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Guess?, Inc. (NYSE:GES)

F1Q2013 Results Earnings Call

May 22, 2012 4:30 PM ET

Executives

Michael Prince – Chief Operating Officer

Dennis Secor – Chief Financial Officer

Russell Bowers – CFO, North American Retail

Analysts

Shreya Jawalkar – Jefferies

Jeff Klinefelter – Piper Jaffray

Robbie Ohmes – Bank of America

Omar Saad – ISI Group

Betty Chen – Wedbush

Eric Beder – Brean Murray

Diana Katz – Lazard

Margaret Whitfield – Sterne, Agee

Janet Kloppenburg – JJK Research

John Kernan – Cowen

Dorothy Lakner – Caris & Company

Operator

Good day, everyone. And welcome to the Guess? First Quarter Fiscal 2013 Earnings Conference Call. On the call are 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.

Now, I would like to turn the call over to Michael Prince. Please proceed.

Michael Prince

Thank you and good afternoon. Before I begin our review, those of you on our last quarterly call will remember that Paul is working on our global three-day conference of licensees and partners that kicks off here in LA tomorrow. This is celebration to Guess? brand in our 30-year history with well over 1,000 people in attendance.

Now, moving to the first quarter, we are pleased to deliver revenues that exceeded top end of our guidance range and margins that were stronger than we had anticipated on our last earnings call. Overall, our performance resulted in earnings of $0.30 per share.

In North America Retail, the progress we made last year in our women’s apparel business continued, as it is still the best performing category in the Guess? stores. Sales of women tops have been very strong, and both dresses and denim continue to perform well.

We’ve seen an excellent response to our 30th Anniversary Capsule and to the events that we held in our stores, as well as the global coverage we received from bloggers, fashion magazines and online media.

We also continue to gain traction in social media. In the last year, our Facebook likes have more than doubled and on Twitter, we doubled our followers in just about six months.

G by GUESS performed very well in the first quarter. Once again posting positive comps and we are continuing to secure attractive real estate for expansion of this concept. Our GUESS by MARCIANO business was challenging in the quarter and we are working on making improvements there.

Overall in retail, we continue to manage with lower markdowns, our best Q1 performance in six years and that led to higher product margins compared to a year ago, despite the overhang of increased cost related to cotton.

Our biggest challenge in retail remains traffic which continued to be down just as we had expected, this led to a comp decline in the quarter and put pressure on our overall retail segment profitability.

In Europe, our business remains stable and overall performed consistently with our expectations. We experienced declines in our more mature markets given economic challenges in the South, while we grew our business in newer growth markets like Germany and Russia, both of which these markets posted double-digit topline increases.

We grow our owned retail business in Europe, where our topline performance was stronger than we had anticipated, as comp store headwinds were less severe that we had planned. As expected, sales in our wholesale business were down compared to last year, as the impacts of the weak economy, particularly in Italy and France impacted our shipments.

In Asia, we effectively met our earnings expectations for the quarter tough on slightly lower revenues than we had planned. Our business in Korea was softer than we had expected, with a more competitive marketplace and with cooler temperatures that were not conducive to our assortment. Comp trends in Korea were negative at the beginning of the quarter but we saw significant improvement in April. In the quarter our China business exceeded our plans offsetting some of the softness in Korea, and we continue to be encouraged by the opportunity in this market.

Finally, our licensees, they faced many of the same economic challenges as we did. They experienced a stronger quarter than we had anticipated with royalty that grew slightly in the quarter. While it’s only been a couple of months since we last spoke, our major priorities for this remain unchanged. We made excellent progress during the first quarter.

One of our primary areas of focus for this year is expanding our marketing efforts to drive traffic, acquire new customers and support our brand positioning. We are working especially hard on our men and accessories categories to match last year’s improvements in women’s. We plan to deliver a consistent message across all channels and support that with clearly defined product stories that reinforce our fashion authority.

We are putting those key items into our windows, onto our [drive isles], onto our homepage, as well as external marketing. We also want to reinforce Guess? as the denim authority and plan to introduce new launches in fits and provide an even higher level of service in this critical category.

CRM remains another top priority with continued emphasis on customer segmentation and loyalty building. We plan to invest more in social media and digital advertising this year, including collaborations with bloggers and entertainment personalities.

We continue to be excited about our opportunities in new markets like Brazil, India and Japan, and we are working hard on establishing the right relationships to build our brand in those key countries.

For the first quarter, we made excellent progress towards the goals that we set for ourselves. For the full year, we feel that we are very much on course and are maintaining our full year EPS guidance. There is a lot to accomplish this year. We have a strong team that remains focused and a great brand with much opportunity.

With that, Dennis will now walk us through Q1 numbers and provide some visibility into the second quarter and the full year. Dennis?

