Guess Q2 Earnings Call Transcript

123jump.com Staff
02 Sep, 2010
New York City

The apparel distributor total net revenue increased 10.5% to $577.1 million in the quarter. Net quarterly earnings rose 12% to $66.8 million. Earnings per share grew to 72 cents compared to 64 cents per share in the prior-year quarter.

Guess?, Inc. ((GES))
Q2 2011 Earnings Call Transcript
August 25, 2010 4:30 p.m. ET

Executives

Maili Bergman – Vice President, Investor Relations
Paul Marciano – Vice Chairman and Chief Executive Officer
Dennis Secor – Chief Financial Officer
Russell Bowers – Chief Financial Officer of Retail
Maurice Marciano – Chairman of the Board

Analysts

Jeffrey Klinefelter – Piper Jaffray
Omar Saad – Credit Suisse
Christine Chen – Needham & Company
Dana Telsey – Telsey Advisory Group
Betty Chen – Wedbush Securities
Eric Beder – Brean Murray, Carret & Co.
David Glick – Buckingham Research Group
Todd Slater – Lazard Capital Markets
Randy Konik – Jefferies & Company
Margaret Whitfield – Sterne, Agee & Leach, Inc.
Chi Lee – Morgan Stanley
John Kernan – Cowen and Company

Presentation

Operator

Good day, everyone and welcome to the Guess? Second Quarter Fiscal 2011 Earnings Conference Call. For opening remarks and introductions, I would like to turn the call over to Maili Bergman with Guess? Investor Relations. Please go ahead, Maili.

Maili Bergman

Good afternoon, everyone and thank you for joining us today. On the call are Paul Marciano, Vice Chairman and Chief Executive Officer, Maurice Marciano, Chairman of the Board and Dennis Secor, our Chief Financial Officer.

During today''s call, we will be making forward-looking statements, including comments regarding future plans and our 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 report filed with the SEC.

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

Paul Marciano

Thank you, Maili. Good afternoon and thank you for joining us. Our second quarter financial results exceeded our expectation both in terms of revenues and earnings. We grew each one of our businesses, which combined to deliver double-digit revenue growth even as the strong U.S. dollar continues to represent a significant headwind for us.

We made excellent progress with several important strategic initiatives. We continued through extension of the North American retail business where we added 17 stores during the quarter.

Our effort to expand international business continues to deliver solid results. Europe and Asia together delivered 45% of the revenue growth. Our all seven Licensing business also performed well and exceed our expectation for the quarter.

We also managed our expenses tightly. We’ve an SG&A rate that was roughly flat to last year, even as we are making investments in store expansion and for our structure and in marketing to support the growth of our brand around the world.

With focused management on the cost structure and inventory, we generated solid earnings that exceed our expectation and set a new second quarter record for our company. The second quarter diluted earnings per share reached $0.72, a 13% increase over the same period last year.

During the quarter, international and Licensing businesses remain solid. At the same time, we began to experience a softening in our North American retail business as traffic continued to be down slightly and the mall became increasingly promotional.

Our ability to deliver record earnings for this quarter is a testament to the value of our diversified business model and our global teams. Our North American retail business same-store sales increased by 3.5%. Throughout this period, we were able to improve conversion to offset the impact of traffic.

We respond to the changing trend by protecting our inventory position while also preserving the integrity of our brand. We ended the quarter with a clean inventory position as we headed into back to school.

Our new store rollout continues to progress. We''re excited about the launch of our new accessory store concept the first of which opened May 15 at the Aventura Mall in Florida. We also secured a new New York flagship store on Fifth Avenue and 47th, which is expected to open in early 2011.

Going forward, we believe our product assortment is strong. We have identified opportunities to broaden assortment and intend to build our business in non-denim bottoms, watches and other categories. Also our footwear collection has been very well received across North America.

Next in Europe, revenues grew 18% in local currency and 6% in U.S. dollar. We have a significant contribution from both our non-jewelry business and all retail stores in the region.

Our businesses in France, U.K., Spain and Germany together grew 27% in the quarter and represented 38% of the segment revenues. We added 13 owned property stores and ended the period with 109 owned stores in Europe.

This business continues to perform well by delivering strong single-digit comps. We successfully launched pre-collection in our Guess? by Marciano and kids businesses where our goal is move to up deliveries to take advantage of early season demands.

We continue to see Europe as a tremendous opportunity for growth, specifically U.K., France, Benelux, Germany and Spain and we still plan to build a $1 billion business in the next two years.

Next is Asia. Our business in Asia exceed our expectation as well with this quarter of 43% increase in revenue over the second quarter of last year. Each of the business initiatives grew with strongest performance in South Korea and greater China. That growth was driven by Korea with new store opening, strong comp performance and favorable response to our new intimate line.

In China, we expanded our distribution opening new doors with partners in secondary cities. The expansion of our business in Asia continues to remain a top priority for Guess? as I am personally committed to that goal.

As a reminder of this fiscal year, we plan to open 23 stores in Asia in addition to the 19 stores opened year-to-date. Our Licensing business once again exceeded expectation. We have a 20% increase in royalty for the quarter with watches, footwear, eyewear and handbag, all posting very strong increases. The second quarter also marks the launch of a new fragrance line, Guess Seductive, which can be found in our stores today.

Now, as an update to the initiative we announced earlier this year, we remain committed to the following. First growth in Europe. The market is expanding and we anticipate opening 97 stores during the fiscal year and also improve the productivity of our business where by focusing in logistics, global sourcing and speed to market.

