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Executives

Paul Marciano - Vice Chairman, Chief Executive Officer

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

Carlos E. Alberini - President, Chief Operating Officer, Director

Maurice Marciano - Chairman

Analysts

Jeff Klinefelter - Piper Jaffray & Co.

Christine Chen - Needham & Company

Eric Beder - Brean Murray & Co., Inc.

Margaret Whitfield - Sterne, Agee & Leach

Betty Chen - Wedbush Morgan Securities, Inc.

Guess?, Inc. (GES) F2Q09 Earnings Call September 3, 2008 4:30 PM ET

Operator

Welcome to Guess? second quarter fiscal 2009 conference call. (Operator Instructions)

Before we get started, please note that the company will be making forward-looking statements during this call including and regarding future plans and guidance. The company’s actual results may differ materially from current expectations based on risk factors included in the company’s quarterly and annual reports filed 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.

Paul Marciano

Thank you for joining us today to discuss Guess? financial results for the second quarter of fiscal year 2009. Also joining me are Maurice Marciano, Carlos Alberini and Dennis Secor.

We are very pleased with our strong financial performance in the second quarter. Each of our business segments delivered double-digit growth combining for 33% increase in global revenue and a 44% increase in earnings, even stronger than the earnings growth we posted in the first quarter. We delivered diluted earnings per share of $0.57 a 43% increase over last year’s second quarter.

The strength of our brand worldwide was evident in a breadth of our revenue performance. Solid demand and earlier product deliveries drove European revenue up 61% for the quarter. In North American retail our comp performance was strong despite the challenging environment and we delivered 8.1% comp for the second quarter, much better than what we planned. And once again our licensees outperformed expectations with licensing growth growing 22%. We set another quarterly global revenue record reaching $550 million in the second quarter.

One of the keys of our growth strategy has been the focus on expanding international business to build a very balanced earning model. Europe has been an important part of this plan contributing significantly to our recent top and bottom line growth and we expect this to continue. Expanding in Asia is also essential part of our strategy with our current operation continuing to post strong sales and earnings growth. We expect that the investments we are making now in China also will generate strong results in the future.

Our North American retail business performed extremely well during the period and I will discuss it later in detail.

The power of our earnings model is clear in this quarterly result. We have a very balanced geographic mapping format. Europe represented 39% of total earnings, North America retail and wholesale represented 40% of earnings, and licensing delivered the remaining 21%.

I will start with Europe. Our business in Europe continued to be very strong with revenues increased by 61% to $174 million for the quarter. Our contemporary line Guess by Marciano more than doubled in the second quarter. Our accessory business was very strong and we continued to expand in new markets with strategy partners like [inaudible] in Spain and House of Frasier in UK. In our Guess? apparel business knitwear was among the strongest performer as well as denim. Our retail business grew by 66% in the second quarter and 72% for the first half of fiscal 2009. Our own retail store expansion is well underway as we now operate 44 stores in Europe alongside with another 222 stores operated by partners.

Our timid objective is to capitalize in the strength of the Guess? brand and to expand its reach in all parts of Europe like UK, Germany, Sweden and Holland where our distribution is not developed. We have a management team and infrastructure largely in place now. We can gain market share. We have a three-year goal to reach $1 billion in revenue.

Retail in North America. We are extremely pleased with our retail performance where we increased revenue by 20% during the quarter. Our 8.1% comp represents our 22nd consecutive quarter of same-store sale increases which followed 16.2% comp in the second quarter a year ago and a 13.7% comp the year before that. Among our weaker concept we were especially pleased with the performance of Marciano stores in US and Canada with comp sales in the high teens during the period. We now have 48 Marciano stores in North America which have been delivering per square foot well in excess of $600. Last week we just opened our first Marciano store in New York Soho District with approximately 5,000 square feet. For the entire chain we opened 16 stores in North America in the second quarter and have opened 35 stores in the first half of this year. We expect to open another 22 stores during the second half for a total of 57 new stores in US and Canada.

We entered the critical back-to-school season with a goal to increase sales in existing doors across our concept and we see our fortune in denim, premium and basics. In fact, this year we are making denim our number one focus, not in US but worldwide. We are [inaudible] to have increasing denim penetration in all our stores in all our businesses and offering a global denim assortment that represents the essence of the Guess? brand. In short, results have been strong and we expect this to continue. In North America our denim penetration improved from 26% same quarter last year to 30% this year.

