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Executives

Paul Marciano - Vice Chairman of the Board, Chief Executive Officer

Dennis Secor - Chief Financial Officer, Senior Vice President, Principal Financial and Accounting Officer

Carlos Alberini - President, Chief Operating Officer, Director

Analysts

Christine Chen - Needham & Company

Eric Beder - Brean Murray & Co.

Jeff Klinefelter - Piper Jaffray

Holly Guthrie - Janney Montgomery Scott

Betty Chen - Wedbush Morgan Securities

Erin Moloney - Merriman Curhan Ford

Margaret Whitfield - Sterne, Agee & Leach

Guess, Inc. (GES) F4Q08 Earnings Call March 19, 1969 8:30 PM ET

Operator

Good day and welcome to Guess fourth 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 fact, including statements regarding future plans and guidance for current and future periods, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results might differ materially from those suggested in such statements due to a number of risks and uncertainties as described in the company’s most recent annual report on Form 10-K and other filings with the SEC.

Now for opening remarks and introductions, I would like to turn the call over to Paul Marciano, Chief Executive Officer of the company. Please go ahead.

Paul Marciano

Thank you. Good afternoon and thank you for joining us today to discuss Guess's financial results for the fourth quarter and fiscal year 2008. Also joining me are Maurice Marciano, Carlos Alberini, and Dennis Secor. Carlos and Dennis will later review highlights and fiscal ’09 outlook.

In fiscal year 2008, we achieved exceptional results for revenue increase of 40% and earnings growth of over 42%. I will discuss that in further detail later.

Q4 delivered very strong financial results in a challenging economic environment. We increased our revenue by 30%, expanded operating margin to 18.7%, and increased operating income by 35%. Once again, all our product categories, Guess Apparel, footwear, handbags, watches, in every part of the world contributed to the top line growth as we increased our operating earnings in the quarter.

Our international business was a key driver of this growth, especially Europe, which had a revenue increase of 75% on top of an increase of 64% the year before. Operating earnings for Europe increased 65% in the fourth quarter. Net earnings reached $55.2 million, representing an increase of over 20% versus last year and marking our 18th consecutive quarter of earnings growth. Earnings per share reached $0.59, also a 20% increase from $0.49 last year.

International continued to exceed our expectations and we invest in the expansion on this market with a strong infrastructure and a great team. We are obsessed with execution as we are all about the quality of the product from unique washes for denim to a footwear styled to our Swiss watches. For that, assembling the right team for the right [execution] is vital for us.

Europe concluded another excellent quarter with revenues of $152 million and operating earnings of $28 million. This business alone contributed nearly 45% of earnings growth for the company.

During the fourth quarter, we opened 42 new stores, including 19 in Europe, 19 in Asia, and four in Mexico and South America. Our wholesale segment, which includes our Asian operation, had another excellent quarter with 63% increase in revenues. Our licensing business had a very strong quarter with revenue increase by 22% for the quarter and 35% for the full year.

For retail in North America, we posted our 20th consecutive quarter of same-store sales increase, delivering over 13% comp for the quarter and 14.6% comp for the year.

Let me now highlight some of the achievements for the fiscal year ’08. We reached $1.75 billion in total revenue. This represents a 40% increase from the previous year and nearly a 90% increase from two years ago.

We increased our operating profit by 50% to $309 million, and improved our operating margin by 130 basis points to 17.7, even as we were making significant investments in [our] business, South Korea, China and two new brands, Marciano and G by Guess. We increased our net earnings by 42% to $186 million. As a result, our diluted earnings per share reached $1.99, which is more than three times the earnings per share we reported just two years ago.

For the fiscal year, we opened a record 184 freestanding stores outside the U.S. and Canada, and we have now 579 freestanding stores, including 302 in Asia, 241 in Europe and Middle East, and 36 in Latin America.

During the last few years, we have achieved a very balanced diversification of earnings across our business segments around the world. Just as a reference this year, Europe, Asia and licensing businesses combined generated 69% of revenue growth and 74% of our growth in operating profit. For the first time in company history, earnings from Europe and the licensing business is 53% of our total operating profit, surpassing North America at 47%.

