Guess? Inc GES
Q4 2013 Earnings Call Transcript
Transcript Call Date 03/20/2013

Operator: Good day, everyone, and welcome to the Guess? Fourth Quarter Fiscal 2013 Earnings Conference Call. On the call are Paul Marciano, Chief Executive Officer; Nigel Kershaw, Interim Chief Financial Officer and Russell Bowers, Chief Financial Officer of 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 and annual reports filed in the SEC.

Now I would like to turn the call over to Paul Marciano.

Paul Marciano - CEO, Vice Chairman and Creative Director: Thank you. Good afternoon and thank you for joining us today. For total Company, in the fourth quarter, we delivered adjusted earnings per share of $0.95, which were at the high end of expectation despite a very fragile Europe economic environment and a challenging North American Retail market.

Before we get into the detail of the call, I want to address a few important issues upfront. I've been very disappointed with the performance in the retail North America over the past year. We have taken a hard look at this business and we are in the process of making some strategic management changes. My top priority is to continue to focus on building an executive team with a combination of new and existing talents.

We are bringing on board two new top executives; one, to head our design who will work directly with me and has a strong background of the young female customers for the past 15 years. And another executive for all merchandising retail North America. They will start within 60 days and I'm very excited to work with these new team members. Also, we resumed the search for Corporate COO. These changes will position us better to execute our long-term strategies.

In North America, in the fourth quarter, comp sales for retail North America were down 6%, which was within the range of expectation; however, traffic trend decline at the end of January and the softness continued into March. We believe that the tax change and adverse weather has all contributed to this decline in a certain degree as a recent slowdown was not significant in a cold weather states. But clearly products played the biggest role in this decline, I'm convinced about that. For me everything starts with the product and end with the products. We have developed a three-point strategy to drive the growth in our business; increase our denim offering and iconic style at entry price point, shorten our supply chain calendar and enhance our denim heritage.

I strongly believe that the heritage of Guess? is rooted in denim. The Guess? girl with sexy and young looks to us for iconic and sexy styles. We must be more innovative than ever in our denim design, always pushing for the best fit, the newest washes and the most inspiring print at affordable points.

In the past 18 months, the strategy was focused on running more sales in higher priced product category. Today, as a result, we realized that we have excluded the young aspirational Guess? girl with more price conscious, than ever. This aspirational girl is very important to us and we'll be increasing our denim offering at $75 to $95 price point, just to the majority of what we have now from $108 to $148 of bulk of our offering.

A few months ago, I took step to advise this and with the design team, we created a return to iconic jeans wear root of Guess? for fall '13. It has received the best reception I have seen in a long time. Our phone advertising campaign, which I just finished would translate that loud and clear. We also recognize that the fashion opportunities in the market place that we can better capitalize on. To accomplish this, we're shortening our supply chain calendar and will keep a portion of our future buy plan to allow us to react to the latest trend as short as five weeks.

In Europe, France, Italy and Spain represents 65% of our total business in Europe and as we look back on the fourth quarter, one of the biggest challenges was Southern Europe. We expected our retail business to be soft in November and December. However, due to macroeconomic condition and government austerity measure retail sales did not improve as expected and traffic continued to be down in this three countries.

We expect this difficult retail environment to continue throughout the summer and also impact our fall, winter wholesale orders.

In Northern Eastern Europe that region had a very encouraging sign in the quarter. We were very pleased with progress we are making in growing Guess? in two key growth market, Russia and Germany.

Orders were up 105% in Russia for the second quarter in a row, while revenue in Germany grew up 40% during Q4.

Our key long term strategy is to continue to grow in these two regions and reduce reliance on Southern Europe. Over the next five years we see the potential of triple our business in Russia and double our business in Germany.

In Asia, our Asian business grew by almost 20% in the quarter led by the Greater China where revenue increased by almost 30%. Over the past two years we have grown our Greater China business by almost 75%, while South Korea business has grown 25% compound annually over the past five years.

This region continued to be priority for us and we will continue on this capital way. Japan will be our next step to open business before Christmas and we would operate directly as we do in Korea and China.

Mexico, in Mexico our business also had an excellent fourth quarter where we increased revenue by 38%; we have been operating directly in that country with our JV partners in 2005. And have grown our revenue every single year including 65% over the last two years. We are excited with this momentum and hope to expand in more Latin American country in coming years.

About marketing and e-commerce, direct marketing continue to be my priority going forward mainly through in-store events, GMM and social media. We plan to continue our successful global progression with (Jesto) number one DJ in the world. We have jeans capsule to include watches, sunglass and footwear as well.