Regarding eCom, we made excellent progress in developing that business which also is one of our top priorities in North America. We have experienced substantial traffic increase to our three websites, www.Guess.com, www.Marciano.com and www.GbyGuess.com. And our conversion also improved. As a result our business has increased by 67% for the second quarter and up 54% for the year.

Wholesale. In the wholesale segment which includes North America and Asia operations, the business was strong and revenue increased by 26%. Our Asian business performed well and we continue to expand in this very important region. Revenue in existing doors in Korea increased by more than 20% comparing to a year ago. We also opened five new stores and concessions in Korea and ended the quarter with 114 total doors in that country. In China we opened our first footwear stores in Beijing as well as seven additional Guess? stores and concessions. China drove almost half of our revenue growth for our Asian business. We continue to invest there ending the quarter with 43 stores and concessions in China. Our goal for Asia is to reach revenue of $200 million within the next two to three years. That does not include our business in Southeast Asia such as Singapore, Indonesia, Malaysia and Thailand where we opened our first stores there 14 years ago.

Licensing. Regarding our licensing business we experienced another excellent quarter increasing revenue by 22% which followed the 51% growth last year same time. Combined our footwear, watches and handbag businesses the increase was 29% during this quarter.

In closing, I’m convinced that our ability to achieve these financial results into this environment is due to the strength of our brand and the consistency of execution by our dedicated team and partners around the world. We are not shielded from what’s happening in the world economy but at times like this our long-term strategy and careful growth is rewarding our shareholders in many ways. We continue to see the world as a field today more than ever.

Dennis Secor

Let me now share with you the key financial highlights that drove our solid performance for the second quarter. Total second quarter net revenues increased 32.7% to $515.2 million. Europe again drove over half of the increase while North America retail accounted for about a third of the revenue increase. We expanded our gross margin by 50 basis points to 45.1% and we increased our gross profit by 33.9% to $232.2 million. The biggest driver of the margin improvement was Europe where we expanded gross margin by 430 basis points including the benefit of the strong Euro. North American product margins declined slightly in the quarter. Remember that a year ago we adopted the redemption recognition method of accounting for gift cards in the US which resulted in a $3.1 million favorable adjustment to both revenues and operating earnings last second quarter. In the quarter we managed our costs tightly improving our SG&A rate by 70 basis points from 29.3% to 28.65. We leveraged our expense structure primarily in North America including our corporate overhead and in Europe as well. Overall SG&A expenses increased 29.1% to $147.1 million. The majority of the increased spending supported the higher sales volume, incremental expenses for our new businesses and infrastructure investments including our new European headquarters.

For the quarter we increased operating profit by 43.2% to $85 million and expanded operating margin by 120 basis points to 16.5%. This includes a $5.9 million favorable currency translation impact or about $0.04 per share. We recorded an impairment charge of $1.7 million to reduce the carrying value of some low-performing US retail stores. Combined the impairment charge and last year’s gift card adjustment negatively impacted the operating margin comparison by 100 basis points.

Our effective tax rate for the second quarter was 36% compared to 39.1% in the prior year quarter. This reflects a shift of profitability into lower tax jurisdictions. We are continuing to plan the remainder of this year at the 36% rate.

In the quarter we increased net income by 43.6% to a record of $53.8 million and increased diluted earnings per share by 43% to $0.57, also a record.

Next I’d like to quickly review our revenues and earnings by business segment.

In North American retail a 14% increase in average square footage coupled with our 8.1% comps resulted in a sales increase of 20.2% to $242.4 million. For the quarter our operating profit increased $2.3 million to $30.1 million from $27.8 million and operating margin declined 140 basis points to 12.4%. This margin decrease includes the affect of the gift card adjustment and the impairment charge that I just mentioned, which for the retail segment negatively impacted the operating margin comparison by 210 basis points.

In our wholesale segment revenues increased 26.3% to $72.4 million with both North America and Asia contributing double-digit revenue growth. Operating margin for the segment was 14.9% versus 17.8% last year reflecting the impact of our Asia business, which as we have said in the past yields a lower operating margin.

