Paul Marciano - Co-Founder, Vice Chairman and Chief Executive Officer Sandeep Reddy - Chief Financial Officer Russell Bowers.

Betty Y. Chen - Wedbush Securities Inc., Research Division Erinn E. Murphy - Piper Jaffray Companies, Research Division Dana Lauren Telsey - Telsey Advisory Group LLC Janet Kloppenburg Eric M. Beder - Brean Capital LLC, Research Division Jeff Black - Avondale Partners, LLC, Research Division John D.

Kernan - Cowen and Company, LLC, Research Division Marcelo Choi Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division David J. Glick - The Buckingham Research Group Incorporated.

Good day, everyone, and welcome to the Guess? Second Quarter Fiscal 2014 Earnings Conference Call. On the call are Paul Marciano, Chief Executive Officer; Sandeep Reddy, Chief Financial Officer; and Russell Bowers, Chief Financial Officer of North American Retail.

During today's call, the company will be making forward-looking statements, including comments regarding future plans and financial outlook. The company's actual results may differ materially from current expectations based on risk factors included in the company's quarterly and annual reports filed with the SEC.

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

Thank you. Good afternoon, and thank you for joining us today. We are very pleased with our second quarter performance as we delivered adjusted earnings per share of $0.52, which exceeded our earning expectation. All the business segment contributed to our outperformance, with every business delivering earnings above what we had anticipated.

This performance was encouraging considering that we continue to face challenging environment in all part of the world. Our biggest priority this year has been to improve sales trend in North American Retail. We are encouraged with our accomplishment over the past 3 months. We saw a sharp improvement in the comp trend compared to the first quarter.

Our comp sales were down 2% compared to minus 10% in Q1. Two of our big focuses were expense and inventory management. We managed both well and delivered significant operating margin improvement. We increased our adjusted operating profit by 17% against a top line expansion of only 1%.

Overall, adjusted operating margin of 10.5% was 150 basis points above last year and 250 basis points better than our expectations. Discipline and commitment for the bottom line was the drivers in this environment.

Before I get into the business performance, I would like to take this opportunity to welcome Mike Relich as our new Chief Operating Officer and Sandeep Reddy, as our Corporate CFO. Mike has over 30 years of retail experience and has been with us for almost 10 years as a Chief Information Officer.

He has been a key executive figure in the tremendous growth of our Guess? since 2004, implementing system solutions across the globe to support our gross from a $640 million business when he joined to $2.6 billion global business today.

He has an intimate understanding of our operation, great leadership skill, has been many close relation inside and outside the company and will lead all key supply chain, omni-channel, process improvements and strategic synergies between all the regions of the world.

Mike will have a great partner in Sandeep who has led the GUESS Europe finance team as Europe CFO for the last 3 years, and bring with him deep European and North American business and finance experience. North America. Now on the -- now we're going to talk about the business updates, starting with North American Retail.

As I mentioned earlier, we are pleased with the improvement our comp sales results during the first quarter. Traffic trends still challenging, improved significantly in the second quarter. The retail environment to be very promotional, and we responded to remain competitive and ensure a clean inventory position heading into the Fall.

So far, we have seen above -- about one month of selling to our Fall product. Denim is performing very well, and the customers responded positively to our 3- [ph] priced denim.

As we're also seeing with dresses and men's, the customer is clearly responding to product category, in which we are making a strong statement with our windows ad campaign and visual. Our growth for the second half of this year is beyond it and to better capitalize on these strengths with deeper, more confident buy and clear product message.

In Europe, despite continued challenging economic condition in Southern Europe, we delivered a strong quarter, increasing operating earnings by 60% to $39 million. We achieved this in good part with tight expense management.

In the second quarter, we continued to have great momentum in key new markets like Russia and Germany, and grew our business in these countries significantly. We're seeing positive response to our product in these under-penetrated markets, and this gives us confidence in the continued expansion in the coming years.