Second, as I mentioned, Asia and greater China specifically is my priority for the next three years as we build a solid infrastructure for our team there.

And third, new store expansion in North America. Our plan is to open a total of 58 stores this fiscal year. New store economics continue to be relatively favorable and there are many quality locations available to us.

In closing, our business continued to deliver solid results. At the time same time, we remain cautious and intend to exercise prudent decision making and strategic management of our business. As always, we will stay true to our core principle and protect our brand. Our strategy is clear, execute with discipline the global extension of each concept while protecting the integrity of the Guess? brand.

With that, I will pass it to Dennis.

Dennis Secor

Thank you, Paul, and good afternoon. Total net revenues for the second quarter were $577 million, a 10% increase over last year. In constant dollars, the growth was about 14%.

Our revenue growth was very balanced with each one of our businesses posting increases. Total company gross profit increased 9% to $252 million and our gross margin declined 70 basis points to 43.7%.

We experienced stronger IMUs in our retail business and lower markdowns in Asia. So these where more than offset by the negative currency impact in Europe and higher markdowns in retail. Our occupancy rate increased modestly due to a larger mix of our global retail businesses.

Our SG&A rate remained flat to last year''s level at 27%. SG&A expenses increased 11% to $156 million to support our retail expansion including store selling expenses, resulting from the larger store base as well as infrastructure investments.

We also increased our marketing spending to enhance our brands awareness around the world. Currency translations favorably impacted our SG&A expenses in the quarter.

For the period, operating profit increased 6% to $96 million. This includes a $4 million unfavorable currency translation impact. Operating margin decreased 70 basis points to 16.7% due to the lower gross margins.

Our effective second quarter tax rate was 30.1% compared to 33% in the prior year quarter. We adjusted this year''s full year tax rate estimate to 30.5% and we are planning the rest of this year with this rate.

Overall, net income attributable to common stockholders increased to 12% to $67 million and diluted earnings per share increased 13% to $0.72 compared to $0.64 in the prior year quarter. And now I will review our revenues and earnings by business segment.

In North American retail, our comp store sales increased by 3.5% or 1.7% in local currency and revenues increased 6% to $242 million. Gross margins declined in the quarter compared to a year ago.

We experienced improvements in our IMU and occupancy leverage resulting from the positive comps. These were more than offset by higher markdowns as we responded to more competitive conditions in the malls. SG&A increased both in terms of dollars and rates given the larger retail store base as well as investments in both infrastructure and marketing.

Operating margin for our retail segment declined 240 basis points to 10.9% and operating earnings decreased 13% to $26 million. During the quarter, we opened 17 new stores and closed two, ending the period with 448 stores in the U.S. and Canada.

In North America wholesale, revenues increased 33% to $44 million. All of our businesses grew led by the U.S. which posted double-digit growth. This includes the shifting of some orders from the third quarter into the second.

Operating profit increased 29% to $11 million and operating margin declined to 90 basis points to 24.2%. For the quarter, European revenues increased 18% in local currency. In U.S. dollars, revenues grew to $222 million, a 6% increase over the year ago quarter.

Our retail business was the largest driver of the revenue growth where we achieved positive comps in the quarter and added 13 owned stores. Our new jewelry business exceeded our expectations and contributed strongly to the region''s overall growth.

European gross margins declined resulting primarily from the stronger U.S. dollar''s impact on product purchases. SG&A expenses increased both in local currency and as a rate primarily due to additional infrastructure and store selling expenses to support our larger retail store base.

Operating earnings increased 7% in local currency in the quarter but declined 4% in U.S. dollars to $50 million. Operating margin decreased 230 basis points to 22.6%.

In Asia, revenues increased by 43% to $42 million with all of our businesses delivering significant revenue increases. South Korea drove the majority of the growth as we continue to open doors and deliver positive comps.

Revenue also increased in China where we are developing our business in secondary cities and improving productivity in our existing locations. Gross margins increased in Asia driven by improvements in both Korea and China.

Overall for Asia, operating profit more than tripled to $6 million compared to the second quarter of last year and operating margin expanded 820 basis points to 13.5%. The Licensing business exceeded our expectations with revenue of $27 million in the quarter representing an increase of 20% over last year.

Now, turning our attention to the balance sheet. Our operating cash flow continues to be strong. In the quarter, our operations generated $56 million in cash and we ended the quarter with cash reserves of $479 million. We remain virtually debt-free except for the lease for our Italian facilities.

During the quarter, the company repurchased 1.5 million of its common shares of its common stock at an average purchase price of $32.88 per share totaling $49 million. As of July 31, 2010, the company had remaining authority to purchase up to an additional $85 million of its common stock.

Accounts receivable increased 4% over last year to $302 million. In constant dollars, the increase was 10%. Overall DSOs improved slightly compared to a year ago.

At the end of the quarter, about 46% of our receivables was supported by insurance coverage, bank guarantees or letters of credit. We ended the quarter with inventory levels at $307 million, 16% higher than a year ago.

We are investing strategically in trending product categories and also to support new store growth and enhanced product deliveries into our stores. Our inventories are clean and are aligned with our expectations for our business.

During the quarter, we invested $32 million in net capital expenditures, mainly to support store growth and remodels. We are now planning for capital expenditures net of tenant allowances to be around $155 million for the full fiscal year.

Our Board of Directors has approved a quarterly cash dividend of $0.16 per share, payable on September 24, 2010 to share holders of record at the close of business on September 8, 2010. And now let me review our most recent trends and update our outlook for the remainder of this fiscal year and provide guidance for the third quarter.