Revenue for the Europe segment increased 61.5% to $174.2 million. Growth was strongest in our Guess by Marciano and accessory business. We succeeded in our goal to deliver products to the market earlier than in the prior year. Certain wholesale shipments which had been planned to be delivered in the third quarter were shipped in the second quarter. The magnitude of this shift was well above the expectations we had earlier in the year. The impact of this shift on earnings per share was about $0.03. European operating earnings increased 107.2% in the period. Our strong gross margin performance coupled with a 70 basis point improvement in our SG&A rate resulted in a 500 basis point operating margin expansion to 23%.

Licensing revenue increased 21.7% to $26.2 million. Once again, strong performance among watches, handbags and footwear were the key drivers of this growth. Our operating margin in the second quarter reached 85.9%.

Now turning our attention to the balance sheet. We ended the quarter with $294.5 million in cash, up $94 million from last year’s $200.5 million. Short-term borrowings primarily to support our European working capital requirement were $40.7 million versus $3.6 million a year ago. Accounts receivable increased by $101.3 million to $288.2 million compared to the prior year. Over 75% of the increase supports the growth of Europe including our recently acquired kids business. Overall, the company’s DSOs were up slightly over last second quarter. The impact of currency translation which mostly relates to the strong Euro but also to the Canadian dollar increased receivables by about $23.4 million over last year’s levels.

We were very pleased with our inventory management this quarter. Global inventories grew at less than half the rate of the business reaching $258.9 million at quarter end, an increase of $32.5 million or 14.4% from last year’s second quarter. This is quite an accomplishment considering that currency translation alone increased ending inventories by $11.6 million. Our inventories are clean as we continue to plan levels very prudently investing in product categories and styles that are resonating most with our customers. Our inventories will continue to support our key growth markets such as Korea, China, Mexico, Northern Europe and North America.

In the quarter we invested $27.5 million in capital expenditures net of tenant allowances primarily to support our owned retail expansion including the 16 new North American stores and six international stores.

During the quarter we repurchased 951,000 shares of our common stock at an average price of $34.73 investing a total of $33 million in the program. The impact on second quarter earnings per share was negligible.

Finally, we announced today that our Board of Directors has approved a quarterly cash dividend of $0.10 per share, up 25% from the previous dividend of $0.08. This quarter’s dividend will be payable on October 3, 2008 to shareholders of record at the close of business on September 17, 2008.

And now I will turn the call over to Carlos.

Carlos E. Alberini

Today I will give you an update on our expectations for each of our business segments and our outlook for the balance of this fiscal year.

Let me start with our North American retail business. In retail the comps that we posted for the first half of this year have been strong particularly considering the prevailing economic conditions. While our traffic has been down for that period, our conversion rates have improved. We just closed August with a comp performance in the mid-single-digit range. We continue to invest in initiatives designed to leverage the long-term potential of the brand in North America.

For back-to-school we launched a loyalty program in our Guess? stores in the US and Canada which follows last year’s successful launch of the M loyalty program in our Marciano stores. This new program is called the Guess List. Over time we expect it to improve conversion rates, drive more repeat business into our stores and increase the average amount that our customers spend.

We are planning our business assuming that the current climate will persist into next year. We feel we are well positioned and can take advantage of opportunities if conditions improve. Our careful planning of this business with strong attention to cost control and focused inventory management has produced solid results and in this challenging time, it should continue to serve us well.

For the second half of this fiscal year we are now planning comps in the low to mid-single-digit range. This performance should result in a revenue increase for both the second half and the full fiscal year in the mid-teens. Overall we are now planning this business with a full year operating margin of about 14%. This includes the impact of our investment in our loyalty program, the storing permit charges that we just recorded, and slightly lower product margins due to upward pressures on production costs.

During our last conference call we discussed that in Europe this year wholesale shipments are being delivered earlier. As Dennis mentioned, the second quarter sales were higher than we had planned due to a further shift in the timing of shipments. These shipments were previously expected to be delivered in the third quarter but were delivered in the second. Considering this we now expect European revenues to grow by about 13% in the second half of the year which should result in a revenue increase for the full fiscal year of about 30% consistent with the upper end of our previous guidance. We continue to expect a 23% operating margin for this business this year.

When you look at how revenues and operating profit are now expected to flow for the year, you will see that the business is very steady across all four quarters as opposed to being very heavily weighted to the first and third quarters as it was in the past. Our goal was to deliver goods on a more regular basis to our European accounts and we are extremely happy with the progress that we made this year.

