Guess, Inc Q4 Earnings Call Transcript

123jump.com Staff
22 Mar, 2010
New York City

Guess Inc fourth quarter operating earnings jumped 76.3% to $120.7 million driven by higher sales. Net earnings also jumped 80% to $86.6 million due to improved margins. Earnings per share were $.093 against $0.51 in the year ago quarter. Company increased cash dividend by 28%.

Guess, Inc. ((GES))
Q4 2010 Earnings Call Transcript
March 17, 2010 4:30 p.m. ET

Executives

Paul Marciano – Vice Chairman & Chief Executive Officer
Maurice Marciano – Founder and Chairman
Carl Alberini – President & Chief Operating Officer
Dennis Secor – Chief Financial Officer

Analysts

Jeff Klinefelter – Piper Jaffray
Omar Saad – Credit Suisse
Christine Chen – Needham & Co
Randal Konik - Jefferies & Company
Jeff Black - Barclays Capital
Eric Beder - Brean Murray, Carret & Co
David Glick - Buckingham Research Group
Todd Slater - Lazard Capital Markets
Margaret Whitfield - Sterne, Agee & Leach, Inc
Janet Kloppenburg - JJK Research
Susan Sansbury - Miller Tabak
Dana Telsey - Telsey Advisory Group

Presentation

Operator

Good day and welcome to the Guess 4th quarter fiscal 2010 conference call. Before we get started please note that the company will be making forward-looking statements during this call including comments regarding future plans and outlook. The company''s actual results may differ materially from current expectations based on risk factors included in the quarterly and annual reports filed with the SEC. Now for opening remarks and introduction I will like to turn the call over to Paul Marciano, Chief Executive Officer of the company. Please go ahead.

Paul Marciano – Chief Executive Officer

Thank you, good afternoon and thank you for joining us today. Also with me are Maurice Marciano, Carlos Alberini and Dennis Secor. Today, we report a very strong 4th quarter result. We posted record revenue and record earning in this period and this performance brought to a close a solid year for the company in spite of many challenges posed by a difficult economic crisis. It was a year of significant accomplishments for Guess, a year where we were very focused on key initiatives and executed our long-term strategies. We effectively remained well positioned for market share gain and profitable growth and our team delivered in all fronts. In the fourth quarter each one of our businesses expanded and contributed to an overall 14% increase in revenue. More than half of this revenue increase was driven by business in Europe which posted a 24% top line increase fuelled in great part by our retail expansion growth. In North America we approached the season strategically capitalizing in the high traffic period and limiting our promotional activities to protect our brand and our margins. We delivered great products with innovative designs and focused assortments. We executed well and posted middle single digit positive comps.

Our Asia business had a very successful fourth quarter with a 55% increase in revenue mainly driven by strong performance in South Korea. While our top line results were obviously strong our bottom line performance was even stronger, with each division positing solid margin improvements. With careful inventory and close management we have fully restored the margin structure of our business, expanding operating margin by more than 3 points. With this performance we have set another earnings record for the quarter as we have increased our earnings per share to $0.96, that is 45% increase over last year fourth quarter excluding charges in both periods.

For the full fiscal year, we posted an all time high in both revenues and earnings as well. Full year revenues increased to more than $2 billion with product sales growing across all our segments at the higher end of International sales. For full year earnings per share reached $2.64. During the year we focused on several key initiatives that we consider critical to the long-term success of our brands. Our first initiative relate to the G by Guess as it gained considerable traction, with positive full year comp and better bottom line. We plan to add at least 32 stores in the next three years of that category. Also, our push to expand customer loyalty program across all retail concepts has proven very successful. We currently have over 2 million aged members in our data base which will allow us to market directly to our most loyal customers.

In Europe, our business continued to extend outside of Italy with France, Spain, Germany and U.K collectively growing 22% for the year. Our retail business in Europe drove most of the growth in that region adding 81 retail stores owned or licensed. We also entered the pre collection for fall and winter of ’09, spring and summer of 10. With these initiatives we are delivering our products into the market much faster than before.

In fiscal 2010, we executed on our plan in view of the Wall financial meltdown. It was exactly the right strategy during that time to protect our capital structure but also protect our brand and customer relationships.

Now moving in the future, our top priorities for this year are first to increase our sales productivity across all businesses. The Guess brand enjoyed tremendous momentum around the world and we have seen opportunities to gain market share in all spaces. We feel we have a significant advantage having a lifestyle brand. From casual jeans wear, dresses, tops, outer wear, handbags, footwear, watches, outerwear, fly wear, we are not just one category but instead we support an entire lifestyle of customers. Of course denim is our world and if you visit any other stores in New York, Miami or Los Angeles the message is clear.

Second is our expansion in Europe, which remains a key priority for us. We continue to be in the strong team in the region to support that important initiative. We focus on the countries where the brand is well known but is still under penetrated like U.K, Holland, Germany, Belgium and many more countries. And expanding our retail business is always critical. Fiscal 2011 we plan to open 85 retail stores in that region. Most of the stores will be concentrated outside Italy, which represents currently half of our sales. This plan will result in roughly 380 stores in Europe by the end of the year. We continue to feel that we can grow our business in Europe to $1 billion sales in the next two to three years.