Overall for the first half of this year, the performance of our international business has remained consistent. The trends in our Asia business have been very strong, exceeding our expectations.

In Europe, our owned retail stores are performing well. Sales from our new jewelry business have outpaced our expectations and in our existing wholesale business, our orders are pacing on track.

In our North American wholesale business as well as in our Licensing business, revenues have been stronger than we had anticipated. North American retail, however, the renewed fall off in consumer confidence and the highly promotional conditions in the malls that impacted our business in the second quarter may persist for sometime. This would impact both our revenues and our operating margins in that business.

So taking all of our businesses into consideration for the full year, we continue to expect total consolidated revenue to range between $2.35 billion and $2.4 billion. We expect consolidated operating margins of about 16% and we are maintaining our previous EPS guidance in the range of $2.80 and $2.85 per share. This guidance assumes no further stock repurchases.

Our revenue guidance assumes low single-digit comps in North America retail for the full year. With our largest store base, this would result in total revenue growth in the high single digits. North America wholesale, our guidance assumes a revenue increase in the low teen’s range.

For Europe, based on our visibility given current orders and our expectations for our retail stores, we now expect a revenue increase in the mid to high 20% range in local currencies, which should result in a U.S. dollar increase in the mid teen’s range.

Finally, for Asia, we expect revenues to increase by about 30%.

With respect to gross margins, we continue to expect gross margins to be down slightly for the year, driven primarily by the impact of the strong U.S. dollar on product purchases at a higher occupancy rate. We also continue to expect that our SG&A rate will be roughly flat to last year.

With respect to currencies, the euro has remained very volatile. Given the volatility, we are planning assuming a further weakening of the euro from its current level. Based on our assumptions for currencies, we would experience a negative EPS impact on translation and margins of about $0.16 per share for the second half of this fiscal year, the majority of which relates to the fourth quarter.

Moving on to our guidance for the third quarter, we expect revenues to grow between 8% and 11% to a range of $565 million to $580 million. We expect an operating margin around 13.5% and earnings per share in the range of $0.55 to $0.58.

In North America retail, we are planning third quarter comps to be flat to down slightly which is consistent with our performance thus far in August. North America wholesale, based on our current backlog and trends plus the impacts of shipments that shifted into the second quarter, we expect third quarter revenues to increase in the low single digits.

Moving to Europe, our wholesale backlog is currently up 55% which includes orders for our new jewelry business and also reflects the impact of an earlier market this year for our spring/summer handbag collection. For the quarter, we expect that our main growth drivers will be our jewelry business and the continued expansion of our retail business where we are planning the positive comps to continue for the quarter.

With growth also coming from our existing European wholesale business, we expect third quarter revenues will increase in the mid to high 30% range in local currency, which would result in a U.S. dollar increase of about 20%.

For Asia, we expect a third quarter revenue increase in the mid 30% range.

Finally in Licensing, we expect third quarter royalties to be about flat given that we now manage our international jewelry business directly.

Turning to third quarter gross margins, we expect profit margins to be down compared to last year primarily due to the impact of the strong U.S. dollar on European purchases along with anticipated lower product margins in North American retail. We also expect our global occupancy rate to increase compared to the same quarter a year ago given our expected comps in North America and a larger worldwide mix of retail stores.

Regarding expenses, we expect to operate with a higher SG&A rate in the third quarter given the investments that we''re making in retail expansion, infrastructure and marketing. And with that, we''ll open the call to your questions. Before doing so, let me remind everyone to please limit themselves to one single-part question. If time permits, we will allow people to ask a follow-up question. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we are ready to open the lines up for your questions. If you would like to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or if you wish to withdraw your question, press star followed by two. Again star one to ask a question. Your first question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed.

Jeffrey Klinefelter – Piper Jaffray

Yes. Thank you. I want to see if I can wrap this into one question. I guess as it relates to the European business, Paul you ran through a number of companies -- countries rather, markets that had collectively resulted in very, very strong growth during the second quarter. If you could just go into a little bit more detail on that and specifically the trend, I believe there are a number of markets you''re underpenetrated in Europe and represent opportunities for growth, if you could identify those?

And then what are the assumptions for the back half of the year? What are your top priority countries? And then if there are any countries that are underperforming or any color around Italy specifically, that''d be helpful.

Paul Marciano

Yeah. Thank you, Jeff. Yes, definitely if you take Europe as a whole, you have half of it maybe in Italy and right away behind that is France, which represents a substantial amount but the countries where we try to concentrate right now and if I take for example just Spain, which despite the crisis, we have been able to open last year 14 stores. This year, we should open another 14, which at the end of the year would end at 28 and that would grow to about 40 stores by the end of next year, fiscal year 2012.

And definitely, we see that as a key priority for us as Spain, U.K., Benelux which is a very strong market for us, Belgium, Netherlands and Luxembourg. And Germany was been still a very completely virgin market for us, we have like three stores there or four stores, which we will develop once we have a full team in place.

So about Italy specifically, I''m mentioning, we''re trying to reduce the dominance that we have on the sense that we feel that we are reaching a level we should not continue to open too many stores. We have close to 110 stores now in Italy. And we think, between all the concept I''m talking, accessories, (inaudible) Marciano, Guess? and Guess? Factories.

And then Eastern Europe, I''m on my way Saturday to Turkey and Switzerland and Romania, I''m going to visit few countries and definitely we are going to address that on a more meaningful way because we have not really developed all what has been developed in Eastern Europe as well.