The growth for the new market was offset, however, by the continued weakness in Southern Europe, specifically Italy and France. Traffic continues to be down in the second quarter in these 2 countries as consumers remain conscious with their spending because of uncertain macroeconomic conditions.

Negative weather condition, but given [ph] also the start of the Summer, also impacted the quarter. We expect this difficult operating environment to continue for most of the year in Europe, which will also impact our Spring/Summer wholesale order to a degree. Regarding Asia, our revenue in the quarter remained almost flat to last year.

The Korean business continued to be strong as revenue grew in the high-single digits in local currency during the quarter. This was offset with the weakness from China where we are seeing clear evidence of a pullback in consumer spending behavior because of the slowdown in the economy.

During the quarter, we also took some steps to stabilize the business of our licensees partner in China, which will have some impact in the short term. These steps will affect the present approach we are taking with our partners to continue to build a strong foundation for the future of our brand in this important country.

One key area over the past year has been to build a strong omni-channel with our strategy to integrate our e-commerce business with our stores in U.S. and Canada as well as mobile and social media. The necessary system investments are in place today, and we are beginning to see the results.

In the second quarter, we saw another strong performance in e-comm North America, which grew 25% over last year. We began our in-store fulfillment of e-comm orders during the quarter and expect to be operational in half of all our U.S. retail stores and all the Marciano stores by the end of this year.

We believe that this initiative alone could increase our online business by 30% over time. In closing, I believe that we have made great progress to adapt ourselves to the ever-changing retail environment while staying true to who we are.

I'm also confident we have the right team to focus, adapt and execute our strategy to drive our growth in the coming years. I believe that the Guess? brand is as strong as ever as we remain true to who we are. Thank you, and with that, I will hand back to Sandeep to discuss our financial statements..

Thank you, Paul, and good afternoon, everyone. During this conference call, all of our analysis will be on an adjusted basis, which excludes the impact of restructuring charges incurred during the first and second quarters of fiscal 2014. You can find more details on these charges and reconciliation to our GAAP results in today's earnings release.

Moving on to the results. Second quarter net earnings increased 3% to $44 million, and diluted earnings per share was $0.52, up 6% compared to $0.49 per share in last year's second quarter. Second quarter revenues increased 1% to USD 639 million and declined 1% in constant currency.

Total company gross profit for the second quarter declined 1% to $249 million, and gross margin declined 70 basis points to 38.9%, although above our expectations. Occupancy deleverage and business mix were the main drivers of the margin change.

We leveraged our operating expenses, posting an SG&A rate of 28.4%, an improvement of 220 basis points over last year's second quarter. Overall, SG&A decreased 7% to $182 million. The lower rate was primarily driven by last year's second quarter bad debt provision related to our Greek distributor.

In addition, advertising and marketing spend was lower as we anniversary our 30th anniversary marketing campaign last year. Operating profit for the second quarter increased $10 million to $67 million, and operating margin expanded by 150 basis points to 10.5%.

As I previously mentioned, we recorded restructuring charges of $6 million in the quarter, primarily related to consolidation and streamlining of our European and Asian operations. These charges consisted mainly of severance and noncash asset write-offs related to exit of certain store locations that no longer align with our strategic priorities.

Our effective second quarter GAAP tax rate was 33% compared to 32% in the prior-year quarter. Now I'll review our segments, starting with North American Retail. In North American Retail, second quarter revenues increased 1% to $254 million, driven by a slight increase in square footage and solid performance in our e-commerce business.

This was offset by the 2% decline in local currency comp store sales in the U.S. and Canada. Gross margin declined in the quarter compared to a year ago, primarily due to more promotional activities. SG&A increased both in terms of dollar and rate as a result of deleveraging from negative comp store sales and impairment charges.

Operating earnings declined $6 million to $10 million, and operating margin decreased 250 basis points to 4.1%, although above our expectations. During the quarter, we opened 3 new stores and closed 7, ending the period with 507 stores in the U.S. and Canada.