Third, this is our U.S and Canada retail expansion. This year we plan to open 62 new stores in North America. Many of this opening will be concentrated in our new concept specially G by Guess and Guess Accessory stores. These are the focus areas. We do have a complex business model which is very diversified in product categories, concept and geography. But because of that, that diversification, we can plan very ambitious goals for the future of Guess brand around the world and not fear any saturation of the market on any concept in the country you have. That’s why we preach and truly believe that the world is our field. Future prospects look very strong to us as long as we stay disciplined, focused on a strategy and its execution. That’s what brand integrity is.

With that I’ll let Denis to walk through the numbers please.

Dennis Secor – Chief Financial Officer

Thank you, Paul. Good afternoon. Today’s press release includes disclosures, which reconciles our GAAP results to adjusted results excluding non-cash impairment charges related to our retail stores. During this conference call our comments excludes these charges as we feel that provides more relevant period-to-period comparisons that are consistent and more easily understood. We are very pleased with our results. Earnings for the fourth quarter reached a record of $89 million which represents an increase of 44%. Diluted earnings per share increased 45% to $0.96. Total fourth quarter net revenues reached $642 million clearly exceeding our overall expectations. Fourth quarter gross profit was $295 million, a 30% increase over last year. Our gross margins expanded 550 basis points or 46%, a very strong performance. Product margins improved substantially in every one of our operating segments.

Our SG&A expenses reached $170 million this quarter which represent 26.5% of revenue. These levels were higher than last year due to higher selling expenses to support our sales growth and a larger retail store base coupled with increased performance based compensation given this year’s stronger results.

For the period operating profit increased 38% to $125 million. This includes a $8 million favorable currency translation impact. Operating margin expanded 330 basis points to 19.5%. For the fourth quarter we reported other net income of $5 million or $0.04 per share, which primarily represents unrealized mark-to-market gains on currency contracts. This contract supports fiscal 2010 inventory purchases. Last fourth quarter we reported net other expense of $6 million, a variance of $11 million or $0.08 per share between the two quarters. Our effective fourth quarter tax rate was 30.2% compared to 26.6% in the prior year fourth quarter as we finalized our tax rates for the full year. We closed the full year with a tax rate of 32% versus 32.9% last year.

Our strong fourth quarter performance ended the year for us that delivered solid results. We reversed a 3% year-to-date revenue decline going into the quarter and closed the year with 2% revenue increase, achieving another record this year. We managed costs and inventory carefully all year improving our gross margin, and expanding our operating margin to 17.1%. With the fiscal year we increased our earnings by 7% to $246 million and increased EPS by 10% to $2.64. For the full year the negative currency translation impact on EPS was about $0.06 per share.

Now, I’ll give you our revenue and earnings by business segments. In North American retail our comp store sales increased by 5.3% in the fourth quarter and total revenues increased by 7% to $309 million. In constant dollars comp store sales increased 2%. We expanded our product margins by more than 500 basis points. We leveraged occupancy and SG&A costs given the positive comps. Over all this strong performance resulted in 570 basis point improvement in segment operating margin and a 60% increase in operating profit for the quarter. In our wholesale segment, fourth quarter revenues increased by 21% to $85 million. We continued to experience rapid growth in our Asia business while revenues in our North America wholesale business declined slightly but exceeded our expectations for the period. Operating margin in the wholesale segment expanded 530 basis points to 18.8%, primarily due to improved product margins. Operating profit increased 69% to $16 million. In Europe fourth quarter revenues increased 24% reaching $223 million. In Euros revenues increased 14%. Over half of this growth was generated by our retail business where we posted positive quarterly comps and increased our retail base to 84 stores. Our wholesale business also grew in the period led by our accessories business and our new jewelry business as we began direct operations in January. Operating earnings increased 49% to $58 million and operating margin increased to26.1% versus 21.7% a year ago.

Product margins improved by over 500 basis points and drove the operating margin expansion. Licensing revenue increased by 12% reaching $25 million in the quarter which was significantly better than we had expected.

Now, turning our attention to the balance sheet, our cash flow was very strong all year. We generated operating cash flow of $358 million a 57% improvement from last year’s level. We invested $78 million in net capital expenditures mainly to support store growth and infrastructure improvement. We increased our dividend and paid down all of our short-term debts. All of this resulted in a very strong cash position ending the period with $502 million. Account receivable increased 10% over last year to $290 million. Over all DSO improved slightly. At the end of the year about 46% of our receivables were supported by insurance coverage, bank guarantees and letters of credit. We ended the year with inventory levels at $246 million about 3% higher than last year. We are very pleased with our inventories which are very clean and well aligned for our growth. And we remain flexible to chase business in categories that are performing.

Lastly our Board of Directors has approved a 28% increase in our quarterly cash dividend to $0.16 per share payable on April 15th 2010 to shareholders in record at the close of business on March 31st, 2010.

With that I’ll turn the call over to Carlos.

Carlos Alberini – Chief Operating Officer

Thank you, Denis and good afternoon. Today we will provide revenue, operating margins and EPS guidance for the first quarter and the full fiscal year 2011. As Paul said, this year our focus would be on resuming profitable growth. In line with this our goal is to grow our revenues between 8% and 10% in spite of anticipated currency headwinds. This growth will be driven by our North American retail business, Europe and Asia. In North American retail, our goal is to increase revenues by about 10%. The 52 new stores that Paul refereed to will contribute to average square footage growth of about 4% and we plan to increase comp store sales in the mid single digit range.