Our partnership are always to capitalize on his global appeal and expose us to his 14 million fans on Facebook as well as Guess concert all over the world in cities like Moscow, Mexico City and Dubai and Singapore coming up. We have made significant stride in social media over the last year as well especially in Facebook. In February 2012 we had 1 million fans. Today we are 4 million fan.

We are also focusing on accelerating growth online by building on a world-class Omni-Channel retail strategy that connects online platform with in-store mobile and social experience. We recently implemented new feature that are always to fulfill website orders from our stores as well as our customers' online order to be picked up on our stores. Our goal is to continue to drive sale to our website and double our direct online business over the next three years.

Capital investment and cost structure will continue to protect our strong balance sheet position as we have done in the last eight years and manage our expense tightly. In the first quarter, we've deputed on our plan to streamline our cost structure in both Europe and North America. We are also reducing our store opening in North America and Southern Europe this year and we focus on improving this performance in our existing stores.

While I recognize that there are many challenges ahead of us, I'm very confident on the future growth of the Company and I'm very confident in our brand. Guess? is a well-diversified brand that has deep presence around the world with over 600 stores in North America, 600 stores in Europe and almost 500 stores in Asia. We have a unique combination of products in our stores with denim, women, men product and a range of accessories, some of the most recognized in the world with our watches and handbag.

In closing, I would like to summarize the four key strategies that we believe will drive shareholder value going forward. One, aggressively execute the product strategy with today consumer need in mind; two, continue to hire key talent for North America to help execute a strategy and drive growth in the coming years; three, review organizational structure across all regions and globally to streamline and improve productivity in all divisions; and four, restore operating profit growth to protect our strong financial position.

Thank you. With that, I will hand over to Nigel to discuss financial performance.

Nigel Kershaw - Vice President of Finance & Accounting, and Treasurer and Interim CFO: Thank you, Paul, and good afternoon. During this conference call, all of our comments were at the fourth quarter and full fiscal year, are on an adjusted basis, which excludes the impact of certain settlement charges. You can find more details of these charges and a full GAAP reconciliation in today's earning release.

Moving on to the results, fourth quarter adjusted net earnings declined 15% to $81 million and adjusted diluted earnings per share were $0.95 which was down 10% compared to $1.05 per share in last year's fourth quarter. Fourth quarter revenues increased 5% to $815 million. In constant dollars, revenues increased 4%. This includes the impact of the extra week.

Total company gross profit for the fourth quarter declined 1% to $333 million and gross margin declined 240 basis points to 40.8% in line with our expectations. SG&A increased 7% to $313 million primarily due to new store expansion. Our SG&A rate increased by 40 basis points to 26.1%.

Operating profit for the fourth quarter decreased 12% to $120 million as expected operating margin declined 280 basis points to 14.7%.

In January 2013 we recorded a charge related to the settlement of tax audit for the Italian tax authority. This settlement was partially offset by unrelated tax benefit resulting in a net tax charge of $0.10 per share. If you exclude the net tax charge our adjusted effect of fourth quarter tax rate was 31.1% largely up compared to 30.9% in the prior year fourth quarter.

Moving to segment performance in North American Retail fourth quarter revenues increased 2% to $350 million a slightly higher square footage, the extra week and growth in our e-commerce business all drove the increase which more than offset the 6% decline in comp store sales in the U.S. and Canada.

Operating income declined 34% to $36 million and operating margin declined 560 basis points to 10.2%, which was in line with our expectations. Compared to last year, gross margins were lower due to higher markdown, changes to our Canadian pricing and a higher occupancy rate as a result of the negative comp.

Our SG&A rate increased mainly due to an increase in store payroll the impact of the negative comp and higher store asset impairment charges during the quarter.

In Europe fourth quarter revenues increased $300 million representing 3% increase in both U.S. dollars and local currency.

Italy and French remained challenging markets for us where apparel shipments into the wholesale channel continued to decline. This was partially offset by growth in euro markets such as Germany and Russia. New store expansions continue to drive retail revenue growth compared to a year ago. For the quarter, overall comp store sales declined in the high single-digit as the sale during the discount period did not materialize to the levels expected in Italy, France and Spain.

Operating income in Europe decreased by 6% to $52 million and operating margin declined 178 basis points to 17.4%. Gross margins were lower primarily due to higher levels of retail promotions and the unfavorable impact of currencies compared to the same quarter last year. Higher occupancy and store selling expenses negatively impacted the operating margin as we expand our store base and continue investing for future growth while lower distribution cost in the current period positively impacted our SG&A rate.