Now, key initiatives going forward -- basically this objective will reinforce three areas of existing business and place them on the top of our agenda every day. One will be international retail expansion in Europe; two, retail and wholesale expansion in Asia; and three, e-com business.

In Europe, we see a big opportunity to maximize our brand retail presence and visibility in Europe as we focus in key markets of France, Spain, England and Germany. We feel these markets represent tremendous opportunity for us in all product categories and all store concepts.

Last year, we opened 84 freestanding stores in Europe and Middle East and we plan to open 86 more retail stores in Europe this year across all concepts. That of course will create a substantial increase in revenue not only for denim and [inaudible] line but for our footwear and handbag businesses as well.

Asia -- Asia was a key driver last year and we have developed a solid foundation for strong expansion, especially in Korea, where we performed very well for the year. We just started there and we more than doubled the revenue and ended the year with 46 freestanding stores. We continue to believe that Korea could be more than a $100 million business for us in the next two to three years, versus $24 million when we took over from our licensee just a year ago.

In China, where we opened a flagship location in [key cities] during 2007, we are focusing our [focus] this year on penetrating secondary markets and we better than ever now believe that the next largest expansion territory is Asia for all concepts and all Guess brands.

All together, we plan to open 185 new international stores this year and 60 new stores in North America, which include 16 freestanding footwear stores worldwide.

Again, I want to remind everybody that the size of our international stores is much smaller than the average stores in the U.S. but still the amount of stores opening clearly demonstrates the global presence and expansion of the Guess brand.

About e-com, our third objective will be related to the e-com business. In the last 18 months, we have experienced a strong increase in traffic and business on the website and we see that the customers are shopping online as well as in our stores. For fiscal ’08, the e-com business had an increase of 34% and year-to-date, it’s up 47%.

With that in mind, we are investing more heavily in online advertising through major search engines such as Google or Yahoo!, as well as other popular sites, new ones, as Facebook.

In conclusion, we have operated with a clear vision and strategy, all with one goal in mind -- the globalization of the Guess brand. We believe that the Guess business model is unique and strongly diversified in product categories as a complete lifestyle brand.

Now Dennis and Carlos will take you through the numbers. Thank you.

Dennis Secor

Thank you, Paul and good afternoon. Let me now take you through some of the key financial details for the quarter. Total fourth quarter net revenues increased 29.9% to $514.6 million. All of our segments contributed to this growth, led by Europe, which accounted for more than half of the growth. Strong comps in North American retail and our growing Asian business were the other strong contributors.

Total company gross profit increased 31.9% to $233.5 million and we expanded gross margin by 70 basis points to 45.4%. A greater mix of European business and Europe’s 390 basis point gross margin improvement drove this expansion, which was partially offset by the impact on store occupancy of one less week in the NRF calendar.

During the quarter, the SG&A rate was flat to last year at 26.7%. Total SG&A expenses increased 30% to $137.3 million. The additional spending supported our new businesses and infrastructure investments, as well as the increased sales volume in the quarter.

For the quarter, the company’s operating profit increased by 34.7% to $96.2 million, which includes a $5.4 million currency translation benefit. We expanded operating margin by 70 basis points to 18.7%.

Interest expense declined by $1.6 million, mainly due to last year’s early debt retirement costs. Interest income increased $400,000. This quarter includes charges of $2.1 million mainly due to marking foreign currency contracts to market while last year’s quarter included gains of $1.5 million from non-operating asset sales.

Our fourth quarter tax rate was 42.2% compared to last year’s fourth quarter tax rate of 36.5%, which benefited from lost carry forwards. Greater profits and high tax jurisdictions, tax rate changes and start-up activities in new markets contributed to the higher tax rate this quarter.

Fourth quarter net income increased by 20.3% to $55.2 million, and we increased diluted earnings per share by 20.4% to $0.59. This includes the impact of several items that collectively affected the quarterly comparison negatively by about $0.08 per share.

Next, I’d like to quickly review our results by business segment.

North American retail sales increased 10.4% to $270.9 million. We accelerated our retail expansion during the quarter, which resulted in a net 8% increase in average square footage over last year. Operating margin rose to 18.2%.