In Europe our goal is to increase revenues in the low teens range driven in similar proportion by our retail expansion in the region sand our new businesses. We plan to grow our wholesale business in Europe in local currency but at this time we expect that this growth will be offset by currency headwinds.

Regarding our wholesale segment, our goal is to increase revenues in the high single digits this year completely driven by Asia. With respect to timing among quarters we expect to accelerate revenues into the second quarter from the third quarter as we complete our European Jeans wear business model transformation. We expect this shift to impact revenues by about $20 million. This year we also plan to expand gross margins modestly. The opportunities will be weighted towards the first half with improvements in IMU and mark downs. Currencies and higher raw material costs will begin to offset this gain in the second half of the year.

In terms of expenses we are planning to make additional investments in our organization primarily to support retail expansion on our newer brands and businesses. We also plan to invest in our growth in Europe and in marketing program to enhance our brand awareness around the globe. Some of these investments will be in advance of revenue. Therefore we expect that the increase in the SG&A rate for the year may offset any improvements in our gross margin. Historically our marketing investments impact the first and third quarters more significantly. But this year we expect the SG&A rates for these two quarters to be similar. We see the fourth quarter as the first opportunity for SG&A leverage this year.

With respect to currency translation we are planning the year assuming that the U.S dollar to strengthen by about 5% from current levels. This would result in a negative effect after the first quarter impacting second quarter EPS by roughly $0.02 and the third and fourth quarters by about $0.05 each. We are planning this year with an effective tax rate of 31%. All considered our full year guidance includes revenues between $2.3 billion and $2.35 billion. We expect our operating margin to be about 17% and our full year earnings per share in the range of $2.87 and $2.95. This assumes weighted average shares outstanding for the year of about 93.5 million shares.

Now with respect to capital spending, we plan to expand our retail store openings both in North America and in Europe. We also expect to remodel several stores in North America. All combined we are planning capital expenditures net of general allowances of about $170 million. Now let me share more about specific business trends and our outlook for the first quarter.

In our North American retail business we feel that consumer behavior has stabilized. Even when customer traffic remains soft we have a plan to increase sales productivity across all concepts. We feel our product lines are strong and the customer response so far has been very encouraging as we have improved conversion rates and increased average dollar sales. Our approach is consistent with this strategy that we used in the fourth quarter when we achieved mid single digit comps and expanded margins. In February we closed with a high single digit comp and have improved upon that trend so far in March. We are making excellent progress with our newer concepts. Comps in Guess by Marciano have led the chain for several months now and G by Guess is also performing very well. Based on these improving trends we are planning comps in the mid to high single digits which coupled with the remodels and the likely larger store base should result in a revenue increase in the low teens for the quarter.

In Europe for the first quarter we are planning that revenues will increase by about 20%. Our revenue increase will be driven by new store growth and positive comps in our European retail business along with the addition of our new businesses. In our wholesale segment we expect that revenues will increase in the mid teens range for the quarter. This growth will be driven by Asia and in North America we anticipate a modest growth in the period. In our licensing business we expect that revenues for the first quarter will be roughly flat as growth in our ongoing license businesses will be offset by the effect of internalizing our international jewelry and intimate businesses. We expect to achieve gross margin expansion over last year’s first quarter of about 250 basis points company-wide. This will be primarily driven by improvements in product margins.

So, to summarize, for the first quarter we are expecting that revenues will grow between 12% and 15% resulting in consolidated revenue between $495 million and $510 million. We expect first quarter operating margin to be around 12.5% and diluted earnings per share between $0.46 and $0.48. This would represent an EPS increase between 31% and 37%.

So, with that I’d like to open the call for your questions. Operator?

Question-and-answer session

Operator

I think we are ready to open up your lines for questions. We request that everyone limit themselves to just one question so that we can accommodate as many people as possible. If time permits we will be happy to take follow up questions. If you’d like to ask a question please press “*1” on your telephone. If you’d like to withdraw your question please press “*2”, again “*1” to begin. Your first question comes from the line of Jeff Klinefelter with Piper Jaffray. Please proceed.

Jeff Klinefelter – Piper Jaffray

Yes thank you very much. Congratulations everyone on a terrific year. So, a couple of questions, one is on Europe. It sounds like the trends are going very well there and appreciating that a lot of that growth is going to come from outside of Italy and also with retail specifically on stores, with respect to the growth of just wholesale, ex-the new retail doors, what sort of trend are you looking for overall and that would be concentrated I’d imagine in those foreign markets outside of Italy?

Carlos Alberini

Yes Jeff, this is Carlos. Yes you are absolutely right. We are looking for growth in local currency for the wholesale business. However, because of the currency headwinds that we are expecting this could prove to be conservative. But because of that, that would be offsetting the growth that we are expecting. So, in dollars we expect this business to be roughly in line with last year’s quarter.

Jeff Klinefelter – Piper Jaffray

And that’s just for wholesale and then your retail will be really all of your net growth?

Carlos Alberini

In our business the growth is going to be in similar proportions between the retail business of the new stores that we are opening this year plus what the stores that we opened last year that will annualize this year and the other side of that is the new businesses, primarily the jewelry business but also the intimate business International.