In Asia, revenues in the fourth quarter grew by 19% to $84 million with both South Korea and Greater China continuing to post double-digit top line increases. In Asia, operating profit increased 7% to $9 million and operating margin declined 120 basis points to 10.5%. Gross margins declines driven by product and channel mix in Korea partially offset by more full price selling in Greater China. The SG&A rate improved slightly due to lower EBITDA linked expenses in the quarter.

In North America Wholesale, fourth quarter revenues increased 26% to $51 million, which included some timing of earlier shipment. Operating profit increased by 37% to $13 million and operating margin increased 220 basis points, 25.7%. Royalties generated from sales by our license partners were better than we expected at $30 million, which represented a 2% decline from the prior year. Operating profits declined 3% to $27 million.

To summarize then for the full fiscal year, consolidated revenues were down 1% to $2.66 billion, but increased 2% in constant currency. The increase in revenue from expansion of our retail stores in Europe and North America and growth in our Asian operation were mostly offset by negative comparable store sales in North America and Europe and lower European wholesale shipment.

Adjusted operating earnings decreased 34% to $275 million. Overall, our operating margin of 10.3% was down 520 basis points from last year's adjusted operating margin driven by the negative comp store sales, new store expansion and investments in advertising and marketing. For the fiscal year, adjusted earnings per share decreased by 30% to $2.15 per share.

Now turning our attention to the balance sheet. During the second quarter, we repurchased $140 million of our shares and in the fourth quarter we paid a special dividend of $102 million. We ended the quarter with cash and short-term investment of $336 million compared to last year's $496 million. We did not repurchase any of our shares during the fourth quarter.

Accounts receivable decreased 5% over last year to $325 million and decreased 7% in constant dollars. Overall, DSOs improved compared to last year by the slowed payments in Italy, continuing to be a focus area and we are managing future shipments very carefully.

Inventories increased 13% to $370 million, while finished goods units increased 8%. Most of the unit increase supports our international store growth and expansion of our G by Guess businesses in the U.S. and South Korea. Although we are not yet fully aligned with projected sales at year end, we have been able to reduce our inventory growth over the last two quarters.

So, now Russ will give an overview of our recent business trends and provide our outlook for the first quarter of fiscal 2014 and full year.

Russell Bowers - CFO, North America Retail Business: Thank you, Nigel. Good afternoon. As Paul mentioned earlier, we recently witnessed some unfavorable retail trends both in North America and in Southern Europe that we have reflected in our guidance. We have also implemented plans to streamline our operations to generate future savings that we expect to fully annualize in fiscal 2015.

Our outlook for the first quarter of fiscal 2014 in the full fiscal year exclude any restructuring costs. In North American Retail we will be opportunistic in store openings and plan to open only 17 stores in the U.S. and Canada during the year.

In fiscal 2014 we plan to close 22 stores in the U.S. and Canada as leases expire all of which are underperforming. So far in the first quarter comp store sales have been down in the low teens we expect this to continue for the rest of the first quarter.

Given the larger store base we expect revenues to decline in the mid-to-high single digits. We believe the changes to the product assortment as well as the increased offerings at entry price points will drive the volume improvements in the back half of the year.

For the full year we expect comps to be down in the mid-to-high-single digits and revenues to be down in the mid-single-digits.

In Europe we are planning to continue to grow in Northern and Eastern Europe, while we expect Southern Europe to remain challenged. So far in the first quarter retail comps in Europe continue to be down in line with the trend we saw in the fourth quarter and we expect this to continue for the rest of the quarter.

For the year we are planning comp store sales to be down in the mid to high single digits. We are reducing our store opening and we will be more strategic as we focus on expanding in key growth areas.

During the year we and our partners planned to open 70 stores of which one-third will be directly operated by us. We plan to close 23 property stores during the year mostly in Italy as we redirect the capital investments to our new growth markets.

In Europe wholesale we are planning the orders for our fall, winter collections to be down in the high single digits. We are not planning for any notable improvement in the back half of the year as we expect growth in Northern and Eastern Europe to be more than offset by declines in Italy and France.

Considering these factors as well as the timing of deliveries on a larger store base we expect first quarter revenues to decline in high-single digits in local currency and in U.S. dollars. For the full year we expect revenues to decline in the low to mid-single digits both in local currency and U.S. dollars.

In Asia, we expect our growth to be fueled by store expansion as well as existing store productivity improvements. In Greater China we will continue to partner with licensees to open new stores in the second tier cities.