Jeffrey Klinefelter – Piper Jaffray

Okay. So Paul just to clarify, Italy is a big piece of the business and a big focus for investors? How has it as a market, how has it been performing kind of year-to-date and what are your expectations?

Paul Marciano

It has been, as of the last quarter, again high single-digit positive across the board.

Jeffrey Klinefelter – Piper Jaffray

Okay. Great. And what''s your euro translation, Dennis, for the expectation for the third and fourth quarters?

Dennis Secor

We''re expecting it to sort of decline throughout the third quarter and sort of land in the high 1.20s range.

Jeffrey Klinefelter – Piper Jaffray

Okay. Thank you.

Paul Marciano

Thank you, Jeff.

Operator

Your next question comes from the line of Omar Saad with Credit Suisse. Please proceed.

Omar Saad – Credit Suisse

Thanks. Good afternoon.

Paul Marciano

Good afternoon.

Omar Saad – Credit Suisse

I actually wanted to focus on the North America business, sounds like everything is going fairly well around the world, Europe and Asia and a lot of these other markets but it seems like the promotionality in the U.S. malls, looks like your inventory has ticked a little bit although you said you''re pretty comfortable that they''re very clean. Wanted to focus on that North America retail business, where you are in your store plans and your inventory planning.

It looks like you opened 14 net new stores in the U.S. or in North America. How do you think about that business, do you look at it as fairly mature? Are you going to be pretty aggressive especially given the promotionality and the competitive environment? Are you still going to be opening a lot of stores? How do you think about allocating capital in North America market especially with-- especially from inventory stance as well?

Dennis Secor

Yeah. Omar we have with us Russ Bowers [ph], who''s our CFO of Retail. I think he''s probably in great position to answer your questions.

Russell Bowers

Yeah. First to start about with the store rollout, as we said in our prepared remarks, so we''re scheduled to open 58 stores for the year. So far we''ve only opened 21 of those. So we have 37 more to go for the year. Those new stores, they''re going to be weighted towards the accessory concept, which we really believe in as well as G by Guess?, which we also believe in.

As far as the environment in retail, it''s certainly gotten more difficult during the quarter, especially the back half of the quarter. Our competitors out there got more promotional and we responded slightly to that as well but going forward, our strategy remains unchanged.

We''re going to protect our brand. Promotionally, we''re going to anniversary the events that we did last year, which are centered around our loyalty program. They''re centered around charities as well as certain high traffic periods of time. And we think that that''s a formula that''s been successful for a long time and we expect it continue to do so.

Omar Saad – Credit Suisse

When you look at the inventory increase, I think it''s up 15% year-over-year, guys, is that -- where does that-- if you look at it as across the segments, where is that concentrated at? Is that expressing itself in North America retail or is that a global push?

Dennis Secor

Yes. The total inventories are up 16% for the company, just a little color. In Asia, they''re up 24%, which is much lower than the guidance we just shared with you. Europe is in a similar situation, it''s up 19% and North America is up 12%, but within that, about half of that growth is to fund new stores. We have about 7% of the square footage coming online by the end of the third quarter and the other is to fund -- we''ve taken positions in some trending categories, mainly accessories. So we want to get in front of any potential demand there.

Omar Saad – Credit Suisse

Okay. Thank you.

Paul Marciano

Thank you.

Operator

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

Christine Chen – Needham & Company

Thank you and congratulations on a good quarter in a tough environment.

Paul Marciano

Thank you, Christine.

Maurice Marciano

Thank you.

Christine Chen – Needham & Company

Wanted to see if you could comment on product. What was trending well for you in the second quarter and have those trends continued so far into the third quarter and then particularly what are some of the emerging trends that you''re seeing out of the European market? And how soon do you think they''ll start taking off here in the U.S. market? And I guess with that particularly denim versus non-denim? Thank you.

Russell Bowers

Hi, Christine. As far as product performance, it definitely reflects the buy now/wear now attitude of the customer that we saw out there. And we all know it was unseasonably hot during the quarter and we think that''s showing up in the results as well.

Shorts were strong for us, as were dresses and knit tops. We were also really pleased with our performance in shoes and we had a very strong assortment of dress shoes out there that the customer responded to, and they were also attracted to the wear-now booties that we had in our store.

On the men''s side, we continue to do a strong business in premium basic denim. As far as European goes, I know that they''ve seen a lot of similar trends to us but Maurice can add some.

Maurice Marciano

Yeah, denim -- what''s happening right now in the denim market, that''s my view of it, is that we are basically at the end of the dominance of the denim in the business where we have the cycle where denim was completely dominating the bottoms business. And now we have non-denim fabric coming into -- coming up and that''s -- I look at that as a tremendous opportunity because it''s going to give us much more feel to generate a lot of business and a lot of sales.

Christine Chen – Needham & Company

Okay. And then in terms of your denim penetration, how does that impact your denim penetration for the back half of the year?

Maurice Marciano

The denim penetration -- our denim penetration is going to be basically for the rest of the year. It is going to decrease just slightly because again we are at the beginning of the cycle and this is going to be -- you''re going to see the cycle going on for quite a while. So it''s going to -- it''s just starting now and the big momentum is going to be towards the end of the -- well the end of this year and definitely next year into the following year.

Russell Bowers

And in the second quarter, we responded to the slowness in denim by making up the business in leggings and in shorts. For the back half of the year, we''re looking at bringing in woven bottoms to our stores also to help make up for that. Now, that''s going to start hitting at the end of this month and we have high expectations for that business.

Christine Chen – Needham & Company

Great. Thank you for the color and good luck.

Paul Marciano

Thank you.