In our wholesale segment we expect our North American business to record modest growth in the second half though Asia will remain the main driver of revenue growth for this segment. Our expectation or this segment is to grow revenues in the second half in the low to mid-teens. We will continue to expand our retail and wholesale businesses in Asia. We plan to end this fiscal year with 73 stores and concessions in China and 133 in Korea. For the full year we now expect wholesale segment revenues to increase in the mid- to high teens and operating margin to exceed 17% for this segment.

In licensing we expect revenues to grow in the low to mid-single-digit range in the second half. This should result in a revenue increase of over 10% for the full fiscal year. We continue to expect this business to yield a full year operating margin of about 86%.

On a consolidated basis we now expect total company revenues for the full year to reach between $2,060,000 and $2,110,000. We continue to expect to deliver an operating margin of about 17.7% this year and we have raised our diluted EPS guidance to a range of $2.47 to $2.53 per share. This of course includes all the assumptions I just shared with you by business segment. It also factors in the $0.03 per share shift related to the European shipments that were made in the second quarter which we had previously expected in the third.

Regarding currency, in the first half of this fiscal year about $0.08 of our EPS growth resulted from currency translation. The Euro and the Canadian dollar are now nearing the levels they were a year ago and we anticipate that these conditions will continue. Accordingly, for the second half of this fiscal year we do not expect any material translation impact either positive or negative. Of course when modeling next year, the $0.08 impact on EPS in the first half of this year will have to be taken into consideration should these current levels persist.

Our outlook includes the effect of the shares that we repurchased in the second quarter but assumes no further repurchases.

We are continuing to plan for full year capital expenditures net of tenant allowances of about $126 million and depreciation and amortization of about $62 million. Our capital investments will support the opening of 38 international owned retail stores this year in addition to the 57 US and Canada stores that Paul spoke about. Including the stores operated by our licensees, we expect to end this fiscal year with nearly 1,200 stores around the world.

Our expectations will result in our fifth straight year of consistent earnings growth. The strength of our results particularly considering the environment underscores the power of our diversified business model and demonstrates our team’s successful execution of our growth strategy that we put into place years ago.

We thank you for your attention here today. And with that we’ll open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Klinefelter - Piper Jaffray & Co.

Jeff Klinefelter - Piper Jaffray & Co.

First on Europe. Fantastic results here in the first half of the year. A couple of points I wanted to follow up on. One is, can we get any more color on country performance through the first half of the year and where you identify Paul some countries - UK, Germany, Sweden, Holland - where you see opportunities going forward, but could you give us also sort of trends to date given that there seems to be concerns about certain countries within Western Europe? A little bit more color on trends to date and how you see that playing out the balance of the year?

And then in terms of Carlos your guidance for the back half, understanding that you’re attempting to spread the orders across seasons rather than in one quarter, it makes sense that you’ve pushed some orders into Q2 from Q3, but wouldn’t you also see a smoothing in the back half meaning that you’d see a stepped up level of reorders in Q4 as well? Maybe just a little bit more color on that?

Paul Marciano

To start with Europe, as you well know we really started when we took over our licensee in Europe three years ago, three and a half years ago now, and so basically we’re pretty new on all these countries while in full development. Of course Italy is well developed. France we just are in the middle of it. Spain we are really starting now to put quite a few stores on the map and the same for UK we plan to have eight to 15 stores in the next 18 months. So we start from scratch in a lot of countries except France and Italy. Do we see a slow down on our end? Not really on the sense that you heard the numbers about the retail. Retail was up on a comp basis of our owned stores 66% and 71% for the half of the year. We are acting cautiously to look at where we open our own stores and where we grant the right of partners to open our stores, but we are not at all developed in Europe so that’s why we don’t perceive yet a major slow down on anything that we’ve done here, especially in Spain and England where the credit crunch is coming the same as in US.

Carlos E. Alberini

Jeff, with respect to your second question regarding guidance, really when you look at what shifted into the second quarter as we had originally planned and we I think mentioned that during our first quarter conference call, we are very pleased with how the team has been able to impact this change and to the point that the customers accept it and took much more product into the second quarter that we had originally anticipated, so we are very happy. Obviously we continue to see the year as we did. We had guided to revenue growth for Europe of 25% to 30% and now we can say with confidence that we are going to be in the upper end of that range in the 30%. The percentage obviously for the second half is impacted by the shift and that’s where the 13% comes from.

With respect to reorders, we have made very conservative assumptions and we think that they are in line with the rate of reorders that we have been seeing. But remember that last year most of the shipments took place in the third quarter so obviously that is going to impact the rate of growth in that period in a pretty significant way.