Dennis Secor

Thank you, Michael and good afternoon. Before I move into my report. We reclassified our prior year numbers moving some European distribution costs from SG&A to cost of good sold that standardized our financial reporting and had no impact on operating margin, earnings or EPS. So moving now to the numbers.

Firs quarter dilutive earnings per share exceeded our expectation reaching $0.30 per share, down 35%, compared to last years $0.46. Last year’s EPS included a net 8% in non-operating charges primarily related to currency contract and balances.

Net earnings for the first quarter of fiscal 2013 declined 38% to $27 million. First quarter revenues declined 2% to $579 million. Growth in Asia and retail expansion in North America and Europe drove the growth, which was offset by negative retail comps, lower wholesale shipments and currency headwind. In constant dollars revenues increased slightly.

Total company gross profit declined 5% to $235 million and gross margin declined 130 basis points to 40.6%. Product margins improved, due to continued improvement in North American markdowns, as well as higher Asian retail mix. Our occupancy rate increased due to the negative comp and retail mix, and that more than offset the product margin gains.

SG&A increased 11% to $196 million and our SG&A rate increased 390 basis points to 33.8%. The increase resulted from higher legal fees along with increases in selling and distribution expenses. We also increased advertising and marketing investments around the world. Lower North American store selling expenses partially offset these increases.

As planned, operating profit declined 45% to $39 million, which includes a $1 million unfavorable currency translation impact. Operating margin declined 520 basis points to 6.8%.

Our effective first quarter tax rate was 32%, compared to 29.5% in the prior year. The increase resulted primarily from a different earnings distribution among tax jurisdiction. We are planning the full year with the 32% rate.

Moving to segment performance, in North America Retail first quarter revenues increased 2% to $252 million, with store expansion offsetting the impact of the 5.5% comp store sales decline.

Operating income declined 9% to $17 million and operating margin decreased 80 basis points to 6.7%. We expanded product margins with a lower markdown rate and higher prices which offset the impact of cost inflation. Our occupancy rate increased however given the negative comp.

Our SG&A rate was higher compared to a year ago, and higher overhead and advertising offset the impact of store expense leverage. During the quarter we opened six new stores and closed seven, ending the quarter with 503 stores in the U.S. and Canada.

In Europe, revenues declined 10% to $190 million. In local currencies, the decline was 5%. Revenues from our owned retail stores increased as new store expansion more than offset the impact of a high single-digit comps decline. At the end of the first quarter, we operated with 191 owned retail stores.

Wholesale revenues declined in the quarter, with jewelry posting the biggest percentage decline given the distribution change we made a year ago. Shipments declined in most of our other wholesale businesses given economic conditions in the South which offset growth in newer markets.

Operating income decreased by 62% to $12 million. Operating margin declined 920 basis points to 6.6%. The lower jewelry sale, expense deleverage cost by the wholesales decline and the higher occupancy rate given the negative comps and retail mix all weigh significantly on the operating margin. It was also impacted by additional comps to restructure our business, redeploy resources and consolidate our logistics operation.

In Asia, first quarter revenues increased by 8% to $65 million. The growth was driven by a substantial increase in our Greater China business, as well as by higher shipments to our Southeast Asia distributor. Revenues in South Korea increased slightly in local currency, so the weaker Korean Won more than offset that increase.

Operating profit decreased 17% to $6 million and operating margin declined 270 basis points to 9.1%. Gross margins were stronger while this was more than offset by a higher SG&A rate given store expansion and infrastructure investment.

In North America wholesale, first quarter revenues declined 4% to $44 million. Operating profit decreased 16% to $9 million, and operating margin declined 300 basis points to 21.3%.

In licensing, revenues grew slightly to $29 million and operating profit declined 3% to $25 million.

Now turning our attention to the balance sheet. We ended the quarter with cash and short-term investments of $490 million, up $48 million, compared to last years $442 million. This comparison includes the impact of last fourth quarter’s $92 million repurchase of our own stock.

First quarter operating cash flow was $37 million, compared to $48 million last year.

Accounts receivable declined 11% versus last year to $336 million. In constant dollars, the decrease was 3%.

DSOs, both consolidated and European were roughly flat compared to a year ago. At the end of the quarter about half of our total receivables and about two-thirds of our European receivables were supported by insurance coverage, bank guarantees and letters of credit.

Inventories increased 11% to $334 million. Our inventory growth comes mainly from our international operations. Asia inventories are up given new store growth and the rollout of our new Korean G by GUESS business.

In Europe, we have more stores and are carrying leftover products from last year, which we plan to sell mainly through our outlets.

Our North America inventories continue to align with anticipated sales growth.