For the full fiscal year, we increased retail segment revenues by 16.4% and expanded operating margin 70 basis points to 14.9%. Our full year same-store sales growth was 14.6% and average square footage increased by 5.3% through the addition of 49 stores and the closure of 10.

Quarterly revenue for the Europe segment increased 75.4% to $152.2 million, with each of our Europe businesses achieving solid growth, led by our accessories business.

Product margins improved across all of our European businesses. We continued to invest in Europe and delivered on operating margin of 18.3% in the quarter, in line with our expectations.

For the full year, European revenues increased 84.5% and operating margin was 22.4%.

Licensing revenues increased 22.4% to $26.5 million in the quarter. For the full year, licensing revenues increased 35%.

Wholesale segment revenues increased 53.1% to $65.1 million during the quarter, with three-quarters of the increase coming from Asia. North American wholesale delivered a double-digit revenue increase and strong margin improvement. Operating margin for the wholesale segment for the quarter was flat at 18%. Margins expanded in North America, which were offset by lower margins in Asia, where we continued to invest.

For the full fiscal year, wholesale segment revenues increased 69% and operating margin expanded 280 basis points to 19.3%.

And now I’ll turn our attention to the balance sheet. We ended the quarter with $275.6 million in cash compared to $207.6 million a year ago. Accounts receivable increased by $111.7 million to $254.4 million, compared to the prior year. Over 80% of the increase supported the substantial growth in Europe as well as in Asia.

Receivables also increased by about $24.3 million, due to the strong Euro and Canadian dollar. Overall, days sales outstanding from comparable businesses improved slightly with the most significant DSO improvement coming from our existing European business.

Inventory reached $232.2 million, an increase of $58.5 million, or 33.7%, within our expectations. This includes the acquisition of our European kids business. We are very pleased with our inventory position, which we feel is clean and well-aligned with our sales plan. About half of the increase supports new businesses, including Focus, G by Guess, Kids, Korea, and China. The other half will support our existing European and North American businesses. Currency translation increased our ending inventory by $15.7 million.

Finally, we continued to invest in retail and in infrastructure. Full year capital expenditures net of tenants allowances was $89 million, lower than our previous guidance due to the timing of cash payments.

Our board of directors has approved a quarterly cash dividend of $0.08 per share payable on April 18, 2008, to shareholders of record at the close of business on April 2, 2008.

Also today, we announced that our board of directors has authorized a new $200 million share repurchase program. This share repurchase authorization does not have an expiration date and allows the company to repurchase shares from time to time on the open market or in private transactions, including structure transactions.

And now I’ll turn the call over to Carlos.

Carlos Alberini

Thank you, Dennis and good afternoon. Let me now update you on our outlook for fiscal 2009 and provide our expectations for the first quarter as well. We are very pleased with the results that we just reported. These results demonstrate the power of our brand and the strength of our diversified and global business model.

For the current 2009 fiscal year, we continue to plan net revenues in the range of $1.970 billion and $2.050 billion. Our European business performed extremely well in the fourth quarter and order activity for the current season has been strong. We also expect to continue to benefit in the year from a stronger Euro than we originally planned. All this should translate into higher European revenues from the initial guidance that we provided for fiscal 2009.

Regarding our North American retail business, given the state of the consumer in the U.S. and economic uncertainty, we are now planning this business more conservatively. For the total company, we are now planning this year’s operating margin at about 17.7%, which is flat to the year that we just closed. We expect our effective tax rate to be 36%. All considered, we continue to expect diluted earnings per share in the range of $2.35 to $2.45 for the current year and we are very comfortable with this guidance.

For the first quarter of 2009, we are planning for consolidated revenues to be in the range of $445 million and $460 million, and operating margin to be about 15%. We expect first quarter diluted earnings per share in the range of $0.44 to $0.046.

Let me now address our capital expenditures plan for the year and our outlook for each of our businesses.

In fiscal 2009, we plan to make significant investments in retail expansion across the globe. We continue to plan capital expenditures of about $126 million net of tenant allowances for the year.