In Europe, due to earlier-than-expected demand from our wholesale customers, we experienced a shift of approximately $8 million in sales from the third quarter into the second versus our expectations during the last conference call. In addition, we experienced a benefit on the timing of expenses versus expectations.

The favorable impact on earnings for the second quarter was about $0.05. Overall, second quarter revenues in Europe increased to $250 million, representing a 1% increase in U.S. dollars and a 3% decline in local currency.

Italy and France continued to be our most challenging markets, where shipments into the wholesale channel continue to decline, partially offset by growth in newer markets such as Germany and Russia. In addition, comp store sales were down in the mid-single digits but were more than offset by favorable currency conversion and new store openings.

SG&A expenses declined significantly, both in terms of dollar and rate, primarily due to last year's bad debt provision related to our Greek distributor, lower selling and merchandising cost and lower advertising and marketing spend. Operating earnings increased by $15 million to $39 million, and operating margin increased 570 basis points to 15.7%.

In Asia, revenues in the second quarter declined by 1% to USD 66 million and 4% in constant currency. Korea posted positive comps and increased top line in double-digits in U.S. dollars and high-single digits in local currency.

This was offset by weaker performance in Greater China, where we saw a decline in comp sales and overall revenue decline in the mid-teens. We took steps during the quarter to protect our licensee partners, which also contributed to the decline. Operating earnings increased 25% to $5 million, and operating margin increased 170 basis points to 7.7%.

Improvements in our SG&A rate in the quarter, mainly due to lower advertising and marketing expenses, drove the higher operating margin, partially offset by a decline in gross margin. In North America wholesale, second quarter revenues declined 1% to $41 million.

Operating earnings increased by 10% to $8 million, and operating margin increased 200 basis points to 20.5%. The increase in operating earnings is primarily driven by our strength in Mexico in our wholesale business where we continued the strong momentum from the first quarter.

Royalties generated from sales by our licensee partners were in line with our expectations at $27 million, flat compared to the last year's second quarter. Operating earnings increased 10% to $25 million. Now turning our attention to the balance sheet.

We ended the quarter with cash and short-term investments of $349 million compared to $282 million a year ago. This comparison includes the impact of a $22 million repurchase of our stock in the first quarter of this year and a special dividend of $102 million in the fourth quarter of last year.

Accounts receivable decreased 16% to $272 million and overall, DSOs improved compared to last year. European DSOs continue to remain relatively flat to last year despite the slow payments in Italy, which we continue to manage carefully. Inventories increased 5% to $400 million.

During the quarter, we were able to reduce the inventory growth from prior quarters as we worked through some excess inventory overhang from the first quarter. So now, Russ will give us an overview of our current business trends and provide our outlook for the third quarter fiscal 2014 and the full year..

Thank you, Sandeep, and good afternoon. As we look forward to the rest of the year, we have adjusted our full year guidance to incorporate some of the second quarter's cost savings as well as tempered expectations for Asia.

In North America Retail, so far in the third quarter, comp store sales have been down in the mid-single digits, and we are planning the third quarter assuming comps decline in the low- to mid-single digits. This would translate into a revenue decrease in the low-single digits.

For the full year, we are now expecting comp store sales to decrease in the low- to mid-single digits and for revenues to decrease in the low-single digits. So far in the third quarter, comp store sales in Europe have improved and are up in the mid-single digits, fueled by the sales period.

For the full third quarter, we expect the comps to decline in the low-single digits as we expect the second half of the quarter to be more challenging as we enter the full price selling period. For the year, we are now planning comp store sales to decrease in the mid-single digits.

In our Europe wholesale business, orders for the Fall/Winter campaign are down in the low-double digits, consistent with our prior expectations, and we are not planning for any material improvement for our Spring/Summer campaign.