In Greater China we plan to open 50 doors including concessions during fiscal 2014, half of which will be directly operated. We continue to see opportunity in South Korea to open more doors including our G by GUESS brand and plan to open 45 doors in total during fiscal 2014, of which half will be directly operated. While we still anticipate some softness in the South Korean economy we will be anniversarying these headwinds in South Korea from last year when the economic conditions initially weakened.

As we mentioned in our previous earnings call we are in the process of establishing our team and infrastructure in Japan. We expect our first flagship store to be opened in fiscal 2015 and expect that the initial set of cost incurred in fiscal 2014 will offset some of the profitability improvements in other markets in the region. For the first quarter and the full year we expect Asia segment revenues to grow in the low to mid-teens.

In our North America Wholesale business we expect revenues to be down in the low single digits for both the first quarter and the full year. We expect to launch our Brazilian operations this year and plan to open two flagship stores. We are anticipating that the initial startup costs will impact the profitability of this segment in fiscal 2014 as we invest in future growth.

In our licensing business, for both the first quarter and full year we are assuming that royalties will grow in the mid-single digits. For both the first quarter and full year, we expect overall gross margins to decline as the expectation of negative comp store sales in North America and Europe continues to put pressure on our occupancy rate. With respect to operating expenses, we expect a higher SG&A rate for the first quarter driven by the impact of negative comp store sales.

For the year, we expect the SG&A rate to be flat to slightly up as some of our restructuring initiatives start to impact the cost structure. We are planning the full year with a 33% tax rate and our guidance assumes foreign currencies remain roughly at prevailing rates. Considering all of these factors for the first quarter, we expect consolidated revenues in the range of $545 million and $560 million. We are planning and operating margin between 1% and 2% and adjusted EPS in the range of $0.05 and $0.10 per share excluding any restructuring charges.

These expectations would result in full year consolidated revenues between $2.6 billion and $2.64 billion, operating margin between 8.5% and 9.5% and adjusted EPS in the range of $1.70 and $1.90 per share excluding any restructuring charges.

For the coming year, we expect to generate between $220 million and $240 million of cash flow before capital expenditures and dividend. For the full year, we plan to manage our CapEx carefully and opportunistically by investing between $80 million and $100 million in capital expenditures 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?

Transcript Call Date 03/20/2013

Operator: Erinn Murphy, Piper Jaffray.

Erinn Murphy - Piper Jaffray: Paul, I just had a question first for you. If you think about some of the restructuring of the management team and some of those key positions you highlighted that you are in the process of searching for. I was just curious if you could just be a little bit more specific, you said you were look for a Head of Design and then a Head of Merchandising for North America. I wasn’t sure if you already have someone in mind for both of those or if your timeline is specifically 60 days and you are just now starting that search and then I guess in terms of that what are the key things that you are looking for as you think about that role and then I have a quick follow-up?

Paul Marciano - CEO, Vice Chairman and Creative Director: Let me correct that, I said that on a call is that candidates have been selected, have been identified and have been hired. We will make a press release in the next few weeks. But both positions have been filled in and they will start within 60 days both of them. One is Head of Design and he would not be Head of Design of men or women, it will be Head of Design of all products it means the total look of the Guess? retail North America and that will definitely control also the design in Europe as an influence as an brand. So that’s one executive. The second one will Head of Merchants of all categories for North America and also that position has been identified candidate has been identified and has been hired. So both of them within 60 days will start to work and both of them will report to me.

Erinn Murphy - Piper Jaffray: I guess in terms of the COO role, well, it looks like you are now resuming that search, could you maybe kind of qualify for us what are some of the characteristics you are looking for, for that role and kind of what will the COO be tasked with doing?

Paul Marciano - CEO, Vice Chairman and Creative Director: I will say for me what help I need as a COO will be focusing on expertise on global sourcing, logistic systems, of course finance and all – I mean having some global experience because we are fully, as you heard, wanted, wanted, wanted exposure around the world. So, that is an important factor for me. But also somebody who understands the culture of a company and (fit) what we still call a family culture in Guess?

Erinn Murphy - Piper Jaffray: In terms of timeline for that Paul? I mean after you have the COO, I guess what's your timeline for that and are there any other key position in the North American business or even globally that you are still looking for maybe a little below from a mid-level management perspective that you still looking for?

Paul Marciano - CEO, Vice Chairman and Creative Director: This is where we – I just mentioned that we are – one of the key priority will be to look at realignment and restructuring on certain synergies between regions and right now the tricky position like this one, I mean, the product then head of merchants and then COO which has been already on for 2.5 months and I have like at least four candidates, but I am seeing with my brother Maurice and otherwise in a priority that's a big one.