For North American retail, as you know we posted double-digit comps in November and December last year. In January, our comps were in the high single digits and in February, they were in the mid single digits. For the full fiscal year, we are still planning our business assuming low single digit comps, consistent with our previous guidance. If this comp performance materializes, full year revenue would grow in the low teens. This assumes square footage growth of about 12%, as we plan to open 68 new stores in North America in the year.

For the full year, we are now planning this business with an operating margin of about 14.9%.

We are planning our retail business prudently and conservatively. We will managed inventory levels very tightly, investing in key categories where we see opportunity. We feel that we have the ability to react quickly to opportunities as they materialize. We will managed our costs carefully and continue to look for opportunities to gain leverage over our cost structure.

For the first quarter, we are also planning this business with low single digit comps and revenue growth in the low teens.

For the wholesale segment for both the first quarter and the full year, we are planning revenue growth in the low teens, driven by our Asian expansion. Operating margin for this segment should reach 17% for the year as a result of our infrastructure investments in Asia to support this expansion.

We expect licensing revenues for the first quarter and for the full year to increase in the low single digits and operating margin to be flat to last year.

In Europe, for the full year we plan revenue growth between 25% and 30%, which includes our newly acquired kids business, and for the first quarter we are planning to increase revenues in the 40% to 45% range. Operating margin for this business should again exceed 22% this year.

The spirit and excitement in the company with the opportunities that we have in any side of the business we look at is tremendous. We need to continue to execute according to our beliefs and our principals at Guess and we will.

Thank you very much and with that, we are ready for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Christine Chen with Needham & Company. Please proceed.

Christine Chen - Needham & Company

Thank you. Congratulations on a fabulous quarter, again. I’m wondering if you could share with us a little bit about category, merchandise category performance so far in the first quarter. What were some of the missed opportunities last year, what’s doing well right now? And then if you can talk a little bit about Marciano and G by Guess. Thank you.

Paul Marciano

Okay. Are you talking about the fourth quarter?

Christine Chen - Needham & Company

First quarter so far -- spring.

Paul Marciano

First quarter of this year -- we are not reporting on the first quarter, Christine.

Christine Chen - Needham & Company

I know, but you talked about February comps, so I was just wondering in February, what categories so far have done well and what were some of the missed opportunities in spring last year?

Paul Marciano

No, we will prepare to discuss first quarter results at the proper time. We can tell you that some of the categories that were trending pretty well out of the fourth quarter continue to be trending, such as dresses, denim is very strong. We had a great turn with outerwear, sweaters in the women’s business.

And you asked about Marciano -- Marciano is also trending very well. The product is outstanding. I’m sure if you had the chance to really visit our stores, you will see. We are very, very excited about the opportunities there and the same thing is true for G by Guess, which we have made significant changes to the assortment over time. The floor space has been reallocated to those categories that were outperforming the rest of the store and many of the changes that were done to the store itself and the concept have been very successful, so we are very excited about that as well.

Christine Chen - Needham & Company

Great. Thank you.

Operator

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

Eric Beder - Brean Murray & Co.

Good afternoon. Congratulations. Could you talk a little -- I guess I want to talk about the shoe business. Could you talk a little bit about how your shoe business is doing well and why you think you are different? I mean, the shoe business is very tough domestically. Could you talk about how it’s worked internationally and just a little bit more depth on how the shoes are doing and the expectations you have for the new stores coming in?

Paul Marciano

The shoe business, if you have a little bit of history of it, at the stage where we are, is kind of new to see because it’s only 2.5 years. We had a licensee for many years and then we stopped and then we start all fresh with Mark Fisher. And our business across every continent right now is doing well, especially in Europe, where we plan to pass a landmark of a million pairs of shoes this year, after just starting two years ago. We are very, very pleased with that.

In the U.S., definitely in our stores, I am sure that you visit quite a few stores in California or in Las Vegas or anywhere, you will see that the footwear is representing a bigger and bigger space in our presentation because the customer acceptance not only about the style but mainly what you cannot see from outside is the comfort. These shoes have a tremendous acceptance percentage by consumers who come back and ask for the same type of shoes. So we are very pleased about that.