Considering these factors, as well as the $8 million shift in wholesale sales that Sandeep discussed earlier, we expect total Europe third quarter revenues to decline in the mid-single digits in local currency. Assuming the euro remains at prevailing rates, this would result in flat revenues in Europe -- U.S. dollars.

For the full year, we continue to expect revenues to decline in the mid-single digits both in local currency and U.S. dollars. In Asia, we continue to be pleased with the momentum of our brand in South Korea, and we expect the revenue growth trend to continue in the second half.

We expect this to be offset by further weakness in Greater China as we move to stabilize that business and protect the health of our licensee partners there. In the short term, we expect that these actions, combined with softness in consumer spending, will result in a revenue decline in Greater China in the second half.

For the third quarter, we expect revenues for Asia to decline in the mid- to high-single digits. For the full year, we now expect revenues to decline in the low-single digits. In our North American Wholesale business, we expect revenues to decrease in the high-single digits for the third quarter and decline in the mid-single digits for the full year.

In our licensing business, for the third quarter, we expect royalties to be up in the mid-single digits. For the full year, we continue to expect royalties to grow in the low-single digits.

For both the third quarter and full year, we expect overall gross margins to decline as the expectations of negative comp store sales in North America and Europe and lower wholesale shipments in Europe continue to put pressure on our occupancy rate.

With respect to operating expenses, we expect a flat SG&A rate for the third quarter driven by expectations of lower overall expenses but offset by the impact of the negative comp store sales and lower wholesale shipments.

For the full year, we expect the SG&A rate to be slightly lower as some of our restructuring initiatives start to impact the cost structure and as we anniversary some onetime costs. We are planning the full year with a 33% tax rate, and our guidance assumes foreign currencies remain at prevailing rates.

Considering all of these factors, for the third quarter, we expect consolidated revenues in the range of $610 million to $620 million. We are planning an operating margin between 7.5% and 8% and for EPS in the range of $0.34 to $0.38 per share, excluding any restructuring charges.

These expectations would result in full year consolidated revenues between $2.56 billion and $2.59 billion, adjusted operating margin between 9% and 9.5% and adjusted EPS in the range of $1.78 to $1.92 per share, excluding any restructuring charges.

Including the $0.08 of restructuring charges incurred in the first 6 months of the year, we expect GAAP operating margin between 8.5% and 9% and GAAP EPS in the range of $1.70 to $1.84 per share. Lastly, in the second quarter, capital expenditures totaled $20 million.

For the full year, we plan to invest between $80 million and $90 million in capital, net of tenant allowances primarily for new stores and remodels. With that, I will conclude the company's remarks and open the call up to your questions.

[Operator Instructions] Operator?.

[Operator Instructions] Your first question comes from the line of Betty Chen with Wedbush Securities..

My question is regarding North America Retail, if I could. Certainly, very nice improvement versus Q1.

Could you give us a little bit more color? It sounds like some of the bias towards opening price points is resonating with that customer base on denim, dresses, et cetera? If you can tell us a little bit more about that, and if we should expect the penetration of opening price point items to continue into the back half.

And then also related to that, any sort of color by brand....

Okay. Betty, just to talk about why business got better in the quarter. I think that the big thing we did is we improved the assortment, we told a much clearer story within our stores and the inventory mix was focused on categories that were really trending well, such as denim and dresses.

And throughout the quarter, we kept our inventories clean, and we developed some targeted promotions that really paid off for us and brought people into our stores.

As far as the opening price points go, the changes we've made this month have been successful, and I say that especially with the denim, and I mean that on denim on the women's side, primarily. The customer really likes that product, and we've seen overall denim sales really trend better in August than it did in the second quarter..

Your next question comes from the line of Erinn Murphy with Piper Jaffray..

I have a two-part question for Paul and Sandeep really on Europe. I guess, Paul, from your perspective, it's good to see some of the recent improvement, as you commented, on the quarter-to-date trends.