Erinn Murphy - Piper Jaffray: I just have quick follow-up for Nigel or Russ on the guidance of on the guidance of $1.70 to $1.90. We think about – it looks like you are essentially assuming in Europe a continuation of the weak trends and really no pick up in the fall winter bookings kind of still down high single digits. Have the European fall bookings actually closed yet or is the window still open. Is there any opportunity for that to be better or is this pretty realistic scenario at this point?

Paul Marciano - CEO, Vice Chairman and Creative Director: I think I can answer that, because I just came back from Europe. I mean if you are really familiar what's happened within France and Italy and Spain of course, that's really France and Italy, I think that I could say with comfort to say that you can feel a fear in these two countries over the near future of the consumer. You see that they are worried and I'm talking about the wholesale customer, not talking – not the customers in the stores. The stores we addressed that. But I feel personally that the customer's multi-brand stores are concerned of the very next future this quarter. Next quarter about the new tax flow, the (VIT) in place was been raised in France and in Italy, really pushing away the customers and it's a cascade of little things that they make them more conscious, more prudent in their buys and more close to the months ahead what we want to buy for the next month and not what we want to buy six months from now. And that is really challenging to deal with, because on one hand you cannot blame them not having any visibility of the economy or these customers and on the other, you have the product what you do, I mean do you catch more do you catch less, so that’s what something to do with Europe and we have a lot of surge in Europe. So, we know how, we have a long relationship with our customers. We have just to be prudent who we sell to and we'll have credit and we'll have credits and we have the guarantees and insurance and all that. So we want to take a very prudent approach with France and Italy especially Italy has a brand new government again, in the last few weeks. And we are seeing what's happening.

Operator: Betty Chen, Wedbush Morgan Securities Inc.

Betty Chen - Wedbush Morgan Securities Inc.: I was wondering if you or Russ can talk a little bit about North America Retail. It sounds like where we are refocusing on some entry price point items to better target that aspirational customer, I guess timing wise when should we expect that and if that’s going to start in Q1 or more so Q2 or second half and related to that it sounds like you and the team have already been working on some new denim product. If you can talk a little bit more about that as well? Thanks.

Paul Marciano - CEO, Vice Chairman and Creative Director: I would answer that, because I am right in the middle of that. Denim prices the $79 to $98 it was a category we had heavily in 2008, 2009, 2010, '11 and '12 actual I am talking not fiscal. Actual '11, '12 we did not raise the price we shift the balance of SKUs between the two, but we had much more, if you go you have been in our stores many times. We had a lot of $108, $118, $128, $138, $148. And only few SKUs have $89 and $98 six or nine SKUs which was nothing. And the majority was in what I will call premium and I think the timing does not work for us and we had to reassess and analyze to say we made a mistake, and we said okay. Now what the customer message is? I love your products, but I would like that, but also I would also like to carry somewhat I can afford myself. And the message was loud and clear. But it doesn't mean we walk away from the premium at all. We continue that on a much more balance that we had 2006, 2007, 2008, 2009 and 2010 and that's what I think you will see happening in the next six weeks. That you will see products in more details of print denim over price dyed between $89 and $98 and even $79. We still carry $118, $128 and $138 absolutely. But we will balance the SKU plan between the two and have things at the last minute also.

Betty Chen - Wedbush Morgan Securities Inc.: Paul, do you think that opportunity exists in other categories as well, whether when its women's tops or dresses or outwear?

Paul Marciano - CEO, Vice Chairman and Creative Director: You are right on, absolutely. What I just said to denim, I just had meeting again last week with the whole team in design and the merchant and production. We will have – we have selected few categories declining few SKUs to be entry price the message of the customers. The customer decides, we don't decide. We realized certain things, here about to say, it's not the time that to save, it's a free spending time. Everything is rosy and pink and beautiful. So, we are dealing with that. It would be in t-shirts, it would be in shirts it would be in dresses and look at within eight weeks.

Russell Bowers - CFO, North America Retail Business: We saw in the fourth quarter, we saw lot of success in a lot of different categories at our entry level price point. So, that's what's given us a lot of confidence to expand this in a bigger way going forward.

Betty Chen - Wedbush Morgan Securities Inc.: Any specifics you can provide Russ?

