alberini

With respect to sweaters and coats, actually this was one of our big initiatives to drive growth in the business and we are very pleased with the investment. I mean, obviously, the fact that the weather didn’t get cold until pretty recently had an impact on that business. But, our business in November was very, very strong in both categories. So, we think that the assortment is right and we feel that we are well positioned for this holiday selling. With respect to GbyGuess, we are, as Paul mentioned, we are in the early stages of development of this brand. We are excited about the opportunities. We have seen that, what we saw was that a big market opportunity is definitely there. The mix of business is very similar to our system business except that men’s is even more penetrated and shows big lines of opportunity there as well. We are anticipating that next year this brand is going to be accretive to earnings and we are excited about that as well. We are not going to expand very aggressively, as you know, we will only open 10 stores next year and we will continue to refine the concept.

Christine Chen – Needham & Company

Has performance been consistent across the two different types of conversions as well as the new stand alone stores? I mean, not stand alone but, the new stores?

Carlos Alberini

No. It’s on a store-by-store basis. You know, you cannot say, “This performance is consistent with that.” It’s like in every one of our retail formats, it depends on the location and [inaudible] and profitability depends on that.

Paul Marciano

Christine, this is Paul. Hi. I think we have to be reminded just that the concept is only a few months old and definitely we start to open the first 20 in April but, during the big Green Friday we had a great weekend across all GbyGuess stores and that has only been like five or six months after we opened the first ones. So, we are learning a lot through our customers. We are listening a lot to our customers. And, definitely, that learning curve is going to go on for at least maybe a year, a year and a half. But, we did open and continue to open that chain of stores with a clear goal to be like a 10 or 15 year business like we started on everyone that we did. So, already to see the adjustment we made in the line, we are very pleased with the results we have. And, I think that you will see the numbers speaking for itself the next year.

Christine Chen – Needham & Company

Okay. Great. Thank you. And then, if I missed it, can you quantify the impact of the 53rd week on the US retail business last year?

Carlos Alberini

I think it’s about $13 Million in revenue.

Christine Chen – Needham & Company

Okay.

Carlos Alberini

And, that is included in our overall revenue guidance that we gave. The fact that, that week is not there.

Christine Chen – Needham & Company

Okay. Great. I think the stores look great. Congratulations and good luck for the holiday.

Paul Marciano

Thank you.

Carlos Alberini

Thank you.

Operator

You’re next question comes from the line of Eric Beder with Brean Murray. Please proceed.

Eric Beder – Brean, Murray & Co., Inc.

Good afternoon. Congratulations on a great quarter.

Paul Marciano

Thank you.

Carlos Alberini

Thank you Eric.

Eric Beder – Brean, Murray & Co., Inc.

You know, I’m interested, you had some interesting expansion plans for the US that we haven’t seen in a while in terms of Marciano and the accessory stores and those have not been expanded as much. Can you talk, you know, you found the space now with Marciano’s that you’re comfortable expanding now by 12 stores? And, what changes have you done to the accessory store to restart growth in those in North America?

Paul Marciano

Well, about Marciano we have done to get, we have just added a big category which is Guess footwear and if you go to any Marciano stores you are going to see a major presence in center stage of that store. And, before, it was only apparel. So now, the next way that it will happen in Marciano stores is to add the handbag. Of course, you know the track record we have in handbag and footwear in our current Guess store. So, definitely we feel much more comfortable now to accelerate the pace of opening Marciano stores knowing that the product is there. You will also notice now, if you go in Marciano stores that there are Marciano watches which we started a year ago. But now that we have the shoes in place and the bags coming in the next six months and the watches in place today, now we have a full complete product that we can offer in any store opening. And, the best example if you want to go would be in Las Vegas, the new one we are opening there.

Accessories, we have, we have let say focused on the international more than domestic and now, the domestic, when I say domestic it includes Canada and Mexico which is North America for us, we have definitely made a priority to accelerate accessory stores. Again, because the products you bought completely that concept the box is pretty small between 800 and 1,100 square feet and we don’t have the need of space like you have for footwear when we do footwear we need a bigger box because of the size of the boxes. So, definitely now we see three years that we have opened the first accessory store. We have close to 140, I think, around the world and we feel completely confident that North America is a priority for us to open now at the same pace.

Eric Beder – Brean, Murray & Co., Inc.