Maurice Marciano

Thank you.

Operator

Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey – Telsey Advisory Group

Hi, good afternoon, everyone. As you think about the North American business, how do you think about how things are performing? Is it the consumer leading to the weaker than expected results or is it product or price and how you''re adjusting?

And just lastly, I was in Mall of America yesterday and I saw the new accessory store. I think it looks terrific. It''s a very updated and differentiated format from what you''ve had in the past. As you think about sourcing and the impact of the different categories, what''s going to happen with costs next year? And just lastly, denim trends, are you seeing any shifts in terms of product, pricing or mix? Thank you.

Dennis Secor

Well, okay, I''m going to -- if I can address your sourcing question first, there was a lot of questions in there. But in terms of pressures and costs, we were pleased in the first half of this year. We''ve been able to generate IMU improvement of about 40 basis points. We are seeing pressures because of rising prices on cotton, labor.

Those pressures begin to impact us in the back half of the year, mainly in the fourth quarter, and that might tend to start offsetting some of those gains. It''s next year where it becomes more of a full year challenge, but we have a lot of initiatives through our supply chain that we think can help offset and mitigate those risks. We continue to consolidate our vendor base. We''re rebalancing our vendor base into other Asian countries, Vietnam, Cambodia, to name a couple. Speed to market is important to us.

As an example, we''re working with new mill partners for them to take positions in fabric, that can help cut anywhere from two to six weeks out of the cycle, that allows us to put more on ships and design closer to the season. And then there''s pricing, we see that there can be opportunities in certain price categories if we can build -- as we build newness and freshness and uniqueness into the product, there''s certain categories where we can pass some of this on to the consumer.

Russell Bowers

In regards to your question about the consumer or the product, we definitely feel it''s the consumer in conjunction with the competition that''s out there, which has been aggressively promoting. We''ve generated a positive conversion on our stores that''s consistently in the mid single-digit range. So the customers that are coming into our stores, we''re turning that into sales. So we think that they really like the assortments they see.

Paul Marciano

And for the accessory stores that you saw just in Mall of America, we opened six already in the last few weeks and the response has been very, very strong. As you know, we have almost 200 accessory stores around the world opened already. And we -- all the new concept would be rolling out in Europe, in Asia, in Middle East now. I mean, in the next few weeks.

Because of that, we plan to have also a segmentation of the categories inside the accessory stores to make sure that the product you''re finding accessory stores will be to a certain degree different of what you have in a Guess? store. So that''s where we are -- we''re planning to do. Also you have the shoes that we put more and more in accessory stores, that means we take a box a little bit bigger. It used to be less than 1,000 square foot or around 1,200 square foot, now we''re taking a little bit bigger to be able to accommodate the demand of footwear which is stronger and stronger at every region we have. So this is where we are in accessory stores.

Dana Telsey – Telsey Advisory Group

Thank you. And just lastly, denim?

Maurice Marciano

Yeah, denim, for the denim we are putting the big emphasis on the basic denim and all the denim is getting more cleaned up now. And what we are seeing is that the premium denim in basic is doing very well and where we''ve been doing very well with it and same thing for the non-premium. What''s decreasing is the fashion denim, which is being slowly replaced by the non-denim bottoms and it can be corduroy, it can be stretch sateen, twill, it can be any of these fabrications. Which is going forward we''re expecting a lot more sales from these categories.

Dana Telsey – Telsey Advisory Group

Thank you.

Paul Marciano

Thank you.

Operator

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

Betty Chen – Wedbush Securities

Thank you. Good afternoon. Congratulations on a great quarter.

Paul Marciano

Thank you, Betty.

Betty Chen – Wedbush Securities

I was wondering if you can speak a little bit more about Asia? It sounds like the results obviously came in ahead of plan. South Korea is driving the bulk of that growth and the intimates line is doing quite well. Could you give us some more product color around what''s working so well in South Korea and China?

And then also now that you''ve expanded into a secondary city, what are you seeing there in terms of demand, any difference versus the larger cities? And then I also had a clarification for Dennis. I think I wanted to clarify the full year guidance of $2.80, $2.85 does that still include I think the $0.04 of pension costs in Q1? Thank you.

Dennis Secor

Just to answer your last question, yes it does and if I can just take the opportunity, apparently I misspoke on the currency, I meant to say low 120s. So I just want to correct what I said before. Now in terms of the performance in Asia…

Paul Marciano

Well Asia, we have definitely, Betty, is Korea continued to be very, very strong for us, opening a lot of new stores. When I talk new stores as you know well, it''s a concession in department stores. There is no shopping mall there and we have been growing very well, and we''re very happy with that. About the product, in South Korea, we have a new category, which is intimate, lingerie and we just had -- on the Q1 I think we just only two stores and now we just opened another 35 in the last quarter in Q2. So we''re expanding rapidly on that.

As far as the product apparel, we are, strong demand in denim. We manufacture locally because of the Asian fits and also, the two categories that we do very well has been footwear. Again, we see that across the board on every region but something we adapted the feet of the footwear to Asian market and that''s what I think the key of the success of the footwear, Guess? Footwear has been there. So we''re accelerating to open concession and stores of footwear in South Korea. But China, we don''t see that much of a difference between the big cities and secondary cities about the product. We see the big demand of denim. We see demand of skirts, shorts, but also logos.

Logos is a big thing, maybe because it''s new territory for us and people are looking for the Guess? brand and so we''ve been addressing that. So all in all, accessory stores, denim stores, the category we don''t have at all in greater China is Guess? by Marciano as a contemporary line and even in South Korea we don''t have it yet. We are looking if we''re going to extend and roll down that category or not. For now, we''re not doing it. Thank you.