Paul Marciano - CEO, Vice Chairman and Creative Director: I can. I'll give you example. If you take, I mean that's why I say we have such a strong brand. We have such brand recognition and that's for a long time. The minute the customer finds the product they want, the price they want, at that moment which was November, December, I introduced some dresses between $79 and $89, the traffic and velocity of the product was really super strong. I didn’t develop enough. I mean that didn't have enough. So, why that’s (indiscernible) is because I love what we have also the $129 to $149, but the velocity was much smaller. The minute we put the $89 dress which we had regular margin on it and everything, the customer reacted like jumping on it. This was a loud message to us to say we love your brand, give it at the right price to us, we love your brand.

Betty Chen - Wedbush Morgan Securities Inc.: Do you think Paul to kind of complement that we should see some marketing messages whether it's email, social media…

Paul Marciano - CEO, Vice Chairman and Creative Director: Absolutely. I give you two examples. One will be clearly website, you are going to see it and we are going to communicate that loud and clear. Two, is going to be in a campaign fall which I just finished 10 days ago which is beautiful, gorgeous all denim and for back-to-school which will be in magazine in July 15 and August and September. And the three, we do mailers to our customers, our CIM, our loyalty customers which is by hundreds and hundreds of thousands of mailers which will have all the current product but weak prices on it. These are the three big things. Of course, we don't put prices in windows, but we will have some price signing in the stores. You can have my assurance that the message is going to be loud and it is going to be clear, with the level of space that we need for our brand.

Betty Chen - Wedbush Morgan Securities Inc.: Then a last follow-up if I could. I think Russ you had mentioned that going forward we are going to be much more opportunistic in terms of store opening in North America and I am sorry that I missed the number of closures for this year and is it possible that there could be additional closures to come and whether the team has identified a potential number of underperforming stores to close in upcoming years?

Russell Bowers - CFO, North America Retail Business: So the number of openings is 17 and to put a little color behind that the majority of those stores are going to be factory outlet locations. The number of closures we've got 22 this year and going forward, we've got another 30 maybe 35 stores that we've identified to likely close beyond this year.

Paul Marciano - CEO, Vice Chairman and Creative Director: The 22 closures just to remind you expiration of leases and some of them, very few of them kick close that we went in some more that did not perform and we are just closing the store, because more are not performing for us. So that’s simple.

Operator: Eric Beder, Brean Capital.

Eric Beder - Brean Capital: Could you talk a little bit about accessories I know that handbag business was tough for you in the beginning of last year and what should we think about in terms of watches going forward?

Russell Bowers - CFO, North America Retail Business: So the handbag business got a lot better in the fourth quarter in our full price stores, actually our full price sales within that segment were up for the quarter which was really encouraging. We did have a lot less markdowns which is also a good thing. The changes we made by putting more logo on the store and adding more fashion to the line with more balance. It's really starting to work for us in handbags. In watches, watches were still down in the fourth quarter, but they did improved quite a bit from where they were in the third quarter so we're starting to get a little bit momentum there. We got a little further to go there than we do with handbags, but we've got a lot of initiatives going forward with jewelry styles another (Jesto) watch and things like that that we think are going to work.

Eric Beder - Brean Capital: In terms of international, I mean, how should we think of both the Japanese and the Brazilian opportunities? Obviously they are in 2014, but how should we look at those going forward?

Paul Marciano - CEO, Vice Chairman and Creative Director: For Brazil we are right nine location with our team we have here in Sao Paulo. We will plan to open the first store I think in the second quarter and Japan we just secured our space, offices and all that. I hope to open – we find one location which I am not crazy about and we plan to open before the end of the year that's my hope, but I really want to go cautiously in Japan. We were there for many, many years with licensees and we've seen the market over six years to let go and cleanup the market. I don't want to start with the wrong step here in Japan, it's a such a delicate market. So we will do what is right for the brand in Japan, that’s for sure. We established our team now. We have our headquarter here and we having to do like we did in Korea and raring to go at cautiously and Korea has been such a success for us, but because we took the timing advance we established the road map, team structure and really market structure.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: I wanted to just ask, as you lower the prices on the jeans assortment, if you could do that with margins that were equal or close to the kinds of margins that you were able to secure on the higher priced jeans or how you thought we should think about the profitability of the lower priced product? And also Russ, could you talk a little bit about the accessory business, it sounds like it's gotten lot better which is encouraging and I'm wondering if it's continuing to trend well here in the first quarter and then I'd just like to ask Nigel about inventories?

Paul Marciano - CEO, Vice Chairman and Creative Director: Okay, so that's three questions.

Janet Kloppenburg - JJK Research: I'm sorry Paul.