Great. And, congratulations on a fantastic quarter and some great guidance. Thank you.

Paul Marciano

Thank you.

Carlos Alberini

Thank you.

Paul Marciano

Footwear will be the next big thing, Eric.

Operator

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

John Rouleau – Wachovia Securities

Hey guys, great quarter. So, wondering if you could talk a little bit, I know you’ve got a new prototype store out there that you’re testing a little bit. I think it’s in the BeverlyCenter, it’s a little bit of a hybrid between the US and Europe. I know there’s just a few and it’s early but, wondering if you’d talk a little about that.

Maurice Marciano

Yeah. This is Maurice. Very simply our goal is to combine the two concepts and that’s why you see a really closing up, you know, of the two concepts. The goal will be to have the same store all over the world. So, we are working towards that direction and it’s doing great. We just opened in 8,000 square feet in [inaudible], Italy. Okay. It’s a resort city and I must say that this is the most beautiful store we have opened as of today. It is one of our franchisee has opened that store and it is gorgeous. So, we continue to fine tune it into that direction with the clear goal to have all of our stores, all over the world, to have exactly the same feel and the same experience for the customer.

John Rouleau – Wachovia Securities

So, the newer stores that you’ll be opening like next year will those all be under this prototype? Or, will they go into select centers and select places because, it’s more of an upscale type store. So, I’m just wondering what the new stores will look like?

Maurice Marciano

They are going to be, most likely, basically like this one.

John Rouleau – Wachovia Securities

Okay.

Maurice Marciano

The one that you’ve seen in Beverly Center.

John Rouleau – Wachovia Securities

Yep.

Maurice Marciano

They’re going to be like that.

John Rouleau – Wachovia Securities

Okay.

Maurice Marciano

They are going to be like that.

John Rouleau – Wachovia Securities

And then, it wouldn’t be a Guess call if you didn’t go through a few product categories. Obviously, with the type of comp that you did in the quarter, everything was really good. I can’t imagine you had anything that didn’t perform well but, just wondering if you could talk about some of the bigger categories. You touched on sweaters and outerwear already but, maybe denim bottoms and some of the tops and maybe Marciano versus young contemporary and men’s and just what you’re seeing in some of the different categories. Thanks.

Carlos Alberini

The trends that we’ve seen are pretty much in line with what we saw before and where we invested our inventory dollars. So, denim was very strong, outwear and sweaters. We talked about dresses, we have had a phenomenal business in dress, woven tops, even knit tops, YC and men also have some success and then all of the accessories watches, and Paul referred to this, watches, handbags, footwear, phenomenal business. So all, the great thing is that the business has been very strong across the board and that is how we have been able to really capitalize on such a strong trend in comps.

John Rouleau – Wachovia Securities

Great. One quick follow up. In the past when the mall got very, very promotional, you know, in December and in the holidays, often times you were forced, you know, to get promotional just to compete. I mean, your inventory controls are such different today, can you just comment on the promotional environment and what your kind of strategy and outlook is, if the mall continues to get very, very promotional leading up into the holiday?

Carlos Alberini

I think, probably, the best example was the day after Thanksgiving. We did have some early birds, as you know, specials and we had great business and we think we were less promotional than most and less promotional than the year before. We don’t think that the tone of business will change dramatically from what we saw. But, of course, like you said, we will continue to watch inventories very carefully.

John Rouleau – Wachovia Securities

Great. Thanks a lot guys. Keep it up.

Paul Marciano

Thank you.

Maurice 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 congratulations. Just looking at the investments in the different global parts of the business, could you just sort of run through a little bit more longer term, you know, looking at Europe whether you think next year will be your big investment hurtle and then things will sort of fall off and things will pick up more in Asia. If you could sort of just go through that thought process.

Carlos Alberini

Yeah, we, like we said, Holly we do anticipate that operating margin to be sustainable but, keep in mind, you know, the new headquarters in Switzerland is definitely going to require some additional investing at least the annualization of what we started investing in. That is already considered in that guidance we are giving about the 22% operating margin. Paul also mentioned, the new showrooms, we have three major centers and that we think is critical for the growth of the region. That is also included in that type of guidance. Now, of course, if we continue to capitalize on growth, over time we can see leverage of those costs because, you know, with this we are pretty much at the end in terms of the big investment initiatives. And then, you know, we should be able to leverage from there. But, we are taking one year at a time here.