Betty Chen – Wedbush Securities

Thank you and best of luck.

Paul Marciano

Thank you.

Dennis Secor

Thank you.

Operator

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

Eric Beder – Brean Murray, Carret & Co.

Good afternoon. Let me add my congratulations.

Paul Marciano

Thank you, Eric.

Eric Beder – Brean Murray, Carret & Co.

If you look at some of the product categories, can you talk about how well your dress business has done? I know it''s an emerging market for you and also, I know it''s early but have you seen initial reads on your outerwear which is always a big piece for the U.S.?

Russell Bowers

Yes, the dress business has been very strong for us, it''s one of our leading categories in Q2 and the outerwear has also performed very well for us. It''s not as important a business in Q2 as the rest of the year but the initial reads for back to school are good and we have high expectations for the balance of the year there.

Eric Beder – Brean Murray, Carret & Co.

Great and congratulations.

Russell Bowers

Thank you.

Paul Marciano

Thank you, Eric.

Operator

Your next question comes from the line of David Glick with Buckingham. Please proceed.

David Glick – Buckingham Research Group

Yes. Good afternoon. Just a follow-up question on Europe, a pretty significant increase in your outlook, just wondered if you can give us a sense for how much of it is really driven by higher wholesale orders than you expected versus perhaps stronger comps, more retail store openings, if you could give us some color there?

And then when you say strong single digit comps, I was wondering if you could maybe be more specific, whether it''s low, mid or high? And how the comps have trended from the beginning of the second quarter kind of through where we are today, just give us a sense of what''s happening in Europe? Thank you.

Dennis Secor

The comps have been very strong. When we talk about the positive comps, they were towards the higher single-digit range and actually have accelerated as we moved into the month of August. So we''ve been very pleased with that performance of the business and the trends and that is one of the factors that is helping to fuel our added confidence in taking the revenue guidance up in addition to our jewelry business.

The jewelry business continues to perform very well. We said at the beginning that -- beginning of the year rather that we would be fueled -- the growth would be fueled by the retail and the jewelry business and that''s really the way it''s shaping out. So those were the two big drivers of the growth and the added confidence.
David Glick – Buckingham Research Group

Okay. Great. And then just a follow up on FX, if I recall your guidance was like going to 1.18 to 1.19 range. So assuming a further depreciation into the low 120s, how much impact is that on your EPS guidance for the year? Is that just a few pennies? So if you could break that out for us, that''d would be helpful?

Dennis Secor

Yeah. In the prepared remarks, I said the back half would be down about $0.16, and that''s weighted for the fourth quarter. The first and second quarters neutralize one another. So the same $0.16 in back half is the same for the year.

David Glick – Buckingham Research Group

Okay. And how would that -- how did that compare to when you gave guidance last quarter?

Dennis Secor

It''s slightly -- the head wind has diminished somewhat.

David Glick – Buckingham Research Group

By a few pennies?

Dennis Secor

By about, I think, $0.06.

David Glick – Buckingham Research Group

$0.06, great. Thank you very much and good luck.

Dennis Secor

Thank you.

Operator

Your next question comes from the line of Todd Slater with Lazard Capital Markets. Please proceed.

Todd Slater – Lazard Capital Markets

Thanks very much and nice quarter, guys. I just want to follow up on the denim comments. First, denim is becoming less important but this is because the non-denim bottoms of all sorts are gaining in importance. And net-net you said see this as tremendous opportunity. So I want to make sure we understand your point about this tremendous opportunity because I think a lot of people might see this shift as negative for a denim dominant brand.

So could you talk about sort of the fashion change as an opportunity to get the customer to buy something new for her closet, whether it''s a one-to-one trade-off do you think for the denim, or is it two or three new pairs versus one new pair? And also just talk a little about the price, non-denim versus denim and the margin so we can just understand the replacement issue there. Thank you.

Maurice Marciano

Yeah. Look let me address that. So what''s happening with the denim is that until for a few years now, the denim was completely, completely dominant in the bottom business. And now we are seeing a shift starting, where the denim is slowing down a little bit and being replaced, a good part of it being replaced by non-denim, which I really see as a really good opportunities. Because then it gives us variety to offer to the customer.

So now, instead of buying one or two pair of jeans, they''re going to buy still the one or two pair of jeans, but they''re going to buy -- they''re going to have more choice, and they''re going to buy other -- they''re going to buy other bottoms. So I see more -- at the end of the day, it''s going to incremental sales. And that''s what we used to see a long time ago when the non-denim was very strong.

Todd Slater – Lazard Capital Markets

Okay. Got it. So you think it''s an incremental number of pairs?

Maurice Marciano

Yes. Excuse me?

Todd Slater – Lazard Capital Markets

You think it will be incremental number of pairs for people?

Maurice Marciano

Yes, yes.

Todd Slater – Lazard Capital Markets

They''ll still buy jeans but they''ll buy another one or two pair of these new--

Maurice Marciano

Exactly.

Todd Slater – Lazard Capital Markets

Non-denim, sateen or whatever? And how about -- how is the price of these -- let''s not say it''s one for one, let''s -- I mean two and three for one, but it''s one to one. What''s the price difference, what''s the margin difference?

Maurice Marciano

Except for the premium denim, if we talk about just the regular denim, then the non-denim is basically in the same price range, so which means we''re talking anywhere between $89 to say you can go to $108, $118, depending on the fabrication and the washes that we''re doing. And in terms of margin, it''s very similar to the denim.