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 June 22, 2012 to shareholders of record at the close of business on June 6, 2012.

So, now moving to the second quarter. In North American Retail, store traffic continues to be down and while we’re optimistic about the potential of our marketing initiatives, we expect it will take some time to realize the benefits from those investments.

Therefore, we do not anticipate a significant impact on the business in the second quarter. Also, the improvements we are driving in our men’s and accessories businesses are expected to yield results but later in the year.

Thus far in the quarter, comps have been down in the mid single digits and we are planning the second quarter, assuming comps stay down in the mid single digits. With a larger store base, this would translate into a revenue increase in the low to mid single digits. For the full year, we are now expecting comps that are down in the low single digits and for revenues to grow in the mid single digits.

In Europe, we feel that the commercial climate has generally become more stable with economic conditions continue to be challenging, particularly in the South.

In our owned retail stores, quarter-to-date comps are down in the mid single digits. But we will come up against increasingly stronger comparison as we progress through the quarter.

Therefore, we are expecting second quarter comps will decline in the high single digits similar to the first quarter. With the largest store base, this should result in overall retail sales growth for the quarter. We are not assuming positive European retail comps for the remainder of this year.

In the wholesale business, we shipped spring summer reorders early in Q2 and will begin to deliver fall winter product later in the quarter.

For the fall season, fall winter orders were down in the mid single digits and we therefore expect Q2 shipments will be down with declines in mature market offsetting growth in newer markets.

There are also some factors that may affect the timing of deliveries. This year, the fall winter accessories collection includes a larger winter components, which will naturally move some selling later in the season.

In addition, given overall economic condition and increasing penetration in newer growth markets, we are anticipating some modest timing changes, as we secure ourselves with tighter credit or prepayments. We estimate these combined changes could shift roughly $20 million of revenues and $0.06 of earnings per share from the second quarter into the third.

Overall in Europe, we are expecting second quarter euro revenues to decline in the high single digits and for U.S. dollars revenue to decline in the high teens. For the full year, we continue to expect euro revenues will grow in the low single digits and our U.S. dollar revenues revenue will now decline in the mid single digits.

We do expect the European operating margin pressure to continue into the second quarter, further impacted by the sales shift. Margin headwinds should reduce in the third quarter as we anniversary last year’s downturn with the potential for fourth quarter expansion if we can achieve our topline objective.

Moving to Asia, in Greater China, we’re continuing to pursue partnerships to expand into new cities. In Korea, April’s movement in trends has continued so far in the second quarter. We are working on initiatives to enhance our Guess? product offerings and are working with department stores to expand our footprint in existing doors.

We also continue to focus on growing our new G by GUESS business in this important market. With the softness, we did experience in Korea in the first quarter, however, we are now expecting full year revenues to grow in the low to mid teens range. For the second quarter, we are planning revenues to grow in the low teens range.

In North America Wholesale, we are planning second quarter revenues to be down in the high single-digit and continue to expect full year revenues to be roughly flat.

In Licensing, we expect second quarter royalties will decline in the mid single digits and for the full year, we also expect royalties to decline in the mid single digits.

As per gross margin, in the second quarter we will have anniversaried the markdown changes that we made a year ago. However, we will not have fully anniversaried last year’s cotton cost increases and the euro is much weaker now compared to a year ago, which impacts European margins where we source a significant amount of products in U.S. dollars.

Overall, therefore, we could experience modest product margin headwinds in Q2. We are also planning with a higher occupancy rate given our expectations for comps and the overall retail mix.

For SG&A, just as with the first quarter, we expect to operate with a higher SG&A rate in the second quarter given the investments we’re making in advertising and marketing and the impact of negative comps.

On currencies, our guidance assumes that currencies remain roughly at prevailing rates for the remainder of this year. This assumption should result in a modest Q2 mark-to-market gain that should also be offset by additional second half margin headwinds.

So, considering those factors, for the full year as Michael mentioned, we are maintaining our EPS guidance in the range between $2.50 and $2.65 per share. We now expect revenue in the range between $2.7 billion and $2.74 billion, and anticipate operating margins in the range between 12.5% and 13%.

For the second quarter, we expect revenues to range between $625 million and $635 million.

We expect an operating margin between 10% and 10.5% and EPS in the range between $0.48 and $0.52 per share. This includes the unfavorable $0.06 per share impact of the expected European sale shift that I mentioned earlier.

Looking past the second quarter, we continue to expect that our earnings headwinds will diminish as we move through the year. Given our euro assumptions, we would experience a substantial currency translation headwind in Q3 and we expect that the largest quarterly dollar increase in advertising and marketing investments would take place in the third quarter in anticipation of the holiday season. We see the fourth quarter as our next opportunity for earnings growth and operating margin expansion.