Holly Guthrie – Janney Montgomery Scott

Great. Thank you and good luck.

Carlos Alberini

Thank you.

Operator

Your next question comes from the line of Betty Chen with Wedbush Morgan Securities. Please proceed.

Betty Chen- Wedbush Morgan Securities, Inc.

Thank you. Good afternoon everyone and congrats on a great quarter.

Carlos Alberini

Thank you.

Paul Marciano

Thank you.

Betty Chen- Wedbush Morgan Securities, Inc.

Now, obviously it sounds like Asia continues to be an area of tremendous opportunity for you and I recognized it was probably an awfully small base, but given how well Europe has been trending for you can you maybe talk to us a little bit about maybe comparing the two regions as Asia is in a much earlier stage of growth. How are the two divisions, you know, progressing? Is Asia growing similar with what you saw in Europe in terms of top line and margin characteristics? And, longer term can you help us quantify what you think maybe an opportunity for the Asian market? Thank you.

Paul Marciano

I’m going to address, this is Paul, I’m going to address mainly the strategy of the store expansion and Carlos will address, I think, the margins. Basically, if you look at Asia, obviously on one hand we just barely started, on the other we have partner in Southeast Asia for near 16 years now in Indonesia, Malaysia, Taiwan, Thailand. The treaties of core now is China for us, Korea in which we are running directly and we just barely started. We have a lot of stores, for example, in Philippians, for almost 70 stores, that also for 15 years and it’s a partner. So, we are just in the process of really developing Asia. It is just beginning. Japan, we had a licensee for 12 years and we ended the license through, at one point or another through what we did in Korea and China and operate directly. Japan is a very, very challenging market, maybe the most challenging market in the world, in my opinion. So, we have a lot of work ahead of us and to compare Europe with Asia, it’s really difficult. I mean, Europe we are very familiar, we know basically every country there and we are well established on many parts of Europe. Asia, we want to act cautiously and we’ve also strong partner at every step except, of course, Korea and China. So, the investment will be substantial but, we are looking from between now and the next five years what we plan to do. And, at one point or another we want to have a business the size of what we have in Europe to have it in Asia on a direct basis. Carlos will address gross margins.

Carlos Alberini

You know, to get there, you know, we’re look at the business with that 20% range, you know, growth on top line. We think that the operating margin for this business in the medium turn should reach the mid teens. Fortunately, our business in Korea has demonstrated that is entirely possible for the region and we think that once the business gains some size we could also capitalize on the infrastructure investments we are making.

Betty Chen- Wedbush Morgan Securities, Inc.

Great. Thank you and good luck.

Dennis Secor

Thank you.

Paul Marciano

Thank you.

Carlos Alberini

Thank you Betty.

Operator

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

Margaret Whitfield – Sterne, Agee & Leach

Good afternoon. Congratulations.

Paul Marciano

Hi Margaret.

Margaret Whitfield – Sterne, Agee & Leach

Hello. Your opportunities in northern Europe, I wondered what is needed? I know you feel you might need a different product and I wondered how you’re doing on the collaboration between the European and the merchandisers here in the North American market to deliver a more unified product offering. And, finally, if you have any color on what we might expect in terms of new fashion for next year, I’d appreciate it. Thank you.

Paul Marciano

Thank you. Let me address north Europe. North Europe, as you know, if you are familiar, it is two different worlds between south and north. We are now have management in for the north, for Germany, for England, for Holland which we didn’t have real business there yet. The line definitely, the product line assortment has to be addressed because it was really very southern Europe line orientated. And, we are just at that point hiring head of merchant for all Europe who would be able to coordinate all that which is a turning point for us. Second, also we plan to invest in some key locations including Düsseldorf, including Amsterdam, including also new stores in England and establish the brand as well as we did in France, Spain or Italy. So, again, it is a matter of investment, a matter of people, a matter of time. But, as you just mentioned before, the line has to be appropriate for north Europe. Whatever you see in south of Spain or south of Italy you’re not going to sell in Sweden. So, definitely, we have addressed that, we prepared that and fiscal 09 should have a great increase of business in that region. We are well prepared for that.

Margaret Whitfield – Sterne, Agee & Leach

And, regarding the fashion in Europe as well as North America, where are you regarding that? Commonality of design?