Todd Slater – Lazard Capital Markets

Okay. So the key is more getting more -- selling more units at the end of the day?

Maurice Marciano

Exactly, yes. I believe that we''re going to end up -- it''s my strong sense that we''re going to end up selling more bottoms.

Todd Slater – Lazard Capital Markets

And how does that affect the tops business, if any?

Maurice Marciano

It''s not going to affect the top business. Top business is really all between the knitwear in the women. And it''s most affected by if we''re in a strong dress cycle or less strong dress cycle. You see what I mean because with the bottom, you are always going to need a top.

Todd Slater – Lazard Capital Markets

Okay. And how do you feel about that cycle?

Maurice Marciano

Let''s not forget, because you mentioned about being so strong in denim, but our brand and in our stores, it''s obvious that even though we have a strong base in denim. But it''s not a dominant part of the total offering that we have in the stores. Which means that being a lifestyle brand, we have so much variety of products in the stores that denim all along has been approximately, in the mid 30 percentage of the offering, like around 30%.

Paul Marciano

And if you look at stores -- this is Paul. If you look at any store in the U.S. or in Canada, and an average percentage of sales in any given store, accessories between handbags, shoes, outerwear, watches, footwear, belt, jewelry and everything represents over 40%, 40% of the sales. So the large majority of the business is accessories. Then you have the men and women and on that you have denim and non-denim.

Todd Slater – Lazard Capital Markets

Got it.

Paul Marciano

So our brand has evolved over the last 12, 15 years drastically from where we started 30 years ago, 29 years ago exactly. And the best testimony for that is just to visit any store, and you will see right away the message. Any store.

Todd Slater – Lazard Capital Markets

Great. Well, I agree, change is good, new fashion cycles are good. And I wish you guys the best in the second half.

Paul Marciano

Thank you and we will celebrate 30 years next year. So we hope to still be in business next year.

Operator

Your next question comes from the line of Randy Konik with Jefferies. Please proceed.

Randy Konik – Jefferies & Company

Yeah. Great, thanks a lot. Can you just give us a little more color again on the discrepancy or disparity between the North American wholesale business versus the North American retail business? What are you seeing differently in the North American wholesale from a sell-through perspective?

Is it different types of product categories that you see you''re selling better? Is the environment a little bit different that you see inside the actual department store versus you''re seeing in any other specialty retail competitors in the malls right now? Just kind of give us a little bit more color and understanding on what, why you think there''s some of this discrepancy in trend right now. Thanks.

Dennis Secor

The business in wholesale that we experienced was very strong. In the U.S., our business in women''s was up double digits. We''re actually performing well with fewer doors. Our stocks are well aligned, so we''ve been doing very well. The men''s business was a little more challenging for us in wholesale. We do have a lot of great new product coming in the back half of the year.

So as we look to the rest of the year though, we are guiding to a little bit of a slowdown in the second half of the year, if you imply -- implied in our guidance, rather, as the growth rate does slightly decrease in the second half of the year in the North America wholesale business.

Randy Konik – Jefferies & Company

Okay. And then just back in the retail, the North American retail area, what would be like differences in maybe product categories or anything there that you would point to versus the wholesale business?

Russell Bowers

This is Russ. In our stores, our product is very focused on a lot more fashion in general. So I think that''s one thing you might see that''s a big difference. As well as in our stores we do carry the full assortment within our stores as well. So I think that''s the big difference. And we''re sitting across from a lot of our direct competitors who were very promotional right across the hall from us in the mall, so we had to deal with that, too.

Randy Konik – Jefferies & Company

All right. Great. Thanks.

Paul Marciano

Thanks.

Operator

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

Margaret Whitfield – Sterne, Agee & Leach, Inc.

Yes, I wondered if you could give us an update on the search for the COO and the President of the Americas?

Paul Marciano

Yes, Margaret. How are you?

Margaret Whitfield – Sterne, Agee & Leach, Inc.

Good.

Paul Marciano

Yes, definitely, I mean Maurice and I and a few Board members already have interviewed several candidates. We see the -- of course a key position on these both President Americas and Chief Operating Officer Global. We have -- we are very close in the next maybe six to seven weeks to make some candidates offers. So we''re well there, we''re very well there.

Maurice Marciano

We are very pleased with the search.

Paul Marciano

Very pleased.

Margaret Whitfield – Sterne, Agee & Leach, Inc.

And I know you''re having a big meeting in New York next week, apart from Maurice could you let us know who else might be there apart from Dennis and Maurice?

Maurice Marciano

Yes. We are going to have -- we are going to have with us our CIO, and we are going to have our -- yes, Dennis is going to be there. But we''re going to have our Chief Supply Chain Officer, Jeff Streader, and we''re going to have Silvia, who is the VP of Marketing, and who is going to cover for Asia, to talk about Asia.

Paul Marciano

We''ll have Luca Donini.

Maurice Marciano

Luca, because I don''t have everybody in -- yes, Luca Donini, our President of Europe, is going to be there and present, just attending, are going to be several of our licensees.

Margaret Whitfield – Sterne, Agee & Leach, Inc.

Very good. Look forward to the meeting. Congratulations and best of luck in the back half.

Paul Marciano

Thank you, Margaret.

Maurice Marciano

Thank you, Margaret.

Operator

Your next question comes from the line of Chi Lee with Morgan Stanley. Please proceed.