Paul Marciano - CEO, Vice Chairman and Creative Director: I'm just kidding. Let me address…

Janet Kloppenburg - JJK Research: We don't get to talk to you that often Paul, so, anyways go ahead…

Paul Marciano - CEO, Vice Chairman and Creative Director: I'm here, come here. Everyday I'm in the office. So, for the denim, first of all we are not creating this priced denim, it exists. We're just simply and last the diversity and the choice of the consumer...

Janet Kloppenburg - JJK Research: Right, I understand.

Paul Marciano - CEO, Vice Chairman and Creative Director: And the margin in – I love the majority of them will be in line with the IMU with the profit margin we're planning to do. What I'm planning to come to personally is to do some test with product made in LA which will be small unit, but to test the market, which the margin will not be very high, but the quantity would be also very small. So, the risk very small, but if the reaction is very good, I can react immediately, and go international being in (indiscernible), Mexico, whether Colombia, whatever I decide to do with the supply chain, we will have the marketing in place. That I'm very confident and we're doing as we speak, we're doing some product, within the store May 1, which is in five weeks and the margin will be very good and retail price will be $89 and I am very excited about it.

Janet Kloppenburg - JJK Research: And Paul do you feel like the advertising and the marketing program which you and I have talked extensively about, do you feel that’s now more compatible with the target customer?

Paul Marciano - CEO, Vice Chairman and Creative Director: Yes, but honestly and I am going to be (runs) with you, you can do whatever advertising you want, you can do whatever you want if you don’t have the product that customer needs, you can just spend as much as you want you will not change anything.

Janet Kloppenburg - JJK Research: In other words you have to get the product right.

Paul Marciano - CEO, Vice Chairman and Creative Director: Exactly, at the price that we can afford, we will by maybe higher, but today it's tougher for everybody. I mean somebody believes although I don’t believe it.

Janet Kloppenburg - JJK Research: And Russ is accessory business continuing to pick up here in first quarter or is any of that been soft as well?

Russell Bowers - CFO, North America Retail Business: Accessories are doing better than how apparel has been doing compared to fourth quarter so far.

Janet Kloppenburg - JJK Research: Do you feel like that business has turned, in other words that you have the right formula in terms of product design and pricing.

Russell Bowers - CFO, North America Retail Business: I think we can still do better. I think it's starting to turn but we can do better going forward.

Paul Marciano - CEO, Vice Chairman and Creative Director: Let me add something, Janet. What I just mentioned to you I forgot to mention during the call is whatever I am talking about denim and dresses and skirts to see up to have more offering at the entry price. I really believe that also the handbag is looking for a price where the competition is severe in handbags by so many brands up and down, is we need to have also some more entry points in handbags around $69, $79, and not like everything that’s $99, $118 and $128. So that will apply to that as well.

Operator: John Kernan, Cowen and Company.

John Kernan - Cowen and Company: Just wondering what you think the right sized store fleet is for each concept in North America? You are now pushing nearly 150 factory stores if we account for the store openings you are planning for this year, yet Guess by MARCIANO, G by GUESS and GUESS Accessories are still little under 100 stores. So what do we think long-term square footage growth looks like here as you slow some of these smaller concepts?

Russell Bowers - CFO, North America Retail Business: You know, starting with the Guess? full price stores, we've got a pretty mature space of stores. There's room for growth. I mean, we've talked lot about New York City and loyal markets like that, but that's where we're going to find it. We're in almost all of the best malls. Factory outlet stores, that's an area that's still growing and landlords are developing new centers, so lot of the growth there you are going to see is that's falling at all of those new centers which lot of them are very successful. Now, G with 85 stores, there is lot of room to ultimately grow G when we get it right in that modern space, but for now we are pausing in and we are trying to focusing on the existing store productivity.

John Kernan - Cowen and Company: Then shifting to the licensing business, it seems like accessories even though you have some momentum of becoming more competitive category with all – everyone trying to become more of a lifestyle brand, what is the long-term growth profile of this licensing business looks like given how high return of a business it is for you? When can we expect the licensing business to become a growth business again and what gets it back to total top line growth?

Paul Marciano - CEO, Vice Chairman and Creative Director: This is Paul. About the Licensing, when it comes to the freebie category, which is really the handbag, watches and footwear, the growth that you can expect will be in different divisions depending of course with the economy that being if its factory, if it's G which is price much more appealing that Guess? if its Guess? could have also some little bit lower price than what we have currently which we start at $99 and $109. We might do shoes also at $89 which change the whole picture. So, this is, but also the number stores we open and licensee stores we opened for example I'll give you a number, total stores we opened in between franchisees and property stores, we opened 160 stores. Let me give you the right number. Yes, so that's a substantial number of stores. But as you mentioned before the competition especially in watches and handbag has been coming from all angles seeing low priced, moderate priced and higher priced went down of major brands. So, we continued to protect our market share, we continue to have an expansion on this work of accessories but it's getting crowded.