Could you just maybe compare and contrast with how you're seeing the early reads for Spring thus far? I know for the back half, the low double-digit decline in wholesale bookings is back half-focused.

But just how should we think about just the overall environment as we get closer to that Spring/Summer? And then the second piece of kind of the European question, for Sandeep, much better operating margins in the quarter relative to just where we were last year.

Could you just help us think about how we should think about the margin structure over the next 2 to 3 years? I know when you were on the team there, you focused a lot on infrastructure. And then just kind of curious about where we think that, that business ultimately can return to..

Erinn, this is Sandeep. So I think I'll answer your first question on the Spring/Summer '14 reads on orders that are being taken right now. Where we are is the trends that we've seen on Fall/Winter '13 is -- declines in the low-double digits, which we communicated to you previously. And so far for Spring/Summer '14, the trends are consistent.

However, we aren't closed with the sales campaign yet. It closes at the end of September, and we'll have a better idea by the time we get to that point in time. And moving on to the next point on the operating margins for the quarter and looking-forward basis.

I would say that for the current quarter, we definitely benefited a lot from expenses that we were anniversary-ing from last year. The first among them was the bad debt charge on a Greek distributor. That was a $0.04 per share impact on our earnings last year, and we anniversary-ed that.

In addition, we benefited from the 30th anniversary marketing campaign, sales and marketing campaign from last year where we had significant investments in the quarter. As we roll forward, we really won't have these easy compares in the third and fourth quarters. So you shouldn't really expect to extrapolate from the second quarter.

And in terms of guidance further out into the next fiscal year, we're just looking into the current fiscal year at this time. So this is where I would stop in terms of indicating operating margins..

Okay. That's helpful.

Can I ask just a quick follow-up on the Spring/Summer book? Is that shaping up? The question specifically is, are you seeing the regional trends similar to what you saw in the Fall holiday book in that kind of your Italy, France worse than that double-digit decline, whereas the other regions that you've highlighted positively, Germany, maybe U.K.

and Russia, being positive? Or just help us kind of think about the regional performance as we think about that backlog..

Yes, it is very consistent with Spring/Summer -- with Fall/Winter '13..

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

Can you talk about -- on the improvement in the earnings, can you talk about the SG&A buckets and how you're thinking of marketing for the back half of the year? And also, on the European piece of the business, the impact of FX..

So from an SG&A perspective, I think I've touched on a couple of the big items, which actually impacted both the company as well as Europe. I think in Europe, we also benefited from selling and merchandising expense in the quarter.

I think looking forward, you would have some benefits from the -- on a full year basis from the fact that we have these easier compares. But overall, from an SG&A point of view, you've seen some benefits in the first half. We have some benefits expected in the second half as well, but not to the scale that we saw in the first half..

Your next question comes from the line of Janet Kloppenburg with JJK Research..

Russell, I wonder if you could talk a little bit about the current trend in North America. I know things improved in the second quarter, and it sounds like the jeans program and I think the effective marketing campaign are helping things out.

So I was just wondering why comps had worsened here in August? I think they were down 2 in the second, and now they're down mid-single digits, but sounds like jeans and dresses and men's are doing well. So maybe you could help us understand that. And it looks like you think the comps could improve as we go through the quarter.

So my guess is that comparisons ease, but maybe you could help us understand that. And Paul, I wanted to congratulate you on the advertising program, the marketing program.

I thought it was restoration back to the roots of the denim heritage of Guess?. And I was just wondering if you thought that advertising and marketing expense would continue to decline, or given the success of that program, whether that we may see that tick higher as we go through the rest of the year..

If I can just answer you that [ph], Janet, and then after that, Russ will cover. For the advertising campaign and marketing, I would say that we have been doing a very close tight relationship between advertising, marketing and e-comm much better than ever.

And this seems to have worked very well because we received so much positive comments around the country and around the world of what the [indiscernible] has been everywhere. So we plan to continue to do that definitely. I'm shooting now in 10 days a new campaign for -- it's going to be Spring 2014.