Jeff Klinefelter – Piper Jaffray

Okay and just one other thing, your margins were very strong this year, very impressive management of those margins. A lot of that, can you share with us, where it is coming from? Are you getting sourcing benefits from your internal sourcing initiatives or is that coming from mark down management or what combination?

Carlos Alberini

A lot of it is due to sourcing improvement. We have made great progress last year with IMU improvements and we were able to deliver that and maintain or improve the quality of products that we offered to the customer. But in addition to that we did a much better job with markdown management. Obviously the fourth quarter was probably the biggest opportunity that we saw, as to the fourth quarter of the year before it was very difficult in terms of promotional activity. But we planned the business very strategically like wholesale and I think it worked out very well. So, we are being very careful the way we are promoting. We have taken advantage of high traffic periods and being very strategic with the use of our customer loyalty program.

Jeff Klinefelter – Piper Jaffray

Great, thank you.

Carlos Alberini

Thank you, Jeff.

Operator

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

Omar Saad – Credit Suisse

Thanks great year guys, congratulations.

Carlos Alberini

Thank you.

Omar Saad – Credit Suisse

On the SG&A line given the growth that you experienced in the quarter, given the kind of guidance for really solid 8%, 10% top line, obviously you are investing in the business just great it was to see, then how should we think about operating leverage in the model? How do you think, given the operating leverage in the model, is this a year where you wont see that and maybe down the road you will build the leverage on some of those fixed costs more or do you think if the comps are going to stay high like this you could generate some operating leverage? How do you think about your SG&A allocation in that context?

Carlos Alberini

Yeah we are seeing this year the year of investments to continue to position the company for further growth because we see a lot of opportunity for that and so when you look at how the operating margins could work this year, we are looking at a slightly improved gross margin throughout the company. We are seeing some opportunities especially in the front end of the year. But that improvement will be offset by SG&A rate increases that are primarily based on building a stronger team. Across the board we have some big initiatives like the building of retail organization in Europe to support the kind of profit growth that we are seeing in these stores but also in our newer brands here in North America and also we are planning to reinvest in marketing going back to historical levels of spending, so, all that is embedded in that. We think that there is tremendous opportunity for leverage on the operating margin line as we continue to grow. But we are not turning the year in that way right now.

Omar Saad – Credit Suisse

Okay great and then a quick question on China. Can you update us on your strategy there, where the business stands? Where you think it is going? What is the right way to approach it? How big is it? Whatever you can share with us would be great.

Paul Marciano

Yes this is Paul hi. Definitely the efforts you have seen happening from organization through Europe for the last three years has brought some good results. And now we plan to do basically the same efforts in Asia. We have a presence in South East Asia already for 20 years. We have close to 85 stores there in South East Asia but the greater China, Hong Kong, Macau, Taiwan and all that we are now really pushing that region now. So, whatever support structure organization that we need from each division we plan to repeat that in Asia. And definitely clearly we see the result of South Korea where we have a super strong team, very effective and the results are way, way above what we expected. So, there is no reason that we cannot do the same with China but I think the territory is so vast, the language barrier is a major obstacle. And that’s why we are now focusing to build a team absolutely in the top priority at every level, in the retail field to the support, to construction, to every level. And in the next I’d say the next three to five years we plan to have at least 150 to 100 at least in that region.

Omar Saad – Credit Suisse

Great, thank you.

Carlos Alberini

Thank you, Omar.

Operator

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

Christine Chen – Needham & Co

Thank you and congratulations on yet another great year. Wondering if you could comment a little bit about the product categories that have been working for you so far in February and maybe in March and then I guess as you look ahead towards the second half of the year, what were some of the missed opportunities in the fall and holiday of calendar ''09? Thank you.

Carlos Alberini

Yeah sure, what did very well was shoes. We had a great fourth quarter in knit pants, leggings, of course was a big category this season. Premium basic denim was a great success. Sweaters, woven tops did very well in the women’s world. In accessories we had good success across the board. Some of the categories were up against very big numbers from a year ago but still comped well. Leather jackets we had many areas of the stores that did very well but again we fought very strategically in the fourth quarter. We had less success with some areas in fashion denim for example in some of our stores. Men’s in general was a tough category overall and knit tops and skilts, those were the categories that had some very tough challenges. We see tremendous opportunities for the year. One of the big ones is, our big opportunity is related to the fact that like last year we were very, very thin in the inventories. So, we have been able to go into those carry through. We saw big opportunity in investing in inventory. The denim continues to be our world like Paul said we are improving and investing in the position in denim. We see big potential with power skis, barriers, watches. Men’s is now improving significantly. So, we see a big opportunity in Men’s across the board. We just introduced premium basic there and then in alternative classification within denim. We are also working with a much more balanced assortment and adding more of dressy categories in the women’s world. And that is working very well already early in the season and again continuous improvement in accessories.

Christine Chen - Needham & Company

And then, with respect to Marciano, since the conversion, you have made product adjustments there and I think you called out that it is actually doing rather well. When do you plan on accelerating square footage growth there?

Carlos Alberini

Yes we are still refining the model. We are very pleased. Actually the great thing about the story is in addition to the comp increase, which has been pretty remarkable we are seeing a significant margin improvement for the business. So, the profitability of the model has improved dramatically. But we are giving our sales this year to really refine that model, increase its productivity and then consider resuming growth for the concept. We are opening a couple of stores in Canada, where the concept has done extremely well. But before we resume growth in the U.S we want to give ourselves this year.