Operator: Jeff Black, Avondale Partners.

Jeff Black - Avondale Partners: Just a couple. On the traffic, could you remind us where we were in 4Q and what kind of traffic trends we're seeing thus far and 1Q? And then on the cost what have we, I guess what are we outlining in terms of buckets that we want to attack? What's the overall amount of cost we think we can take out of the business and what part of that flows into this year, if we can have some help on that, that would be great?

Russell Bowers - CFO, North America Retail Business: So, Jeff starting with traffic, it was down in the high single digits in the fourth quarter, but it slowed since then. It's been down in the teams so far in the first quarter.

Operator: Jeffrey Van Sinderen, B. Riley Caris.

Marcelo - B. Riley Caris: (Marcelo) in for Jeff. In your own retail stores how should we think about promotion levels in Q1 versus last year's Q1 and how should we think about merchandise margins overall?

Russell Bowers - CFO, North America Retail Business: Looking at the first quarter, we've been a little bit more promotional than we were a year ago and we had the similar case in Q4 we gave back a little bit in product margin. But if you are looking at the overall year, we'll have easy compares starting in the second quarter and especially in the back half of the year so that’s a little bit of an opportunity and lot of the price changes that we've been talking to are also going to help us manage out markdown rates a little bit I believe.

Paul Marciano - CEO, Vice Chairman and Creative Director: I am sure you are on East Coast right now, 10 days is April 1 and we have just again yesterday snow storm in New York I think, I talked to my brother in New York right now, there is snow in Paris, in Milan I mean the weather has been pushing more and more colder within the year and that doesn’t help really the traffic of customers who are looking for spring, summer products when its snow outside.

Operator: Susan Sansbury, Miller Tabak.

Susan Sansbury - Miller Tabak: In terms of the stores that you are going to close you admitted that they are underperforming once, they are out of the store base can you give us any idea of what the lift is going to be either in terms of cost savings or elimination of losses or step up in sales per square foot or something like that, is it going to be meaningful?

Russell Bowers - CFO, North America Retail Business: The stores don't lose a lot of money. I mean, we're talking about $0.01 to $0.02 of share benefit from the close of these stores. It does help our sales productivity number, but again you are talking about 1% to 2% on that line. The close it does spread across different concepts also.

Susan Sansbury - Miller Tabak: But going back to Jeff Black's question about cost savings, you are going to annualize some cost savings by 2015. Can you give us a rough idea whether these are going to be significant or not?

Nigel Kershaw - Vice President of Finance & Accounting, and Treasurer and Interim CFO: When you look at what we've done it's been very targeted approach we've looked at both our North America and European cost structure and we are focusing on those businesses that are underperforming. So, we are going to continue to invest in growth areas like North and Eastern Europe, Asia, we mentioned Japan, Latin America and in some cases we may actually redirect some of those resources towards those growth region. But when you look at what we've already executed upon in North America and Southern Europe, essentially we've attacked all of the back-office functions and you are talking about roughly with those specific functions about 5% to 10% of the cost structure. So, when you look to the guidance and the outlook we've given, we do have some embedded cost savings in the back half of the year that we expect to achieve and that we're talking – the goal here – the way that we look at it is more on an SG&A basis and that's even with the tough economic conditions we still – the goal is still to have the SG&A rate flat to last year. And then on a long-term basis, if you know, are there any more opportunities, historically we've been at about 27% SG&A rate, right now we're probably about 300 basis points higher and so the goal in our long-range plans is to get back to that closer to that 27%.

Operator: There are no further questions in the queue at this time. I will now like to turn the call over to Paul Marciano for closing remarks.

Paul Marciano - CEO, Vice Chairman and Creative Director: Thank you. Thank you everyone for being part of this call and this is the beginning of the year. We look forward to achieve all this goal that we have in mind and we just finished and executive retreat 10 days ago and there is one word we walked away with to accomplish these goal we have, it's courage. Courage about to do new things, courage to do decision and what will impact our customers, what will impact our business, what will impact the productivity, what will impact operating growth and it takes courage either way, one way or another. But we are currently decided to do that and we would do that. So, thank you very much and we will see you in two month in May for the Q1 report.

Operator: Thank you for your participation on today conference. This concludes the presentation. You may now disconnect. Have a great day.