In general, I think the footwear outside our doors I think has been a little bit challenging. For us, it’s a new business so we are in progress every single quarter, every single season. And the other great thing that we have is if you remember, we introduced footwear for Marciano as a new category in the middle of the year, so we are experiencing significant growth because of that, just annualizing the introduction. So some of the plans that we have for this year in terms of growth in the retail business is around shoes.

Eric Beder - Brean Murray & Co.

Thank you.

Operator

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

Jeff Klinefelter - Piper Jaffray

Congratulations, everyone, another fantastic year. I’ll just kind of sneak in one-and-a-half questions, if I could. Just a little housekeeping wise, could you comment on, since everyone seems to be focused right now on these cash balances, Dennis, any exposure to ARSs? Is it pure cash? Anything that you can point us to there?

And then also on that inventory you gave us, the currency impact of $15.7 million, what would that impact have been last year, so we have an apples-to-apples comparison? And then I just have a follow-up for Paul.

Dennis Secor

Okay, so we’re talking about three questions, but with respect to the cash, we’re primarily invested in municipal tax exempt money market funds, same day liquidity and within that, most of the investments are in municipal bonds, with interest rates reset to an index. So we are not invested in any auction rate securities.

With respect to the inventory question, the $15.7 million change is the result of applying last year’s rate to this year’s balance -- perhaps I’m not understanding your question.

Jeff Klinefelter - Piper Jaffray

You were saying this year’s inventory was positively impacted by $15.7 million as a result of the impact to the Euro, correct?

Carlos Alberini

No, he is saying that the inventory is increased as a result of the stronger Euro in U.S. dollars relative to last year, if you had assumed this same kind of exchange rate that was prevailing at the time at the end of last year.

Jeff Klinefelter - Piper Jaffray

I got it. Okay, thank you for that clarification. And then just in general, the European business is tracking well and obviously a very important part of your business and you comment on France, Spain, England, Germany as great potentials. I know those are relatively under-penetrated.

Overall, there’s some concerns about some European trends, some consumer spending trends like there are in the U.S. It would appear that those are not impacting you at this point. Could you just comment further on, in Italy specifically and then in Europe overall -- you just don’t seem to be seeing that same sort of traffic slow down at this point?

Paul Marciano

In Italy, as you know, this is the most penetrated country we have for Guess. We have currently 63 freestanding stores, so we have a -- pretty much a good view of what the consumers are and we are not experiencing anywhere any negative comp stores in any [weeks] that we have. So our business has been strong, first of all, again because very few companies, if any in Europe have the assortment of product that are as complete as we are. From the denim side to the handbag side to the footwear side to the watches side to eyewear, very few have this combination.

We’ve [a tag] of being an American brand in Europe, so we have not been -- and we are pretty new in the [scene there], so we have not been affected by that and when you realize that we only have four stores in England, only five stores in Spain, only zero in Germany and 15 in France, it’s absolutely virgin territory for us. We have such a strong demand by the department stores of [inaudible], and [Printemps] and [inaudible] in Spain and House of Frasier in England, we are new.

So we are don’t have a 10-year or 15-year history to say well, business is slowing down because we are the opposite. I mean, we keep compounding positive on positive because the demand is so strong for a new brand basically in Europe.

Jeff Klinefelter - Piper Jaffray

Okay. Thank you very much.

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. I wanted to get some more color on inventory. I hate to go back there but could you just talk about -- you said half of it has to do with the new business and half of it has to do with the existing businesses. Could you just talk about the new business part of it? Is that the -- are you talking about the business, the stores that opened in Q4 and are planning to open in Q1? I guess just kind of categorize what segments of new business and what timeframe you are looking at.

Dennis Secor

The business that we are defining would be Focus, they would include Korea and China, G by Guess -- I think those are all of them. And that’s just to segregate for you and help you understand -- oh, that also includes our European kids business. So those are the new businesses and that represents about half of the additional investment that we made in the quarter.

Carlos Alberini

So Holly, we are very, very pleased with how we were able to manage our inventory position because we have the inventory where we need it. You know, as you know, our European business is primarily a wholesale business and we have orders for that business and as you also know, this operates with two big seasons -- spring and summer, which is the one that we will be shipping right now, and it’s a six month type of cycle. So you would expect, especially in a growing business, we are guiding to a pretty significant growth in Europe, that you will have a lot of inventory to be able to support those orders.