And it would be in the same vein of never forget your roots. That's the theme. So this is what we have in mind, and if you'll visit our windows in our stores, if you visit the merchandising inside the store, if you look at the website, if you look at the social media, Facebook, all that, you will see the consistency across-the-board.

And if you go in Europe, it's the same; if you go in Asia, it's the same. That -- but it takes time to do all that, and that's where we are now..

So Janet, in regards to the August comps, they have slowed somewhat compared to where we were in the second quarter, and really the big issue is traffic. Our traffic is softer than what it was. And what we're seeing is we're just seeing the customer tend to wait later and later every year as far as August.

We've really seen that the last few years, and it's really become more of a wear now customer. So we are expecting a little bit this business to shift to the back half of the quarter. And to your point, we do have some -- a little bit easier compares coming up in September than we do in August.

And we've also got some strong merchandising programs that we're going to be rolling out the next couple of months as well that should help business..

And if I could ask a question about China and Korea, it sounds like Korea is getting much better and maybe China is worsening.

I'm curious, are the merchandising assortments and the marketing programs the same or similar in both markets? And why would there be such a dispersion?.

Well, I think that's a very good question because we have exactly the same head merchant in that region, and he's based in Korea and travel extensively in China. But I think -- I just came back also from Asia just a few weeks ago. And Korea has taken back some confidence. Meanwhile, China, the general atmosphere has been a little bit hesitant.

We will [indiscernible]..

Your next question comes from the line of Eric Beder with Brean Capital..

In terms of this basics from -- we talked about the denim, I'm curious how the T-shirts are doing.

And what's the next iteration of this for holiday? And just remind us, wasn't there another 30th anniversary ad campaign in the back half of the year that you anniversary? And do you plan on -- does that offer some upside to it also?.

Yes, so in your question regards to the tops, the tops business has been our most difficult category all year long. So we really have some work to do, as well as some opportunity to drive better business with that category going forward.

And our big thing is to really get away from a lot of the commodity tops and to really field the core fashion items that are going to be a lot more feminine, a lot more body conscious than what we've had on the floor for the first half of this year..

And in terms of the advertising campaign for the 30th anniversary, was there another one in the back half of the year?.

No, I don't know where you -- no, we do not [indiscernible] every 30 years..

No, we don't. No..

No. But what we -- I think, Eric, maybe we can talk about a little bit something we talk about apparel. We should talk 2 minutes about accessories. We have not talked about at all because it has been the driver for us over the last few quarters, and we have seen some, really, some turn on there. Handbags have been encouraging now.

We are not in a negative comp anymore. The watches also have been flat for the quarter. The shoes, Q2 has been challenging. But August, the current month, which is almost over, this month has been much better. So we see the accessory playing now, finally, a better role than it has been on the last 4, 5, 6 quarters, past 6 quarters.

So we are pretty happy about that..

Your next question comes from the line of Jeff Black with Avondale Partners..

Can you remind us just in the next -- in the second half what that performance was last year? I think those compares are fairly easy.

Could you also just delve in a little bit deeper on the merchandise margin in 2Q in North America? And how do we feel on the inventory side about any carryover that might be extending into 3Q? Or do we feel pretty good about where the inventory ended in the up 5%?.

So in regards to our comps, our comps were down in the mid-single digits the back half of last year, and there wasn't a big difference between Q3 and Q4. As far as our merchandising margin, we gave up about 160 basis points during the quarter, and that was from us doing some promotional activities to help bring a lot more traffic into our stores.

And we're really pleased with a lot of the results for that. It really helped. As far as the North American inventory piece, we're in pretty good shape. We ended the quarter flat per square foot compared to last year.

But if you adjust for that week [ph] shift, we would actually be down 3%, and we're -- and our stock position is really strong in some of the items that are really trending..