Jeff Klinefelter - Piper Jaffray & Co.

So Carlos assuming that the strategy works and it seems to be, you’re getting product in earlier to the retailers in Europe, you should see strong and steady sell-throughs in Q3. In theory if they see the evidence of this working, then they may come back and there may be more reorder business in later Q3, early Q4. Are you prepared inventory wise to be able to supply that?

Carlos E. Alberini

Exactly. That’s the strategy. What we want is to really accelerate the sell-throughs at the retail point of sale but we are also taking a lot of the initial shipments out of that period. So even if you have a good reordering activity, that is going to fill for what you took out. I can’t answer you for all stores because we monitor our own stores. We see already reorders of fall product that we just delivered early July and we are end of August, first week of September and our stores are demanding some product that we already sent out, especially in denim and accessories. So to answer your question, yes. That is strategy and so far it’s working.

Operator

Our next question comes from Christine Chen - Needham & Company.

Christine Chen - Needham & Company

I just wanted to follow up on the international scene. With respect to Asia, is that what’s driving the slight bump up in guidance for wholesale operating margins? I think previously you had said 17% and now you’re saying it’s going to exceed 17%. Is that because Asia’s doing a little better than expected?

Carlos E. Alberini

Yes, that is true. Also our wholesale business has been very healthy and when you put it all together, yes we are seeing an improvement over what we thought. We had controlled expenses very effectively and we expect for that control to continue into the second half.

Christine Chen - Needham & Company

And back to what Jeff was asking, is it fair to assume that you would not be able to move the shipments in Europe up if the demand in Europe didn’t continue to be very strong?

Carlos E. Alberini

I’m not sure I understand your question. We did move the shipments in Europe. We have more visibility today in terms of the backlog than we did a few months ago of course, so I would say that the fact that we are now looking at the upper end of that range is pretty much based on visibility that we have today.

Operator

Our next question comes from Eric Beder - Brean Murray & Co., Inc.

Eric Beder - Brean Murray & Co., Inc.

You talked a little bit about denim and we’ve seen it really in the stores in terms of premium denim and other pieces. Where was your denim penetration the second half last year and where are you looking to take it in this year? And what more are we going to see in terms of the denim and the premium denim in the stores and internationally?

Carlos E. Alberini

If you look at just the general picture of our company right now from the advertising in magazines to the billboards on the streets to the stores to the windows to the merchandising, it’s screaming denim, denim and denim. Clearly the comp numbers justify that effort we put behind that. So penetration last year was 26% same quarter. This year same quarter was 30%. Our goal will be to continue to increase another 5% or 6%. That would be a very good target for us. We have been investing a lot in development of fabric, in styles, in washes, in treatment, in trims. You go and see the product and I think you will see a very different product of last year. As well as that, what happened with it is that our premium denim is selling better and better. It means an upper hand. Like anything above like $130 is selling better and better than last year. And of course we’re sending less of the $79 and $89 and we’re more of the - but it’s a question of strategy and investments we made and that’s the goal we have for the 35% penetration.

Eric Beder - Brean Murray & Co., Inc.

It’s going to be higher average ticket driving this or is it units?

Carlos E. Alberini

The ticket is not significantly up but there is a tremendous improvement in the stock, in-stock for big doors. We have done a lot of things in the allocation methodology as well. So there is a significant increase in units that go along with this increased penetration. Visit our stores. You will see.

Eric Beder - Brean Murray & Co., Inc.

I have and I’ve seen it. It looks great.

Operator

Our next question comes from Todd Slater - Lazard Capital Markets.

Todd Slater - Lazard Capital Markets

I have a question and a follow up. Carlos, so currency helped by $0.08 in the first half and you expect it to be neutral in the second half. Backing out let’s say $0.08 for 4x in 08 and $0.09 even in 07 just to look at those growth rates 08 to 07, to me it looks like about 28%, 29%. I’m wondering if you can help just in terms of how we should be thinking about the growth rate for 09. Is it fair to back out let’s say the $0.08 and look at that on sort of a non-4x basis and maybe look at a 20% type of growth rate on an operating basis, which gets you to about 294? Is that sort of a good way, a conservative way of looking at the business model including 4x?

Carlos E. Alberini

I think that is a very good way and I think that will be conservative but really in a very prudent way to look at next year, yes.