If you look at our North American business, our inventories were remarkably low relative to the sales trend that we are experiencing, so we are very happy with the absolute dollar amount of the inventory and we are extremely happy with the composition and mix of it.

Holly Guthrie - Janney Montgomery Scott

Great. Thank you.

Operator

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

Betty Chen - Wedbush Morgan Securities

Thank you. Good afternoon, everyone. I was wondering if you can talk a little bit about the North America retail business. Obviously I think you talked about the macro environment and that’s not a surprise to anyone but if you can talk about are you seeing that kind of pressure across all the different business concepts, which parts of the region where -- for example, in California where there may be some difficulty given the housing market. And then maybe talk a little bit about G by Guess and again, what additional learnings you have gained during the holiday quarter. Thank you.

Carlos Alberini

We are -- our retail business has performed remarkably well and of course, we are aware of all the macro issues that everybody reads about every day, but we have seen an increased conversion rate, which has helped us in continuing to drive the kind of comp performance that we have seen.

Now, that being said, you are right. There are some regional differences. I think we are very privileged with the kind of store base that we have of over 80% of our stores are in that -- that really capitalize on tourism and on the big cities in the country. And obviously we have experienced a significant in-flow of customers coming from other parts of the world with a very strong currency and because we are a global brand and one that is recognized by those international customers, we benefit from that in a pretty significant way.

So areas like Florida that for others I believe are under pressure for us have been and continue to be a driving force for our retail business.

That being said, we do have some slowness in California that we have experienced and of course, in areas such as the Midwest, things are more difficult than in the other areas that I mentioned, such as the city of New York or Florida overall, as I said. Even Vegas continues to drive very strong numbers.

And I didn’t mention Canada but Canada continues to do very well.

Betty Chen - Wedbush Morgan Securities

And then could you talk a little bit about G by Guess, Carlos?

Carlos Alberini

Yeah, as I mentioned, you know, we have I believe very realistic expectations for G by Guess and I think we shared some of those expectations the last time we talked. G by Guess we continue to believe is a very strong opportunity for the company and I think with the changes that the merchandising team and the general management that is driving that business, I think that we will continue to improve our opportunities there. We think that there is definitely a strong customer base for that concept and the concept allows us to reach a customer that we couldn’t reach with our existing concept, so we are very excited about that.

Betty Chen - Wedbush Morgan Securities

Thank you. Good luck.

Operator

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

Erin Moloney - Merriman Curhan Ford

Just a question, following up on your North American retail business, it looks like your guidance for the year now, it looks like you are maintaining your revenue guidance but operating margin guidance quite a bit lower than what you talked about last quarter, so I’m just curious where the change is coming from. Is it on the margin line? Just exactly where that change is.

Paul Marciano

Yes, Erin, you are right. The guidance that we had provided before was 15.5% operating margin and we closed the year with 14.9. We are guiding to a flat operating margin. And there are a couple of reasons for that. I am sure you are aware there is more pressure on [IMU] at this stage with some increase in costs across the board. We have been able to offset those but at the time that we were talking, we had an expectation to significantly improve IMU and we are being more conservative on that expectation.

And then there is a little bit of a lower expectation on the cost structure leveraging, because we feel that we have to continue to invest in this business and we feel that providing strong customer service is going to be critical in this environment.

So those are the two main reasons. We have adjusted now the store opening program and remodelings and that has a small impact on occupancy but the biggest drivers of the change in our expectations were the two that I mentioned.

Erin Moloney - Merriman Curhan Ford

Okay, great, thanks. And then I was hoping we could just get the store breakout by concept in North America for the fourth quarter.

Dennis Secor

Sure. So we ended with in retail, 187; in factory, 97; Marciano, 38; accessories, 17; and G by Guess, 34.

Erin Moloney - Merriman Curhan Ford

Great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Margaret Whitfield with Sterne, Agee & Leach. Please proceed.

Margaret Whitfield - Sterne, Agee & Leach

Good afternoon and congratulations. You mentioned the direct business was a priority. You mentioned the percentage change but I wondered if you could size the business and tell us what your goals are down the road for building this business?