Lastly, we now expect to invest between $115 million and $130 million in capital, net of tenant allowances, primarily for new stores and remodels.

With that, I will conclude 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

Yeah, sir. (Operator Instructions) Our first question comes from the line of Randy Konik with Jefferies. Go ahead.

Shreya Jawalkar – Jefferies

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

Michael Prince

Good. Thanks.

Shreya Jawalkar – Jefferies

So, good job on the first quarter. Those are pretty good numbers. I’m just wondering about more color on Europe. Can you provide or could you provide more color on what you are seeing within the European countries, has the consumer sentiment changed since last quarter and also you mentioned that your business is sustainable, do you think this is sustainable for the rest of the year?

Dennis Secor

Yeah. The way we characterized, what we are seeing in Europe is stable. It’s mixed among different markets. The South is certainly the most challenging, but in our business, what we are seeing is some declines in those markets, offsetting for the moment improvements that we are seeing in some of our growth markets.

Germany was a market for us in the quarter that was up in the teens. Russia was up, I think almost 30%. So we are getting a strong performance there. But we’re not fully anniversaried against the changes that we saw in the South. So that hopefully starts to impact us later in the year.

Michael Prince

Yeah. This is Michael and as Dennis mentioned, Europe performed as expected or as planned. But obviously you’ve got the uncertainty with the French elections, Greece and the overall macroeconomic environment. So that’s something we are watching very closely knowing that things could change depend on any given news on a given day.

Dennis Secor

Yeah. I mean, for the rest of the year, the way we’re looking as, we are assuming things don’t improve significantly nor do they deteriorate significantly.

Shreya Jawalkar – Jefferies

Great. Thank you.

Operator

Our next question comes from the line of Jeff Klinefelter with Piper Jaffray. Go ahead.

Jeff Klinefelter – Piper Jaffray

Yeah. Thank you. Just, first a follow-up on Europe, Dennis and Michael. Give us a sense for, like coming out of Q1 going into the second half of the year on a run rate basis, where is that mix shaking out between Italy and Spain in the South and then North given how North and Russia, given how quickly you are growing those kind of non-mature markets?

And then also on the bookings, it sound like fall winter down mid single digits. Could you just remind us, what your bookings were again going into the second half last year and just share some perspective on, what kind of visibility you feel you have at this point, what kind of behavior you’re experiencing with some of your wholesale customers in the southern markets?

Dennis Secor

Yeah. I mean, we are -- you are right and just in terms of the trajectory of the fall winter bookings, they were down. Italy as expected also declined. France was down as well. But remember we are -- the fall winter bookings are up against the environment that wasn’t fully recessionary a year ago. But we’re seeing that fall winter -- just to answer to your question on the fall winter, it was up 7%. So if you combine the two and look it on a two-year basis, they are sort of neutral.

Michael Prince

Yeah. Jeff, on the cancellations and reorders -- this is Michael. They’ve performed as we had expected. So we haven’t seen cancellations go way up or reorder come way down. So they had performed in the backlog as we planned.

Jeff Klinefelter – Piper Jaffray

What about the mix? How was Europe mixing at this point or where would you anticipate maybe on a run rate basis, it has been on the second half of the year? Italy has been a standout in terms of the percent of total it represents. Where do you see that and where is that growth specifically coming from? Is it direct doors? Is it distribution gains in Germany and Russia?

Michael Prince

We’re opening doors. We have been -- we’ve opened some stores but the strategy going into Germany is more of a wholesale department store strategy. So we see that doing much more towards the wholesale business.

Dennis Secor

Yeah. And Jeff, when we look at the business, you’re seeing Russia and Germany perform really well for us. And we’ve just seen or continue to see opportunity in Northern Europe and Eastern Europe as well. And you’re starting with obviously a much smaller base but growing those markets has been critical and we’re seeing good growth come out of some of those markets.

Jeff Klinefelter – Piper Jaffray

Okay. Thank you.

Operator

Our next question comes from the line of Robbie Ohmes with Bank of America. Go ahead.

Robbie Ohmes – Bank of America

Thanks. Afternoon guys. I was hoping you could tell us for the first quarter comps and the second quarter to-date comps, the AUR versus traffic components for both U.S. and Europe? Thanks.

Russell Bowers

Yeah. For the U.S. business first, AUR was up in the mid singles overall but if you look at the full price stores, it was up over 10% in the U.S. Traffic was our biggest issue while traffic was down in the high singles. And that’s something we’re really working to improve our marketing efforts and we’ve got a slight increase in conversion so far.

And so far, in May, the traffic is a little better but -- and the full price stores have improved a little. But overall the trend is relatively the same, maybe moving slightly in the right direction. And in Europe, traffic is also very difficult, that’s the biggest driver of their negative comps. And AUR there is relatively flat.