Christine Chen – Needham & Co

Thank you very much and good luck.

Carlos Alberini

Thank you.

Operator

Your next question comes from the line of Randal Konik with Jeffries. Please proceed.

Randal Konik - Jefferies & Company

Yes, thanks a lot. Carlos, you talked about the operating margin kind of guidance or expectations for 2010. How do you think about the long run sustainability of the margin structure looking out a couple of years, especially given the change in geographic mix in the channels by distribution mix? And then just the other question would be are you seeing any differences, any trend changes, on the fashion side that we should be looking for on the US versus Europe, any changes there? And then finally, just curious about wholesale ordering patterns across your US business versus your European wholesale customers. Are you seeing any one group order more aggressively than others in the past indicating we''re seeing more stabilization in the market? Again, you touched on North America or US getting more stable, just those three questions, thanks.

Carlos Alberini

All right with respect to the operating margin as I mentioned before, we see big opportunity for margin expansion over the medium term. Part of that would be as we continue to grow some of the regions like Europe which carries much higher operating margins and that becomes a larger part of the mix. Of course that’s going to result in margin expansion over time. We also see big opportunity in retail. Currently in every five points of comp would result in one full point of operating margin expansion for our retail segment. So, the second is very sensitive to store productivity and we think that we can improve significantly there. And then Asia, the only big business that we have like Paul said is South Korea but we are carrying a pretty healthy double digit operating margin there and we think we don’t see any structural issues with that over time. There are regions within Asia that could carry similar type of operating margins. So, overall when you have a newer brands we have been losing more money, very small money, but as we turn those businesses around and we think that we are on our way to accomplishing that, that would be very significant as they add to our operating margin.

Your second question was about fashion, and I think that what we are seeing is that a lot of the styling that we are using in part of our global lines are very, very consistent and very strong image of the brand and strong representation of the brand. So, we see that the demand is becoming very consistent across the world and we are pleased with that type of result, because that’s exactly what we see going with the global line.

And with respect to the wholesale business our wholesale appetite here in North America has been modest. But we just had a major strategic meeting with our main partners in that business and it is very successful. We have great relationships and we see that we may start seeing some growth in the near future there.

With respect to wholesale in Europe the business is much more fragmented and depending on the territory the story maybe a little different. Italy has been under some pressure but many of the other markets are growing like Paul mentioned.

Randal Konik - Jefferies & Company

Thanks.

Operator

Your next question comes from the line of Jeff Black with Barclays Capital. Please proceed.

Jeff Black - Barclays Capital

Thanks. I will add my congratulations. On the investing side, can we just drill down a little bit more on the CapEx? Are we to understand that it is mostly retail and mostly corporate expenses? Are there other aspects to this in terms of technology or more investment in the newer businesses that we should understand and know about? And then on the Europe side of the equation, what gives us confidence? The last time we talked London was doing a lot better. Have France and Spain given you indications that they can, indeed, sustain a lot more store growth, and if so what are those indications? Thanks.

Dennis Secor

This is Dennis. In terms of the CapEx for next year, the vast majority of those investments are going to be in retail expansion. We pulled back this year because of the crisis but we think this is the time to reenergize that growth. So, about three quarters of that is going to go into expanding new retail both here in North America as well as in Europe and the rest of it is going to be in some infrastructure and as well as making some investments in growth in Asia. As Paul alluded to I think a substantial priority for us.

Paul Marciano

And to answer the question about the business in France and U.K I think you mentioned in Spain, definitely these are the countries where we have said repeatedly consistently that we are going to focus and the results are coming in stronger and stronger. When positive comps in the last few months and all these countries and we expect to expand much more stores in these countries. France could be as big a business as we have in Italy which is representing half of the business of total Europe. So, this is kind of the goal and hope we have in Europe. Spain we should reach 25 stores on our own or with some franchisees and we are also doing some joint ventures like now in Canary Islands, and we just started operating with partners in Portugal. So, we are very active all over Europe and I think I want to go back to what I mentioned before. We are not really a denim company. We are a lifestyle brand company and that’s what I think has been a real surprise and success in Europe by the consumer acceptance of the product because we cover basically everything and very strong, very successful products on each category, into watches, into handbags and into eye wear now is absolutely growing so fast and also the handbag. I think I mentioned that. So, is the footwear. So, I think this is what has been, it is not usual in Europe to find a total concept with a brand. You have specialized people who do just denim or you have people who do all other things but complete lifestyle you don’t have as many. And that’s what I think we are trying to capitalize on that as strong and as fast as we can.

Jeff Black - Barclays Capital

Great good luck, thanks.

Paul Marciano

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, congratulations. Could you talk a little bit about the changes you have done at G by GUESS that gives you the confidence after a few years of not really ramping up that you can really ramp up this concept? And what should we think about in terms of longer term growth for this concept if it works? Can this also be a European concept too?