Maurice Marciano

What we’re going to do, this is Maurice, what we’re going to do is we are going to increase the penetration of the American product into the collection for northern Europe. Because, we really believe that the American product is much more inline with the tastes and the fit for northern Europe rather than the products from Italy. So, that’s what we’re doing.

Margaret Whitfield – Sterne, Agee & Leach

And any thoughts on the fashion direction for next year, Maurice?

Maurice Marciano

Yes. For the fashion direction for next year we really believe that we’re going to see a resurrection of the non denim bottoms, very strongly both for men and women which should have a big impact on the business. Because, this has slowed down tremendously in the last three years and we think that, we think this is going to have a big impact. Besides that, we see the knitwear, the knitwear fashion for women, the knitwear fashion business really taking a bigger part of the business versus the woven tops.

Margaret Whitfield – Sterne, Agee & Leach

Okay. And, Dennis, what was the currency benefit to the bottom line in the quarter?

Dennis Secor

For the quarter it was $4.8 Million.

Margaret Whitfield – Sterne, Agee & Leach

Okay. And, in terms of November comp trends where they consistent throughout the month Carlos?

Carlos Alberini

Yes.

Margaret Whitfield – Sterne, Agee & Leach

You have a much lower forecast for the quarter overall.

Carlos Alberini

Very consistent with third quarter. Yeah, as we said Margaret we remain very conservative with that forecast for the remainder of the holiday season.

Margaret Whitfield – Sterne, Agee & Leach

And, was your comp in Q3 driven by ticket traffic? Or, what drove the comp?

Carlos Alberini

We had the similar type of trends that we have experienced all the year in terms of good traffic, good conversion rate and average unit retail was also up slightly.

Paul Marciano

And that was nine question you have.

Margaret Whitfield – Sterne, Agee & Leach

Thank you. Good luck in Q4.

Paul Marciano

Thank you.

Carlos Alberini

Thank you.

Operator

Your next question comes from the line of Shaun Knotin with Piper Jaffray. Please proceed.

Jeff Klinefelter – Piper Jaffray

Yes, actually, it’s Jeff Klinefelter calling in. So, congratulations everyone on another fantastic quarter.

Carlos Alberini

Hi Jeff.

Dennis Secor

Hey Jeff.

Paul Marciano

We hope it’s not too late for you.

Jeff Klinefelter – Piper Jaffray

No. No, not very late yet, we’re okay. In terms of the US retail comps, I guess, a quick follow up to that last question. In terms of the impact that the accessory categories have had on US retail comps and maybe, to frame that up you can remind us again how many doors you have, in the US retail stores, how many doors you have footwear, handbags and watches in and how those have contributed to those comp trends.

Paul Marciano

I don’t know if I have the exact number of how many doors we have in footwear. I think, we are close to 110 doors in retail and all the doors in factories. But, it think, the total comp, if I’m not mistaken, for the quarter could be in the high 20s.

Carlos Alberini

Footwear has trended and that is exactly what Paul is alluding too, has trended ahead of the total store, if that helps. So, obviously, it has contributed greatly to the comp growth.

Paul Marciano

Yeah.

Carlos Alberini

The same thing is true for watches and handbags.

Paul Marciano

Watches, I can tell you, for the quarter we were up, if I’m not again mistaken, around something like 30% against 40% same quarter last year. So, it was a huge jump but mainly because we pushed this GP watches with the ticket price is almost like three times the Guess watch, the regular Guess watch. So, that’s what helped a lot.

Jeff Klinefelter – Piper Jaffray

So, I would imagine this is driving up the UPTs in terms of it being a comp catalyst?

Paul Marciano

On accessories? Yes. Yes.

Jeff Klinefelter – Piper Jaffray

Okay. And the, just two other quick ones. In terms of your China growth next year, what’s your plan or what’s implied in that growth in terms of new stores you plan to open in mainland China?

Paul Marciano

Again, in fact, I’m on my way to China this week, I’m leaving day after tomorrow. We are planning to continue to cover the key cities of south like Shanghai, Beijing, Macaw, Honk Kong [inaudible], all these locations. Once we remove our selves from the center of these key regions of main China, of mainland, we want to find the right partner to operate together because, it’s very, very spread out. And, we plan to have a very cautious organization structure there to open these stores because we want to keep control with partners who are in retail business and not just to run 100 of doors in China. We know what we can do and we know what we cannot do and all the key cities will be opened and controlled by us. And, all the remaining cities that are 700 cities and when you talk about 700 cities there are a multitude of 6 Million people, this is where we will find some partners to work with. So, [inaudible] I don’t have it but, definitely we will have a better picture in the next 60-90 days where we go for 09 as a firm number of doors to open in mainland.