Just to follow on, on that specific point on inventory. If you look at us quarter-over-quarter compared to Q1, we've actually improved quite significantly from plus 12% to plus 5%. The big overhang last time was Europe where we were carrying a lot of excess inventory.

We've managed to burn through a lot of it during the course of the second quarter, and that accounts for the majority of the improvement, from 12% to 5% that you see in the second. There's more work to do. We're going to keep on working through to the end of the year, and we should see better results at the end of the year..

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

Wanted to go back to the SG&A question again. It looks like SG&A dollars were down about $12 million year-over-year in the first and second quarter, and I know you talked on the last call about a $25 million expense reduction plan. There could actually be more than that embedded in some of the back-office savings.

So how -- why would we -- it seems like your guidance assumes that SG&A dollars are flattish in the back half of the year, year-over-year.

How does that cost savings program that you articulated on the last call -- it seems to have some momentum in the, certainly, in the first half of this year -- how does that progress going into the back half of this year and into next year?.

Yes, this is Sandeep. So let me try to help out with that. So I think what we saw in the first half of the year was the sort of SG&A reduction of $25 million that you referred to between the first quarter and the second quarter. And then on a separate basis, we have some cost reduction plans that we talked about.

But most of the initiatives we would actually see the benefits coming through toward the end of Q4 and into the next fiscal year. So what I would say is from a back half of the year, our guidance assumes some reduction in SG&A, but not at the same scale that you saw in first half of the year..

Okay.

So then that cost reduction, that $25 million you talked about on the last call, that could actually be an annualized number that could be greater into the next fiscal year in terms of an SG&A dollar reduction?.

So let me clarify on that. So yes, we definitely do look to get some savings from that, but we also plan very much to invest in our growth opportunities, whether it be Russia, whether it be Germany, whether it be Brazil, Japan, all the new greenfield territory that we haven't been to.

We want to actually expand dramatically over there, and those investments will be funded by these savings..

Okay. Great. That's really helpful. And then one more follow-up, some encouraging comments you have on accessories. And certainly, your licensing business, which is heavily skewed towards those categories, has been improving in the first half of this year relative to where it was last year.

And that's in contrast to a lot of other accessories focused brands we've talked about. I think you've talked about it -- a more competitive and tougher environment.

What do you think is driving that? Is there any one specific category in general? Or -- and how can we expect that business to kind of trend in the back half of the year?.

Well, you have the different factors. For example, in handbags, the logo has been coming back very strong. The signature bags have been really a key volume driver.

We did some specific program, multiple program, we [indiscernible] for watches, and it was a success that was way beyond what we expected as far as the licensee or ourself as far as the retail stores. And now we've been pushing also the new sports type delivery for watches, and we expect that also to be big volume drivers.

So now for the shoes, we have like last year, was not -- the back-to-school was not a great year for boots. It seems like August have been giving us some good strong start, and we are hopeful that the dress also, dress shoes look to us have been coming back again Q3 of last year. This is the 3 big categories..

Your next question comes from the line of Jeff Van Sinderen with B. Riley & Co..

This is actually Marcelo Choi in for Jeff. Just had a couple of questions.

One, I know it's pretty early still, but have you seen any signs of cannibalization in terms of your higher-end denim given the lower price points that you've introduced?.

Yes, some of the business has moved from some of the higher categories. Last year, we started at $89 and $98. So some of that business last year that was at $98 has now moved to the opening price point. But because of that, we've also sold more units.

And as a result of it, we've seen our overall sales trends better since we've introduced the $79 denim than it was before, and then that's particular true on the women's side, less so for men. Yes, our men actually tend -- seems to be a little less price-sensitive..

Okay. Great. And just one more follow-up question, you mentioned about merchandise margins declining about 160 basis points in Q2 given the promotional activity.

Do you expect a similar promotional activity for Q3? And how should we look at merchandise margins?.

Yes, so far in August, our product margin is almost flat. But I think if you look at it for the whole quarter, we probably will give up a little bit product margin to last year, probably not as much as what you saw in the second quarter, but we'll have to see how the quarter trends out.