Maurice Marciano

In this environment, better it is to be conservative.

Carlos E. Alberini

Yes. When you look at how the Euro has behaved and where we are today, I think that is conservative but realistic too based on what we see today.

Todd Slater - Lazard Capital Markets

On the follow up on Jeff’s question and others on the smoothing. I understand how if retailers, the Europeans are ordering more or spreading the orders more across the quarters instead of everything up front in the first quarter for the first half and everything up front for fall in Q3. They’re buying it more across all the quarters. So I see how revenues might spread or shift from first quarter to second quarter and from third quarter into fourth. So the fact that in this case there were shipments that went from 3Q to 2Q has to do with the fact that the business is trending so well people want their orders more quickly or more up front. Will we still see some movement from 3Q into 4Q?

Carlos E. Alberini

We cannot anticipate more than what we have because you also have to keep in mind what you’re taking out of the base Todd. It isn’t just the reorder activity that impacts these numbers but it also is impacted by what you take out of the base because of the shift that already took place with the business model between third quarter and second. So the reorder activity even if it is strong from what you deliver on the second will have to replace the business that went away to begin with because of the change in the business model.

Todd Slater - Lazard Capital Markets

So is it possible to expect some shift then just as some 3Q went into 2Q, you might get some 4Q into 3Q unexpectedly?

Carlos E. Alberini

We try to factor in all the shifts to the best that we could in the guidance that we are providing you today.

Scratchy

The strategy is absolutely that. The strategy is to ship early and to generate some reorders into the third quarter and even into the fourth quarter to help to have more business. But we don’t want to assume that is going to happen. The strategy is there. We are doing it. Now we’ll see how it’s going to happen. We hope that is going to work exactly the way we planned it.

Operator

Our next question comes from Margaret Whitfield - Sterne, Agee & Leach.

Margaret Whitfield - Sterne, Agee & Leach

I wondered if you could give us more color on retail and how the comps trended during the quarter and how the men’s business performed versus YC versus accessories? I’ve seen a lot of tie-ins for back-to-school between the apparel and the denim. I wondered if you could comment on that if that is accurate that you’ve done a better job of tying denim to the apparel pieces in the store?

Carlos E. Alberini

Yes, that is very much the case. The four big areas that really contributed most of the growth and we have very healthy business in YC driven by denim. Woven tops were good. Knit tops also performed well. Sweaters, skirts even. The men’s business was very strong this quarter once again driven by denim, woven tops and knit tops. The Marciano business was very healthy both in our own Marciano stores and in the Guess? stores that carry the line. And in accessories we had some great sales from watches, handbags, shoes, jewelry and belts and smaller goods. It’s pretty much across the board. We did have a very successful quarter and I think at the balance was pretty much across all different lines. I think what you said is very true. Both Maurice and Paul felt very strongly about denim and making this more a jeans-wear type of line that went along in terms of bottoms and tops and I think that that strategy has been working well for us.

Margaret Whitfield - Sterne, Agee & Leach

How about geographic trends? Any weakness to note in certain areas? And also, any comment on G by Guess.

Carlos E. Alberini

In terms of the geography, the regional performance was very strong in areas that were benefited by tourism. I think we once again had pretty significant fortune with that. It has driven additional traffic and conversion was very, very strong. The West Coast was below the company average as it was the Midwest and the Southwest. We had great success in the Southeast, Northeast and Canada was also above.

Margaret Whitfield - Sterne, Agee & Leach

And G?

Carlos E. Alberini

We are very pleased with the performance of G. We are excited about the opportunities we see. The big merchandise categories that are performing well continue to be men’s. I think Paul spoke about this in the last call. Also we had some significant progress made in the accessories line including handbags, shoes continued to do well, and we continue to work on the women’s line but with some good progress there. In the last 15 months we opened 43 stores already which is pretty good. And also the www.gbyguess.com is going much more rapidly than the rest of the websites www.marciano.com and www.guess.com. So we feel very, very good about G by Guess but again it’s only 15 months project and we want to stay cautious, we want to stay prudent about the overall company, but we still have a plan to open quite a few more. But once it’s completely a proven format then we will accelerate the growth.

Operator

Our next question comes from Betty Chen - Wedbush Morgan Securities, Inc.

Betty Chen - Wedbush Morgan Securities, Inc.