Chi Lee – Morgan Stanley

Hi, good afternoon, everybody. On the wholesale backlogs for Europe, what was the growth organically, excluding the jewelry business? I believe you said is 55% on a consolidated basis.

Dennis Secor

Yes, the 55% includes the jewelry business. I''ll have to refer to my notes here, if you can just give me one second. I don''t know if I have that. But one of the big drivers there is in our handbag business--

Paul Marciano

Exactly.

Dennis Secor

We are out earlier in the market and in our denim business as well. So we''re out earlier for those businesses so we started the campaigns earlier.

Chi Lee – Morgan Stanley

Okay. And I guess, just given the timing shifts, I mean as you look at the composition of that backlog there''s fall in there and presumably there''s a good chunk of spring now in there as well. Are you actually seeing an acceleration in the core into spring or are we seeing a deceleration?

Paul Marciano

I did not understand.

Dennis Secor

Could you repeat the question?

Chi Lee – Morgan Stanley

I guess, if you were to look at that backlog growth and you separate it from fall relative to spring 2011, are you actually seeing an acceleration or a deceleration in that backlog trend going into the spring season?

Dennis Secor

We''re seeing -- the spring is very strong. Part of that though is the shift in the timing of the orders. So it''s probably a little premature to draw any conclusions from that.

Chi Lee – Morgan Stanley

Okay. And then I guess if I heard correctly, you guys are now targeting 97 new units in Europe. I think the last number that I had was 85. So the additional 12, are those owned or licensed stores that are coming on line this year?

Paul Marciano

It would be a combination of that. It''s correct that the last conference call the number we gave was 85, now it''s 97. And it''s part of the opportunities that both some franchisees came along with some great projects. And we went along it''s -- including us who find some great locations, specifically in France and in Spain, and we decided to go ahead for this calendar year. So that''s how the number went up 14 stores.

Chi Lee – Morgan Stanley

Okay.

Paul Marciano

12 stores, I''m sorry.

Chi Lee – Morgan Stanley

Perfect. And then my last question, just in terms of the guidance, Dennis, if I look at what''s implied for the fourth quarter, it seems you guys are now looking at operating profit growth in the neighborhood of call it 8% to 10% if I do rough math. So that''s down from the 20% that you guys had talked about last quarter. Is it just greater gross margin pressure that you''re expecting for the fourth quarter that gets us there? Understandably you have a little more of a conservative comp outlook for the back half now, but if could you help us better understand the dynamics behind that operating profit growth for the fourth quarter that''d be great?

Dennis Secor

We haven''t given much color on the fourth quarter, but I think what you should infer is that -- is given what we''re seeing in North America retail, it''s fourth quarter is obviously a very important for that business. So that will impact our view of the fourth quarter now versus where we may have been three months ago.

Chi Lee – Morgan Stanley

Okay. Great. And I guess just following up on my first question, I don''t know if you have the organic backlog number? If not, I can take it the offline and follow up with you then.

Dennis Secor

I think it''s in the 20% range.

Chi Lee – Morgan Stanley

Okay. Perfect. Thank you very much.

Paul Marciano

Thank you.

Dennis Secor

Thank you.

Operator

Your next question comes from the line of John Kernan with Cowen. Please proceed.

John Kernan – Cowen and Company

Hi, guys. I know you''re excited about the hire of Kitty Yung. Can you talk about her ongoing efforts and can you talk about what you think is sustainable growth rate is in your distributor channel in China over the next three to five years in terms of unit growth?

Paul Marciano

About assuming about stores?

John Kernan – Cowen and Company

Yes.

Paul Marciano

Well, I think that the plan we have for greater China specifically, and again, we go back to understand what these stores are there, it''s most of it concessions. And majority of it is in department stores and then more and more shopping centers opening right now everywhere.

So we''re looking in the next three to five years to have a good 250, 300 stores in China. And I think it''s absolutely doable for the brand we have and again, about the fact that we are multiple concepts. So it could be accessory stores, it could be Guess? Jean stores, it could it be factory stores. So whatever it''s going to be, the 300 store mark is definitely in our goal.

John Kernan – Cowen and Company

Okay. Great. And then just a housekeeping question. Is CapEx still planned at $170 million for the year?

Dennis Secor

No, $155 million now.

John Kernan – Cowen and Company

$155 million. All right. Thank you.

Paul Marciano

Thank you.

Maurice Marciano

Thank you.

Operator

As a reminder, ladies and gentlemen, to ask a question, star one on your touchtone telephone. You have a follow-up from the line of Christine Chen with Needham. Please proceed.

Christine Chen – Needham & Company

Thank you. I was just wondering if you could give us an update on your merging of the European and U.S. lines, how much overlap is there now and where would you like it to be? Thank you.

Paul Marciano

If I can tell you the best estimate we have now, it''s around 42%. And our goal is going to be in the next 12 months, around 55% and again, we look at hundreds and hundreds of different styles. So if we reach the 55% during the next fiscal year, we''ll be very happy.

Christine Chen – Needham & Company

Okay. Great. Thank you.

Paul Marciano

Thank you.

Operator

At this time, I will now turn the call over to Paul Marciano for closing remarks.

Paul Marciano

Well, thank you very much to join us. As you know now, we have the next two quarters will be pretty significant of impact on the business, especially the first quarter. And just we -- we''re looking to get some more consumer confidence coming back in the mood and definitely we will see you end of November to report the Q3 and maybe to see you in the next week -- next Tuesday at the New York Stock Exchange when we will be there. Thank you very much. Thank you again.

Operator

Ladies and gentlemen, this ends your conference for today. You may now disconnect. Have a great day.