Yeah. The comp overall for Europe, the comp trends was pretty similar as a group to what we saw coming out of the fourth quarter. Italy actually improved the trajectory. It was still down but it was a better performance than we saw in the fourth quarter. France actually was the offices.

So it’s a mixture but we’re seeing some markets perform a little bit better and some a little bit weaker than they had compared to the fourth quarter. But on balance, it was very similar to what it was the previous quarter.

Robbie Ohmes – Bank of America

Great. Thanks very much.

Operator

Our next question comes from the line of Omar Saad with ISI Group. Go ahead.

Omar Saad – ISI Group

Thanks. Good afternoon guys. I wanted to ask question about the North American trends, kind of, what you’re seeing with the consumer there on the retail business. Has there been a weather impact, kind of, going through the spring? What do you think on the color side, we’ve been hearing about the color theme a lot?

How do you have been able to cooperate that in your offering and what’s really working more than -- what’s working in your retail business and what’s not. Just kind of your general thoughts on that retail business? Looks like your CapEx number too might be coming down a little bit. Have you changed your store opening plans as part of that business? Thanks.

Russell Bowers

Yeah. This is Russ. So what we’ve seen related to weather, we haven’t seen a really big impact from weather. Our comps are relatively consistent throughout the first quarter. Now, from a product trend, there is a lot going on with color that we think has really benefited from us.

We went after a lot of business in the color denim, and almost every thing we did in that area was very successful for us. And we’ve also seen some great trends with our woven tops.

We really went after that business at the beginning of the quarter. There is a lot of our product, we’ve really blown out really quickly. So we’re happy with what we’ve seen with that.

On the CapEx side, lot of its coming from remodel. So we’re pushing back some of the remodels and lot of that’s related to us, just trying to find -- find the right spaces. So we’ll probably be doing a lot of remodels in January, which will fall into next year’s CapEx.

Omar Saad – ISI Group

And Russ, do you mind commenting on the accessories, kind of, how services are performing in the stores?

Russell Bowers

Accessories is a difficult category for us. It started in fourth quarter and it’s still been pretty tough. It’s our softest category. We’re really addressing that with our licensee partners and really working on the design and the quality with the offerings they are going to have in the back half of the year to improve that trend.

Michael Prince

Yeah. Omar, this is Michael. Just a reminder when Nancy came in, she really focused on YC Apparel because that was a big category for us, which we felt like needed the most improvement. So she even after that has been performing well and her focus over the last few months has really been focused on accessories in men’s.

Omar Saad – ISI Group

All right. Great. Thanks Michael. Thanks Russ.

Russell Bowers

You’re welcome.

Operator

Our next question comes from the line of Betty Chen of Wedbush. Go ahead.

Betty Chen – Wedbush

Well, thank you. Good afternoon, everyone.

Dennis Secor

Good afternoon, Betty.

Betty Chen – Wedbush

Hi. I was wondering if we can talk a little bit about G by GUESS. It sounds like it once again did very well in the quarter. Could you share with us maybe some of the better selling categories or products at that brand?

And I was curious in terms of store openings, what we should expect for G by GUESS this year and also what you are seeing for that brand in Korea? And related to that, I was just curious Dennis or Michael, what do you think happened in South Korea during the Q1 timeframe? I know that we’ve since strengthened, but do we think it was just a temporary pull back? Was it weather? Any sort of insights would be really helpful? Thanks.

Russell Bowers

Okay. So, this is Russ. G by GUESS was comping really well in the first quarter. We really think we are really resonating well with that customer. Denim did well across women’s and men’s, but overall, within G by GUESS, men’s was the best category, just about anything we did in men’s was successful during the quarter.

So we are happy with that. And also encouraging is the new stores that we’ve opened up for G by GUESS over the last six to nine months which were actually outpacing the fleet as a whole, which is really good news because typically a pretty long ramp-up time for new stores for G.

So, with that, we’re going to open up over 20 G by GUESS stores this year. And we’re looking at keep expanding it next year as well.

Michael Prince

This is Michael. On the Korea question, for those of you who know that market, for us it’s been a great business. South Korea has been a great market and we got a very strong GM that knows that market extremely well.

And what we saw there in the first few months of the quarter, the weather didn’t necessarily cooperate, it was cooler than expected. So, that impacts our product assortment and also it got very promotional with multiple brands and some of the local brands as well.

What we saw in April as the weather started turning and going to the May, that selling improves, that we’ve actually have the opportunity to maybe take some additional market share. We’ve got, concession opportunities. We think we can expand some space.