Jeff Klinefelter – Piper Jaffray

Okay. And then, just one last quick question, your GbyGuess, it’s very early obviously, that you have no content but, any sense in terms of what size you have to get for total stores to break even in that concept?

Paul Marciano

Oh, we believe, I think, at the end of next year we should be able to break even, for sure.

Maurice Marciano

[Inaudible] true how positive [inaudible].

Paul Marciano

Let’s put it that way Jeff. End of next year 09 we have to be break even, that’s for sure.

Jeff Klinefelter – Piper Jaffray

Okay. Very good. Good luck with the holidays everyone. Congratulations.

Paul Marciano

Thank you.

Carlos Alberini

Thank you very much.

Operator

Your next question comes from the line of Diana Katz with Morgan Keegan. Please proceed.

Diana Katz – Morgan, Keegan & Company

Hi. Congratulations.

Carlos Alberini

Hi.

Paul Marciano

Thank you Diana.

Diana Katz – Morgan, Keegan & Company

While it’s included in guidance, can you just talk a little about how large and profitable the Guess Kids license is that you’re acquiring?

Carlos Alberini

It is not that large. We are anticipating that next year that could contribute about 4-5% of the gross margin in Europe. And, it is profitable.

Diana Katz – Morgan, Keegan & Company

And then, are there any other licenses that you are looking to reacquire in the European business?

Paul Marciano

Not at the moment, no. I think we’ve captured basically all categories and again, I think you have heard us say that time and time over, we know what we can do and we know what we cannot do and that really accessory world we have the best partners and we intend to keep that way. When it comes to apparel we believe that we have been reacquiring and become partner with license we have and there is basically no apparel license left in the world except Philippians and South Africa which are very small remote countries and for customer and [inaudible] reason we will not be able to achieve that to be direct. But that’s basically that. But, for example, the key element that you have seen happening here has been Korea. We have license for 19 years and because the rules and laws have changed in Korea and South Korea we’ve been able to operate directly and these turn out to be an excellent, excellent investment we made to go direct in Korea.

Diana Katz – Morgan, Keegan & Company

On that note, in Europe would you be able to break out the size difference between apparel and accessories and how that mix shift has been impacting margins?

Carlos Alberini

No, we do not break those numbers down, Diana. With respect to the margins, I mean, there is a lot that has to do with a mix of shipments by month and that business, like Dennis said earlier, has become very complex because of all the different types of business that we have currently there.

Diana Katz – Morgan, Keegan & Company

Okay. And then, in terms of the US retail stores would you be able to give us figures on sales per square foot for the US accessory stores? Do they perform inline where the licensed accessory stores are? And also, for Marciano, where do you see with these new categories coming in, where do you see, do you have any sort of target metric for sales per square foot?

Carlos Alberini

Well we have said that the Marciano stores are performing over $600 per square foot and that has been the case for the whole population for Marciano stores. To speak to accessory stores, one of the, this is one of the main reasons we are so excited about opening some more stores in that category, like Paul said before because, several of our stores are doing very, very well in terms of productivity and obviously, profitability.

Diana Katz – Morgan, Keegan & Company

Okay. Thank you very much.

Paul Marciano

Thank you.

Carlos Alberini

Thank you.

Operator

Your next question comes from the line of Janet Kloppenburg with JJK Research. Please proceed.

Janet Kloppenburg – JJK Research

Good afternoon and congratulations.

Carlos Alberini

Hi Janet.

Janet Kloppenburg – JJK Research

Hi. Just a couple of follow on questions. First, I’m a little confused I thought, Carlos you had said that GbyGuess would be accretive to earnings next year and then I heard maybe Paul say break even? So, maybe you could clarify that?

Carlos Alberini

I think Paul just said at least we would break even. So, obviously, we are, our internal plans are to be accretive to earnings and that is what we are guiding to.

Janet Kloppenburg – JJK Research

Okay. And, just a question on that Carlos, is you’re only opening 10 next year. Is there a strategic reason behind that given how many you opened this year and the fact that you do feel good about the progress of the brand?