And for holiday, we haven't yet finalized everything we're going to do. We're testing a lot of ideas in the next month or so..

[Operator Instructions] Your next question comes from the line of Dorothy Lakner with Topeka Capital Markets..

I wondered if -- just going back to tops for a second, you'd mentioned that that's been a weak category for a good part of the year and certainly, you're not alone in that. I just wondered if there were things that you were doing in the second half of the year that might help improve that.

And then secondly, just thoughts on G by GUESS and how things are going there. And also, just wanted to comment the -- you've been doing some great events. Not only is the advertising looking really good, but some of the events you've been doing in the stores have been great. I was at the event on Fifth Avenue, and it drew a really nice crowd there.

So congrats on all of that as well..

Okay. Dorothy, this is Russ. In regards to the tops, we are certainly making a lot of changes to get business better. As I mentioned earlier, we want to get to more fashion product, more product that's really developed with the Guess? customer in mind.

And we're developing some programs that fit that mold that we can really put on the table and exploit for holiday. That being said, we think it is going to take a little bit of time to get that business exactly where we want it. And for G by GUESS, G by GUESS had a really strong quarter.

The comps were up in G by GUESS, and we also had product margins up in G by GUESS during the second quarter. We did a really, really good job of converting the customers that came into our stores. As you know, the men's business there is very, very solid, and we also saw some improvement with women's.

And denim product in G by GUESS was -- worked very well for both genders..

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

Just a follow-up question on marketing. I was wondering if you could quantify the marketing spend kind of year-over-year for Q2, how much less it was so we can help understand the overall difference in SG&A and the pieces.

And also, what is the level of spending now for FY '13? And what's the right rate of sales for marketing going forward?.

I'll just talk in the first part, which is the level of decline in spending in the second quarter. It's about $5 million was what we experienced because of the 30th anniversary campaign anniversary.

I think -- looking forward, I think we continue to invest in the brand, as we always have, to keep the right level of support right through the year consistent with previous years..

Yes, this is Paul. It's exactly that now we have a big portion of our marketing -- I mean, advertising growth in marketing, social media. There is a big balance about CRM [ph] loyal customers. So it's a very complex area.

But overall, I mean, as you can see, if you just go in the web or in our stores, you will understand these are dramatic, dramatic change of synergy and cohesion between all that. And this is where we get leverage, but sometimes, with less expense than before..

You have a follow-up question coming from the line of John Kernan with Cowen..

Russ, you talked about some of the merch margin progress.

Where is merch margin in North American Retail? How far is it below its prior peak? And how much do you think that you can get back over time as some of the markdowns are normalized and the product sell-through gets better?.

Yes, our peak was a couple of years ago, and we're off -- it's not a huge number. But we are off -- the idea is at that point in time, a lot of our AURs were to high, and that really lead to some traffic decline.

So what we're really trying to find is the optimal product margin for our business that's a balance between traffic and revenue and of course, overall profitability..

And if I can add something to that. I mean, for the last few quarters, in the last maybe 2 years, we continue to see overall in the market what we call aggressive promotion, heavy discount [indiscernible] and we continue to look at what is the new normal. Where's the new normal, we stabilize because it seems like all that become the new normal.

And this is where you have to adapt, you have to manage and figure out every single quarter what is coming up on the environment, not here or there but it's everywhere, globally. So this is where we continue to try to adapt, and we try to be on top of it..

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

Thank you. So thank you for all your attendance, and thank you to be with us again today. Of course, Q3 is very important to us. It's the back-to-school, and the most important Q4 the holiday will be the key factor how we're going to end the year. And we go back to work tomorrow to that and it end up to be customer, product, satisfaction and discipline.

So this is where we are. But above all, I hope that you see a big improvement in the brand integrity and the brand equity that we have built over the years. Thank you, and have a good evening. Thank you..

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day..