Carlos Alberini

Eric there has been a lot that has been done to improve the concept. And I think as you know all the changes have been very effective, from product assortment. It is probably one of the biggest ones. We believe that the store design is very appealing and very attractive and we are very excited about that and so are the landlords because we bring a concept that is very unique in the marketplace today. We believe that there is still more to do and that we have been strengthening the team to be able to accomplish more improvements on the product side. We think that the concept has a lot of potential. We have been limiting our presence to certain markets where we think that there is a tremendous position for the concept and where we believe it gives us an opportunity to cluster some of the stores. So we are targeting some areas using that criterion. Long-term we see more than 100 store opportunities eventually but we have a lot to do in the U.S before we even start thinking about other places of the world. So, time will tell.

Eric Beder - Brean Murray, Carret & Co

I''m sorry. Did you say 32 or 52 stores in the US this year?

Carlos Alberini

52 stores in the U.S, not in the U.S, North America, this year. Five two.

Eric Beder - Brean Murray, Carret & Co

That includes Canada, I assume?

Carlos Alberini

Right, right, that is primarily U.S and Canada.

Eric Beder - Brean Murray, Carret & Co

Okay. Thank you.

Operator

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

David Glick - Buckingham Research Group

Good afternoon. Add my congratulations, just a couple of quick questions. I was wondering if you could give us some insight into what is happening in your most mature market, Italy, in terms of comp store sales trends, your wholesale business trends, order book. Just give us a flavor of the fourth quarter and year-to-date in how the business looks to you in 2010. And then secondly, just give us a little more specifics on what drove your increase in licensing. We were obviously expecting a decrease versus the nice increase after having taken back jewelry. So if you could give us a few more details there, thank you.

Carlos Alberini

Yes with respect to Italy, Italy has been soft for us. So, same stores sales for fiscal 2010 were down in the mid single digit range. Now we did experience lot of that drop early in the year. Our fourth quarter was a positive comp. So, we were very pleased with that and our trends are kind of consistent with that since then. The wholesale business was also soft in Italy and we think that we should expect a flat business in wholesale this year as well. We are planning comps up though. We have a lot new stores that will be annualizing too within Q2. There is a lot of opportunity to do better and so planning and allocation in those stores, so we are going after that and that’s part of the improvement in the infrastructure that we are building.

With respect to licensing we were very pleased with our performance. Many of the categories did extremely well. Handbags did exceptionally well. We had a great quarter in watches. Footwear also had a great quarter so because of these categories did much better than what we had anticipated even the loss of jewelry was more than offset with that growth.

David Glick - Buckingham Research Group

Thank you for the color, just one quick follow up on the Q1 gross margin. Based on the strength in Q4, what would have to happen to put up that kind of gross margin in Q1? Because it looks like you had a pretty significant drop last year in Q1 as you did in Q4. Is that just being a little bit conservative? It sounds like you have momentum in your business.

Carlos Alberini

Not really. I think that our 250 basis points is a very realistic goal. Remember that last year yes in the fourth quarter we dropped I think it was like 510 basis points but we had a lot of excess inventory which we liquidated during the fourth quarter. So, obviously that took a huge toll on our profitability in that period. I think going into the first quarter we were very clean and we have planned purchases very lean. So, we did not have the impact of the liquidation sale. So, the gap now is not as significant as it was for the fourth quarter.

David Glick - Buckingham Research Group

Okay great. Thank you very much and good luck.

Operator

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

Todd Slater - Lazard Capital Markets

Thanks, and great quarter, great year. I''m wondering what your base case assumption is for comps beyond Q1 in North America and International. If you can give us a sense of what you are thinking.

Carlos Alberini

We are planning the business. Obviously we had a good fourth quarter in North America with comps in excess of 5%. And that was the first quarter that we started annualizing the impact of the crisis. So, the opportunities we see them to be more significant in the first three quarters of the year in terms of comp growth. But we are planning the business with a healthy comp growth going forward so, that doesn’t mean that we are planning on negative comp for the fourth quarter. And that type of thought and strategy is similar in Europe as well.

Todd Slater - Lazard Capital Markets

Got it and I just wanted to clarify on the EPS guidance. It is inclusive of the forex impact that you expect, $0.02, $0.05, $0.05, $0.12 a share of pressure just related to the forex on a 5% stronger dollar.

Dennis Secor

That’s exactly right. That’s including our assumption.

Todd Slater - Lazard Capital Markets

Perfect. Great, thanks and best of luck.

Dennis Secor

Thank you.

Operator

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

Margaret Whitfield - Sterne, Agee & Leach, Inc

Good afternoon and I add my congratulations. I wondered if you could comment on how the jewelry line launched and give us more color on the intimate apparel, also a question on your program to consolidate your vendor base and when that might positively impact the bottom line.

Paul Marciano

Hi Margaret, this is Paul. About the jewelry which we understand is everything in the world except U.S. We find we believe is coming for very strong results and because I just came back from Europe visiting quite a few countries and the result of this business is we did again above what we expected and we have not addressed Asia on that. We are starting to address Asia in jewelry. In fact this week is the Basel show of jewelry which is the most important show of jewelry in the world. And definitely we think that this is just the beginning of a great division. It could be as important as maybe the eyewear or maybe even close to the footwear because it is a very vast field there. That’s for that.

Margaret Whitfield - Sterne, Agee & Leach, Inc

What kind of prices are we talking about, Paul?