Paul Marciano

Yes. I mean, this is in our plan. We have an immature need to open a certain number of doors to have the product adequate for the stores and now, as you heard, the plan of how many stores we plan to open next year which I think in North America 68 stores.

Janet Kloppenburg – JJK Research

Right.

Paul Marciano

Part of that number will be 10 GbyGuess stores, 15 will be accessory, seven will be footwear, 18 will be Guess stores, 12 will be Marciano. So, there is that much cap ex we can allocate to each division and that is the allocation we have for GbyGuess.

Janet Kloppenburg – JJK Research

Okay. Good. And then, on the US comp trend, obviously, it was very strong in November. I think you said that you’re looking for it to be up mid single digits in the fourth quarter. Is that just general conservatism, or is there a big bump from last year’s December comp that maybe will cause the number to just naturally come in?

Carlos Alberini

No, no. It is conservatism and, you know, of course when we do that we’re looking at everything and that includes looking at our performance last year but, if you look at how we comp against November which was a very strong comp, we were able to continue to comp a very high number.

Janet Kloppenburg – JJK Research

Right. And, on the US retail gross margin, Dennis I just want to make sure I understand it correct. Is the reason that the margin was down was because of the mix of the accessory businesses that are growing as a percentage of the sales of the business?

Dennis Secor

I’m not sure I understand.

Janet Kloppenburg – JJK Research

Well wasn’t the gross margin down in the US retail stores in the third quarter?

Carlos Alberini

No, no, no. The main issue was the contribution and the dilution in margin because of the new concepts.

Janet Kloppenburg – JJK Research

Oh, that was it. Oh, so the product margin was actually improved?

Dennis Secor

Right. Yes.

Janet Kloppenburg – JJK Research

Alright. I apologize. Carlos, can you just go through a little bit about what you talked about next year’s third quarter that the margin there will be closer to the fourth quarter? How do you want us to think about that?

Carlos Alberini

Right. You know, basically what we would like you to consider is that we do anticipate that the first and second quarters in terms of operating margin performance, we expect them to be very close to each other.

Janet Kloppenburg – JJK Research

Which they were this year.

Carlos Alberini

Exactly.

Janet Kloppenburg – JJK Research

Yes. Okay.

Carlos Alberini

We expect the same type of phenomena to occur with the third and fourth quarter and that is not the case this year.

Janet Kloppenburg – JJK Research

No. The third quarter is higher.

Carlos Alberini

Right.

Janet Kloppenburg – JJK Research

So, the question is do you expect the third quarter to come in next year? Or, do you expect the fourth quarter to go up?

Carlos Alberini

We expect the third quarter, well, it should be a combination but, you know, because at the end of the day, you know, we are giving you these overall guidance for the year and a 18% operating margin. So, obviously, what we do anticipate is that there is going to be some flattening of the third quarter and taking it from the fourth quarter.

Janet Kloppenburg – JJK Research

In other words, the fourth quarter is anticipated to rise?

Carlos Alberini

Exactly.

Janet Kloppenburg – JJK Research

Okay.

Carlos Alberini

That’s because of how the businesses are evolving.

Janet Kloppenburg – JJK Research

Okay. Could you help me with that a little bit, understanding that evolution and the affect on, the influence it has on the operating margin in the fourth, third and fourth quarter?

Carlos Alberini

The major factors here is the significance of the retail business as part of the total mix. And, also what we’re trying to do to move some of the shipments to either earlier in the cycle for Europe.

Janet Kloppenburg – JJK Research

Okay.

Carlos Alberini

Which is taking some of that margin away from the third quarter.

Janet Kloppenburg – JJK Research

Okay. So, you just want it to be clear then that we should look for our operating margins to be down in the third quarter of 08 versus 07 and then some sort of offset in the fourth quarter 08?

Carlos Alberini

Exactly.

Janet Kloppenburg – JJK Research

Okay. Great. I understand that. And, alright. I think those are all my questions for now. I’ll speak to you guys later. Thanks.

Carlos Alberini

Thanks Janet.

Paul Marciano

Thank you.

Operator

At this time there are no further questions. Ladies and gentlemen this ends the Q&A portion for today’s conference. You may now all disconnect. Have a great day.

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

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

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

Source: Guess, Inc. F3Q08 (Qtr End 11/03/07) Earnings Call Transcript
This Transcript
All Transcripts