We’ve adjusted our product assortment and are going forward and taking more layered approach to offset any risk in the weather and just feel good about the marketplace, even though there is still risk there, still the market softened up. We feel like Korea still is a very good market and the strength of the brand is holding up well there.

Betty Chen – Wedbush

And Dennis, could I just follow-up with the clarification question regarding the timing change in the deliveries in Europe. Did you say that it is related to fall winter merchandise?

Dennis Secor

Yeah. So the last year, there was much more of a fall SKU to the accessories mix for the fall winter line compared to the apparel business. This year they have been aligned. So, there is more compared to last year, more of a winter component on the accessories business and between fall and winter, the winter products just naturally shifts later on in the season.

Betty Chen – Wedbush

Okay. And that’s why we’re going to see that $0.06 benefit Q3 versus Q2?

Dennis Secor

Well, just to be clear, the $0.06 includes both VAT and the expectation around a little bit of closer to the market sell-in because of credit.

Betty Chen – Wedbush

Okay. Okay. That’s very helpful. Thank you.

Russell Bowers

You’re welcome. Thanks.

Operator

Our next question comes from the line of Eric Beder with Brean Murray. Go ahead.

Eric Beder – Brean Murray

Hi, guys. Eric Beder in. How are guys there?

Russell Bowers

Hi Eric.

Michael Prince

Hi Eric.

Eric Beder – Brean Murray

You talked just about -- let’s look at MARCIANO by GUESS. What are you seeing in the U.S. markets there and how you are seeing that in Europe also impacting and in Asia?

Michael Prince

Yeah. So, the MARCIANO stores in the U.S., it was a tough quarter for us. The dresses we brought in didn’t work that well. But we’re bringing a lot of new product at the end of this month to reverse that trend. And we’re also adjusting some of the opening price points, we might have taken up a little bit too far.

In Europe, the GUESS by MARCIANO as a product has been working pretty well in a lot of our stores. So it continues to be great there.

Eric Beder – Brean Murray

What about using that? I know you’re doing that now in some of the U.S. men’s stores, you’re rolling out some of that product there, how is that working out?

Michael Prince

Yeah. That’s doing well so far. And it’s really something that we want to do directionally for the back half of the year to sort of reinvigorate men’s.

On the YC side, we did that dressy section which has been successful for us. So we want to replicate that on the men’s side as well. So, that’s in the MARCIANO product kind of represents that.

Eric Beder – Brean Murray

Great. Congratulations.

Michael Prince

Thanks Eric.

Russell Bowers

Thanks Eric.

Operator

Our next question comes from the line of Diana Katz with Lazard. Go ahead.

Diana Katz – Lazard

Hi. Thank you for taking my questions and good afternoon.

Russell Bowers

Hi Diana.

Diana Katz – Lazard

Hi. Wanted to know, if you still expect to comp positively in the U.S. in the fourth quarter this year? And then also just looking at guidance for the year, you took down your revenue guidance to maintain your operating margins. I guess within the margin piece, where do you feel better right now?

Russell Bowers

Yeah. Our goal is still to comp positively by the end of the year and lot of things we are doing with product, we think is going to take us in that direction. We are going to anniversary up against the price increases during the back half of the year, last year which we think is going to give us the great opportunity to improve our conversion trends.

And based on, we are seeing now that’s projects very favorably towards the back half of the year. And the traffic trends due to the marketing that we are doing, we expect that to get better and we’re also up against the easier comparison as well.

Dennis Secor

And with respect to the guidance, yeah, we brought the top line down and maintained the operating margin guidance. Most or a big part of the change in the top line really relates to our assumptions around currencies and the big drivers there were currencies, we did recognize a little incremental risk in Korea. Those were the large components actually also we took up the licensing business a little bit.

So, in terms of predicting that, I would tell you that currency is always the wildcard on where that could land. We’ve got pretty good visibility into the European business now we’ve got fall winter booked and that effectively takes us into the third quarter and that’s the biggest part of our wholesale bookings.

I think the big wildcard for us is the comps. And as Russ just mentioned, we’ve got a lot of initiatives that are there to drive those comps. We are investing a lot in marketing to bring that customer back into the store.

But it remains to be seen how things play out and it remains to be seen what the environment is like and what the competition is doing. So that’s probably a little bit -- the most difficult of part of that business to predict.

Diana Katz – Lazard

Okay. Thank you very much.

Dennis Secor

Thank you.

Operator

Our next question comes from the line of Margaret Whitfield with Sterne, Agee. Go ahead.

Margaret Whitfield – Sterne, Agee

Good afternoon. A couple of questions, I wondered, what the jewelry impact was in Q1 in terms of EPS and whether or not that ends the situation there? If you could give us an update on your focus on working with new partners in Japan, Brazil and India that would be great?