Paul Marciano

I can tell you. I can tell in Euro because if it is Euro we will not sell anything in Dollar. It is on the retail side it starts from I’d say 35 euros to 40 euros. And then after that, I’m talking just like a little girl’s ear ring and then it goes easily to 100, 150, 180 euros up to 250 euros. So maximum so we can see what the average prices are.

Margaret Whitfield - Sterne, Agee & Leach, Inc

So you will be in Asia this year, or next year?

Paul Marciano

We are already for our stores we have not advanced the big business of the department stores and we have to address through our stores. We have to address departmental stores business…we just hired some regional, commercial directors and we are going to focus on wholesale business. The intimates stores we started in Korea just a year ago in Najul (ph) and we plan to expand that program in all the countries close to where it generated which is Seoul and that should go now in different channels from Taiwan to greater China and other places. And as you know we internationalized the leisure suit from Europe which was licensed for seven years, eight years I think and now we do that in generally through our office in Guess Europe in Lugarno. So, we just started and that’s a small business. The competition there is massive in Europe but again we don’t intend to compete with all the major brands of the major yield special items. But we have the brand. We have the place where customers come and shop a lifestyle. And we plan to take advantage of that as a bundled niche. So also the luxury will extend to swimwear men and women and it is a nice business but we don’t expect miracles on that business in Europe. It will be much larger in Asia.

Carlos Alberini

And Margaret, your next question was about sourcing and the vendor base and we have already successfully contracted our vendor base by about 40%. We have been experiencing some improvements in that space that are related to that type of contraction. Last year I think we had an 80 basis point improvement in our newer company work and this was the primary reason that help came from that vendor consolidation. But we are doing many other things including strengthening our team and our operation in Asia with our Guess day celebration and we feel that there is more to come. One of the challenges now is that prices of the raw materials are going up and we do anticipate that, that is going to have an impact on our gross costs.

Margaret Whitfield - Sterne, Agee & Leach, Inc

Will you be able to price your products to offset?

Carlos Alberini

We have been able to deliver more quality, better watches, better treatment, better products and still hold the line on pricing. We are going to protect the business but we do believe that there are other ways to get there in terms of engineering the products better, trying to be closer to the market when we do develop products and being more efficient internally.

Margaret Whitfield - Sterne, Agee & Leach, Inc

Okay. Thank you.

Paul Marciano

Thank you, Margaret.

Operator

As a reminder, ladies and gentlemen to ask a question press “*1” on your telephone. You have a question from the line of Janet Kloppenburg with JJK Research. Please proceed.

Janet Kloppenburg - JJK Research

Hi, everybody and congratulations. I had a couple of questions. Just to clarify on Italy, Carlos. Are you expecting the Italian wholesale business to be down all year? Or is there some opportunity for that to improve as the year unfolds?

Maurice Marciano

This is Maurice. What we have to understand is that in Europe the market is much earlier than here and so for the beginning of the year we have the wholesale which is going to be a little bit softer like flat or a little bit soft just for the beginning of the year. If you took the order in June, when you remember June was not a great environment but we are experienced now for the line coming for fall of next year, this year sorry. We have seen a great improvement okay of the orders and a good increase of the orders. So, we expect the end of the year to be strong.

Janet Kloppenburg - JJK Research

And that''s particularly for the Italian market.

Maurice Marciano

Yes I am talking of the Italian market. That’s the most developed market for us.

Janet Kloppenburg - JJK Research

Okay fabulous and then another question I had was if you could just talk about your rate of square footage expansion expected for fiscal ''10 and roughly what it was for fiscal ''09 please and maybe your thoughts about square footage expansion going forward, if it will stay about the same level as ''10 or could you see it moving higher.

Carlos Alberini

Okay it is difficult to hear you well Janet but I think what I understood is you’d like to know about the square footage expansion that we are expecting for this year. That number for North America is about 4% of our square footage base. That’s primarily the 52 stores that I was talking about that we are opening this year, concerning on an average when those stores open. The vast majority they will open beginning second quarter and a few of them towards the end of the year.

Janet Kloppenburg - JJK Research

So what about Europe?

Carlos Alberini

In Europe the square footage expansion is very significant because we are starting with a very low base. We are talking about adding in excess of 50 stores internally. These are the ones we own and that starting with a base of 85 stores. So, obviously the square footage expansion there is as a percentage is a very sizeable number. But still the number of stores is a very manageable number.

Paul Marciano

If you look at just what we call region 2 which is Europe and Italy we plan to open close to 85 stores but Janet bear in mind that our stores in U.S average size is about 3500 square feet. In Europe average size is among all concepts combined would be around 1600 square feet.

Janet Kloppenburg - JJK Research

Okay, but do you think that expansion in the US can move higher in fiscal ''11 or will it stay around this level?

Carlos Alberini

Okay fiscal 11 is the current year for us.

Janet Kloppenburg - JJK Research

Fiscal ''12, I am sorry.

Carlos Alberini

Of course when you look at 52 stores it is not really a big number considering the opportunities that we see across all concepts but yes that number could grow eventually.

Janet Kloppenburg - JJK Research

Okay and then my last question is on G by GUESS. If you could talk about the rates of return you are seeing in that business, if it''s productivity is where you would like it to be, and if it''s making a contribution, if you expect it to make a contribution or is it hurting earnings in this year, and what the prospects are going forward.