I was wondering just a follow up on the earlier question on G by Guess. I believe the plan was for this year for the concept to reach break-even to accretion. Is that still kind of on track to reach those targets?

Carlos E. Alberini

In fact, that’s exactly where we are.

Betty Chen - Wedbush Morgan Securities, Inc.

Are you referring to accretion?

Paul Marciano

We’ll get break-even on this fiscal year. Don’t forget we opened the first store in May 07, fiscal 08 if you want to. So I think Carlos can give you exactly the term on the financial side.

Carlos E. Alberini

We are working on our plan. I think we feel that there is still a pretty good opportunity to make significant improvement over last year even if things are not going exactly how we pictured for the second half of the year. We are talking about maybe $0.02 of impact to our bottom line if things don’t go in the way we would expect. But also we are looking into next year and the opportunity for the brand to be profitable is right there. So we are very pleased with how we look right now.

Betty Chen - Wedbush Morgan Securities, Inc.

In regard to China, I was wondering if there’s been any update on looking for a partner to help you expand into the secondary cities?

Paul Marciano

You mean franchisees?

Betty Chen - Wedbush Morgan Securities, Inc.

Yes.

Paul Marciano

In China, yes definitely we broke down the country in three regions, the same way we broke down the world, Region 1, 2 and 3. We broke down China in three regions 1, 2 and 3. We identified already our partners there and we are opening already some stores. We control every region on the key cities which means it’s under our management, our stores, our team, our training, on like Beijing, Shanghai and of course Hong Kong. But then we identified partners to open stores with us being the accessory stores, being the Guess? jeans stores, or being footwear stores, and that’s what we’re in the process to. But it takes time and we continue to make great progress. As you saw, the biggest part of our growth on this quarter was coming from China top line.

Betty Chen - Wedbush Morgan Securities, Inc.

You mentioned earlier Carlos about the currency impact from the strengthening dollar. Could we think about any potential benefit given some of your sourcing is coming from Asia? Would the stronger dollar help your product costs at all as you source also from those countries?

Carlos E. Alberini

In this case we benefited from the stronger foreign currencies including both the Euro and the Canadian dollar. And as that changes it will be exactly the opposite. It will be to a detriment of our earnings. And that impacts both translation and even the initial margin.

Betty Chen - Wedbush Morgan Securities, Inc.

I understand obviously with the dollar strengthening it would hurt your translation impact from Canada and Europe. But on the sourcing side?

Carlos E. Alberini

On the sourcing side we are already buying in US dollars so it doesn’t make a change. We don’t source from those countries like in Euro or in Canadian dollars for US purposes.

Betty Chen - Wedbush Morgan Securities, Inc.

Could you explain a little bit more about the impairment charges that took place in the second quarter?

Dennis Secor

That relates primarily to the G by Guess conversions. As you remember when we started the chain we converted about 20 stores. Half were factory stores. The other half were the underperforming Guess? stores. Those are the stores that we’re primarily talking about here. Those stores generally had fairly short lease term remaining and our policy is we don’t look at anything for impairment until it anniversaries. Those are coming up now so we looked at those, that real estate, with its shorter term remaining and took a conservative view that we would go ahead and take that impairment. Then with respect to those leases, we’ll consider whether we renew those at the time that’s appropriate.

Betty Chen - Wedbush Morgan Securities, Inc.

Dennis, inventory like you said was very clean. How should we think about that for the back half?

Dennis Secor

The inventory was nicely aligned with the growth of our business. We’re up 14%. So I think you would expect that the inventory would behave similarly to the way that the business behaves.

Operator

Our next question comes from Christine Chen - Needham & Company.

Christine Chen - Needham & Company

G by Guess, has there been a difference in performance between the two different types of conversions versus the stand-alone G by Guesses that you opened in new locations?

Paul Marciano

Actually we are very pleased with that. There were two different types of formats that we converted. One was some difficult stores in retail and some were factory stores. The factory stores are doing extremely well. The retail stores are more challenging and that’s what Dennis was referring to. But the new stores are performing much better than the rest of the chain so we are very happy about some of the newcomers and we see a lot of future for that.

Operator

At this time there are no questions in the queue.

Paul Marciano

Thank you again for your participation in this call and we will report to you in the next quarter. We hope to have as good of a quarter. Thank you very much and have a good day.

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Source: Guess?, Inc. F2Q09 (Qtr End 08/02/08) Earnings Call Transcript
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