And is the marketing budget going up any further from your last call and do you have any special events like you did in April with the 30-day anniversary to kick off the fall season at Guess? retail, and when would Nancy’s new lines for men’s and accessories arrive in stores here?

Dennis Secor

Okay. So, we’ll try to keep track of all that so bear with us. The $0.04 was the answer to the first question on jewelry and that should effectively -- and there is probably a little bit left in the second quarter. But second quarter is pretty small in comparison to the first and the third on the jewelry sell-in.

Michael Prince

Yeah, Margaret. This is Michael. On the new market opportunities, we talked about Brazil for a while, and Paul has been working with the team to identify a great partner. We’ve gone through a list of names and feel like we’ve got someone that could be a great partner for us that we are excited about.

So we are looking at what that opportunity might look like. We just feel like that consumer in that marketplace could be a great opportunity for Guess? and so far so good. So we’re at work in progress, but making great progress on it right now.

And then as far as Japan, that’s a market we are evaluating that Paul and Maurice likes a lot. It’s a fashion market. Its high profile and we’re looking at our options there as well.

Margaret Whitfield – Sterne, Agee

India?

Dennis Secor

Most of the product initiatives of fall holiday, though you will see some of the leather handbags that we brought in our stores right now.

Margaret Whitfield – Sterne, Agee

And marketing plans?

Dennis Secor

The marketing plans aren’t changed significantly overall from the last call. What we’ll do for fall, we’ll certainly do some events that we haven’t finalized those plans yet though.

Margaret Whitfield – Sterne, Agee

Thank you.

Operator

Our next question comes from the line of Janet Kloppenburg with JJK Research. Go ahead.

Janet Kloppenburg – JJK Research

Hi, everybody.

Dennis Secor

Hi, Janet.

Russell Bowers

Hi, Janet.

Janet Kloppenburg – JJK Research

My first question is on inventory, Dennis. I think it was up 11% at the end of the year and it’s up 11% now. And I’m just wondering given the top line weakness, should we expect it to be elevated this way going forward or how do -- I know you broke it down, I have the breakdown, but it still seems high relative to the revenue numbers?

Michael Prince

Yeah, Janet. This is Michael. I will take this one.

Janet Kloppenburg – JJK Research

Hi, Michael.

Michael Prince

How is it going? So when you think about revenue and I mentioned this on the last quarter. I said you’ll probably see us up a little bit higher than we want to be for Q1 and Q2. Part of that is because I’ll break it down. If you look at North America, we’re in good shape in North America on inventory. So we feel good about that.

In Europe, we had the headwinds in the back half of the year. So we’ve got a little bit of overhang regarding the European inventory. But we’ve got our outlet channel which is set up to absorb that inventory. It clears through it very quickly at great margins and brand appropriate way. That will start happening in Q2 and early Q3. We also had some of our pre-fall line in Europe that came in a little bit earlier. So we could service the marketplace.

And then in Korea, same impact, you’re up a little bit because of weather conditions and some excess inventory. We’ll treat that at the same way as we do Europe and sort through the outlet channel at brand appropriate way, good margins and then don’t forget we’re funding Asia with retail expansion and G by GUESS growth in Korea.

So that’s why those inventories are up. But I feel like our inventory position is up a little bit, but very manageable and you’ll see it normalized in Q2 and Q3.

Janet Kloppenburg – JJK Research

So, at the end of 2Q, we should see it come down here?

Michael Prince

You may see it come down a little bit. Q3 is where I really expect it to be, where we wanted to be.

Janet Kloppenburg – JJK Research

Okay.

Michael Prince

Because you still need the fall winter Q2 timeline versus our products.

Janet Kloppenburg – JJK Research

And just staying on Asia for a second, Michael, I continue to be frustrated by the operating margin deterioration there. And I know you’re investing in the business, but that infrastructure building has been going on now for several quarters. And I’m just wondering when you think that may stabilize and maybe what the inflection point is on margins in Asia?

Michael Prince

Yeah. Well, yeah. We talked about this on the last call that we’ll be continuing to invest in the infrastructure in China. Our goal this year is by the time we get to the fourth quarter, we could see some leverage on the SG&A rate in China and then move that forward into fiscal ‘14.

Janet Kloppenburg – JJK Research

So in other words, beginning in next year, we may start to see some improvement there?

Michael Prince

What I’m saying is that this fourth quarter, not for the full year this year, in China we could see some SG&A leverage and then the plan would be as we go into the next year than we should have gotten to the size that we can grow the top line faster than the additional infrastructure investments that we will still need to make. We won’t be done. But we’ll start getting the benefit to some scale.