Carlos Alberini

Okay so last year G by Guess was not a contributor to earnings. We are making money in the four wall and we do see profitability in the very near term. That being said, are we completely satisfied with the productivity that we are seeing? No, we see tremendous opportunities to continue to improve productivity. We are seeing positive comps now for several months and we see more opportunity to grow for further growth, and that was on top of positive comp a year ago for the comp.

Janet Kloppenburg - JJK Research

In other words, on a fully allocated basis, G by GUESS could make money this year.

Paul Marciano

Yes. This is a possibility and we pray for it.

Janet Kloppenburg - JJK Research

Okay, I do too. Congratulations. I will talk to you later.

Operator

Your next question comes from the line of Susan Sansbury with Miller & Tabak. Please proceed.

Susan Sansbury - Miller Tabak

Thanks very much, just a clarification on Italy, the outlook, the weakness that developed last year and the outlook for Italy. Then I have one other.

Paul Marciano

What was the question?

Susan Sansbury - Miller Tabak

Janet was asking some questions about Italy and was it a function of weakness in wholesale. My question is was it a function of weakness in the macro environment. Is it a function of increased competition in Europe? Or was it just your own execution? I shouldn''t say -- you had a fabulous year -- but was it a fault of your own execution?

Carlos Alberini

We believe that the business last year was impacted like in every part of the world and obviously with the crisis that everybody is seeing. So definitely that impacted Italy as it impacted many other regions. We believe that the country and the businesses are still very healthy there. Our margins did not suffer and it could be that the way we are looking at the business is conservative. Time will tell. We have a very strong team that really runs the whole Italian market and we are making significant changes to be even stronger especially on the denim side which is one that offers the development opportunity. But this is not…also remember what we said earlier. We are expecting our wholesale business in Europe to be up in local currency and the only reason why we are giving you guidance for flat revenue in Europe is because of currency headwinds that we are not really anticipating but are planning with.

Susan Sansbury - Miller Tabak

Okay. That helps. And on the marketing spend, could you help me understand how much you are going to increase marketing spend. When you say you are going to go back to historical levels, is there a way to indicate what those historical levels were, the percent of sales, or can you talk about the dollar?

Carlos Alberini

We do not disclose such type of number or strategy.

Susan Sansbury - Miller Tabak

Okay, but you are significantly -- is significant the right adjective to use in terms of your marketing spend?

Carlos Alberini

No I wouldn’t call it significant. I mean obviously marketing is an important part of our structure and it is important for brand awareness but actually I think if you look at the amount of money that we spend in marketing we are considering the strength of our brand and the size of our brand, and the reach globally, I think that we are probably among the lowest in the industry.

Susan Sansbury - Miller Tabak

Okay, okay well best of luck. You have done a fabulous job so far and I look forward to great results in the current year. Thank you so much.

Operator

We have a question from the line of Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey - Telsey Advisory Group

Good afternoon and congratulations. As you think about real estate and expansion of real estate, what is happening with real estate costs, either lease renewal costs, renegotiations in outlets versus regular malls? And what are you seeing for productivity. And how does GGP and what''s happening there impact you? Thank you.

Carlos Alberini

Well with respect to real estate overall what we are seeing is a big opportunity. There aren’t that many companies that are credited as we are with a great concept and a lot of flexibility and with an appetite to grow. So, we see a lot of opportunity for us to really find great real estate. We have great relationships with landlords and I think we have to hold that. In terms of the cost as you know up until pre crisis times the real estate costs were increasing at an accelerated pace and it was kind of very difficult to renew without having a significant impact on the total cost, whether you had the location or where you wanted to go into one, especially on the top level malls. That being said I think as you know top level malls continue to be expensive but not at the rate that we were seeing in those days. So, we are pleased with that and we have been able to secure a lot of locations for accessory stores for example and we are pleased with what we are doing there. The model is highly profitable considering the current rent structure and the proceeds that we can achieve.

And then looking at the concept of G by Guess for example, is very attractive, because those landlords really love that concept. So, they are accommodating us in a great way. We are getting great locations. But with stores where we continue to do very well and we are opening a few stores this year as well. And again the returns are very good.

Paul Marciano

And to complete that Dana, this is Paul. When you look at the real estate in Europe it is a completely different structure. As you know it is an issue of key money locations, street locations, and so it is a much higher cost but it is something that pays as you own these key money locations on key streets. If it is Milan, Barcelona, Paris, London, I mean definitely you have that asset there. That’s why you CapEx is growing much stronger this year because we are planning to open number of stores in Europe and bear the cost of it.

Dana Telsey - Telsey Advisory Group

Thank you.

Paul Marciano

Thank you.

Operator

At this time there are no further questions. I’ll turn the call back to Paul Marciano for closing remarks.

Paul Marciano

Thank you and just I want to mention a quick word just to say that Maurice and I we want to thank our team and associates and all managers and partners we have around the world about lots of great deal we have accomplished together which capacity was not that obvious. In fact at this time last year was pretty scaring for everybody and nobody knew where this abyss will finish. So, everybody stayed calm in our organization, in our team and our partners and I want to thank them because it was an incredible experience good and bad. And that’s what was key, the trust and loyalty that we have to each other and I want to thank everybody for that. It was an amazing moment. Thank you very much and we will talk to you in two months which is I think May 27th for the Q1. Okay. Thank you very much.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. All parties may now disconnect. Enjoy your day.