Carlos Alberini

You know, the business for us is very small. We see big opportunities just looking at what others have been able to accomplish and this is becoming a big priority for us. Obviously the business is highly profitable and highly leverageable, so we see a big opportunity. We are going to invest in the business and we have new management, so we are excited about the opportunity.

We have never disclosed the size of this business. I can tell you that it is probably -- it is higher than any one of our stores in terms of volume but it’s not a very significant business.

Margaret Whitfield - Sterne, Agee & Leach

So initially, it will be North American focused or will it be global?

Carlos Alberini

No, initially it’s North American focused, primarily U.S. focused.

Margaret Whitfield - Sterne, Agee & Leach

In terms of Q1, the guidance range was below the consensus. My numbers sort of parallel the revenue and the operating margin. I wondered if there is a bump in the tax rate in Q1 as there was in Q4, or is it going to be like the year, which you said was 36%?

Carlos Alberini

Yes, when we guide tax rate, we expect that that is the rate that you are going to use for every one of the periods until we see things differently. But right now, that’s what we expect, a 36% tax rate across the board.

Margaret Whitfield - Sterne, Agee & Leach

And in terms of the yearly guidance, any thoughts on how we should model gross margins and SG&A to get the operating margin in line with your guidance?

Carlos Alberini

Margaret, we do not want to get into that. We don’t think it’s productive because our business model is so complex. We have so many segments. I think giving you operating margin by segment is plenty for you to really come up with the right answer.

Margaret Whitfield - Sterne, Agee & Leach

Okay, and in terms of any directional changes in fashion in denim or elsewhere? If Paul or Maurice could speak to that, to learn what we might be looking at this year?

Carlos Alberini

I’m sorry. I do not understand --

Margaret Whitfield - Sterne, Agee & Leach

The fashion changes which could stimulate demand or interest within the Guess stores?

Paul Marciano

I think you are one of the most familiar analysts around since Guess exists and I think you are going to see a great emphasis and push again for the denim business for Guess, not only here but in Europe, in Asia, in the Middle East, in South America. Denim is going to take [inaudible] back to school, [front and center] of our focus for the business. Accessories, needless to tell you that across the board we have been doing incredible season after season and year after year, but that doesn’t mean that we are going to get comfortable with that because a lot of people are trying to focus on accessories and we keep our eyes open and definitely we are working on that every day. Thank you.

Margaret Whitfield - Sterne, Agee & Leach

Thank you.

Operator

Your next question is a follow-up from the line of Holly Guthrie with Janney Montgomery Scott. Please proceed.

Holly Guthrie - Janney Montgomery Scott

Thank you. I was hoping to get just a little bit of directional comments on SG&A. Last year you invested a lot in SG&A, G by Guess, footwear, international -- I guess in all parts of your business and SG&A grew I guess around the same rate that sales did. I was wondering if you could just talk about what we can look for, SG&A growth, particularly any that has to do with any kind of SG&A expenses this year.

Carlos Alberini

Holly, with respect to the fourth quarter, keep in mind that a lot of those initiatives you mentioned were not annualized. So we talk about the new headquarters in Europe, that was an initiative that was put in place in the middle of the year so of course the fourth quarter is going to have the same kind of impact that we saw before, in this previous quarter, meaning the third quarter.

The same thing is true for G by Guess, which was a completely new initiatives that wasn’t put in place until the second quarter last year. And I think that if we go through, you know, Korea’s the same story, the whole investment in China is the same story.

Many of these initiatives do not annualize until later on this year, so you are going to continue to see that kind of impact on the SG&A line. We have a plan that would protect the operating margin performance of the company and still allow us to continue to invest heavily in all those initiatives that we believe are the future of Guess and that is what we are planning to do.

Holly Guthrie - Janney Montgomery Scott

Great. Thank you.

Operator

At this time, there are no further questions in the queue.

Carlos Alberini

All right. Well, thank you very much and we are looking forward to reporting to you on the first quarter. Thank you very much.

Operator

Thank you for your participation in today’s conference, ladies and gentlemen. All parties may now disconnect. Have a great day.

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Source: Guess F4Q08 (Qtr End 2/2/08) Earnings Call Transcript
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