Dennis Secor

Yeah. Janet, that market is performing really well for us right now. We had great growth in Q1 and we are seeing good momentum going into Q2. I know we’re investing in it and its probably taking a bit longer than you guys would like. Like Dennis said, Q4, we’re feeling good about it and just feel like we’ve got a really good momentum in the Greater China marketplace.

Janet Kloppenburg – JJK Research

Okay. And just a little more clarification on trends in Europe, is it the accessory, jewelry and accessory weakness that’s really where you’re seeing that the sales declines and what’s happening in other categories in Europe?

Michael Prince

Well, I mean all of -- this quarter because again remember we’re up against the last first quarter when Europe was still growing. So we saw declines in virtually all of the categories. Jewelry was the largest because in addition just to the economic headwind, we made the changes in the distribution and we haven’t fully lapped that. So, we don’t see that turning until we start anniversarying that recessionary environment, which happens in the back half of this year.

Russell Bowers

Yeah. Janet, this is Russ. In our stores in Europe, the accessory and footwear trends have actually been better than what we’re seeing here in the U.S.

Janet Kloppenburg – JJK Research

Is the product mix different, Russ?

Russell Bowers

It’s not significantly different. It’s just the taste of the customer there.

Janet Kloppenburg – JJK Research

Okay. Good. Thanks so much you guys. Good luck.

Russell Bowers

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of John Kernan with Cowen. Go ahead.

John Kernan – Cowen

Hi, guys. Nice job managing through very difficult environment.

Michael Prince

Thanks, John.

Russell Bowers

Yeah. Thank you.

John Kernan – Cowen

I just wanted to go back, the licensing business is obviously really high margin great business for you guys. It beat your expectations pretty handily in Q1. Sounds like you’re feeling better about that business for the rest of the year. What makes you feel better about that business -- and do you feel bad about the inventories in that channel. Are you hearing something from your licensing partners, what’s going on there?

Dennis Secor

Well, I mean, the increase we certainly were very pleased with what we saw in the first quarter. Now keeping something in mind that the licensing business is a business over which we have the least visibility because it’s operated by third party. So they were able to -- we were anticipating that we would see some headwinds given they are selling in the same environment and we were very pleased with the results.

Handbags were much stronger than we anticipated. They would be as were several other categories. We still -- so what you saw us in the first quarter a big portion of the beat against our own guidance and taking up the year as flowing that -- mainly flowing that through.

We do expect based on what we are hearing from our licensees that there is still some potential challenges. They are selling into that environment. So we -- our guidance reflects the forecast that we are getting from our licensees.

John Kernan – Cowen

Okay. Great. And then I guess going back to accessories real quick. Any, I know you guys are big in watches. Have you heard anything about potentially this watch cycle slowing down? Is that one of the categories you are seeing a slowdown in within accessories?

Michael Prince

Yeah. Our watch business wasn’t that great in the first quarter. As far as with the cycle, we think it’s a lot to do with not having lot of newness in our stores. So, we are looking to really refresh those watch cases in the back half of the year to offer something different to our customers.

John Kernan – Cowen

Okay. Then one last question, Dennis, it looks like you got a little bit more aggressive in terms of share buyback in the most recent quarter. What’s the outlook for share count for the remainder of the year?

Dennis Secor

We -- I’m not guiding, assuming that there’s any additional share repurchase. And I think what we are using on average for the year was a little bit -- assumes a little more dilution than we reported for the first quarter.

Operator

Our next question comes from the line of Dorothy Lakner with Caris & Company. Go ahead.

Dorothy Lakner – Caris & Company

Thanks and good everyone. Just if we could go back to accessories for a second, you said handbags were much stronger, but earlier I think you said you were trying to address some issues with various licensing partners. So just what are the other categories that you are looking to make improvements in and when might we see that?

And then secondly, just a general question on what you’re seeing in terms of foreign tourists trends both here in the U.S. and also in Europe and Asia, if you could just give us some color on that? Thanks.

Dennis Secor

Yeah. So, the most important accessory categories for us are handbags, eyewear, footwear and also watches. And so it’s all of those, especially the handbags and the footwear that we’re looking to make a lot of improvements with the design and the quality for the back half of the year.

In relation to the tourist trends, our tourist stores didn’t get -- they softened a little bit during the first quarter. So it wasn’t as great as we would have liked and in Europe and Asia…

Michael Prince

Yeah. I think in Europe they have been consistent. I don’t think we’ve seen an increase or decrease either way. I mean what we’ve heard is that, the Europeans are traveling a little bit less to the states on their trips and then maybe they are staying local. But we haven’t seen an impact in our stores materially one way or another.

Dennis Secor

Yeah. The South American tourist is still strong however.

Operator

Ladies and gentlemen that does conclude the time that we have available for questions today. Thank you for your participation in today’s conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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