Victor Herrero - Chief Executive Officer Sandeep Reddy - Chief Financial Officer Michael Relich - Chief Operating Officer.

Erinn Murphy - Piper Jaffray & Co. Dana Telsey - Telsey Advisory Group Eric Beder - Wunderlich Securities Betty Chen - Mizuho Securities USA David Glick - Buckingham Research Group Dorothy Lakner - Topeka Capital Markets Janet Kloppenburg - JJK Research Richard Magnusen - B. Riley & Co. Bridget Weishaar - Morningstar.

Good day, everyone, and welcome to the Guess? Fourth Quarter Fiscal 2016 Earnings Conference Call. On the call are Victor Herrero, Chief Executive Officer; Michael Relich, Chief Operating Officer; and Sandeep Reddy, Chief Financial Officer.

During today’s call, the company will be making forward-looking statements, including comments regarding future plans, strategic initiatives, capital allocation, and short and long-term financial outlook.

The company’s actual results may differ materially from current expectations based on risk factors included in today’s press release and the company’s quarterly and annual reports filed with the SEC. Now, I would like to turn the call over to Victor Herrero..

approximately $300 million from the Americas, with a particular focus on e-commerce, factory stores and G by GUESS. We plan a net increase of 60 stores in the Americas over the three-year period; approximately $300 million from Europe, including our new joint venture in Russia.

We plan a net increase of 140 stores in Europe over the three-year period; and approximately $200 million from Asia where we expect to generate more than two-third of sales growth from Greater China. We plan a net increase of 200 stores in Asia over the three-year period.

As a result of this growth in revenues, again assuming currency remains constant, we expect operating margins to increase by 200 basis points to 7.5% over the three-year period. And we expect earnings per share to increase at a compound annual growth rate of 20%.

Capital allocation is the most fundamental responsibility of management, because cash has an opportunity cost, which is a value of the next best alternative. So unless capital is being allocated to the highest and best used, it is underperforming relative to its opportunity cost.

In order to drive this growth, we expect to allocate $250 million to $300 million for capital expenditures over the three-year timeframe. This is somewhat higher than our average historical CapEx commitment, but we fully expect that over the three-year period we will generate sufficient cash flow to finance our growth while sustaining our dividend.

Even though we have $445 million of cash on our balance sheet and virtually no debt, it is very important to me to be able to finance our growth from free cash flow.

Finally, as Sandeep gives you guidance for the first quarter of this year, please keep in mind that the next six months is a transition period for the implementation of our three-year plan, which will include one-time changes and other anomalies.

Do not interpret the guidance for the next two quarters as a deviation from our three-year plan, but rather as a transition period that will make our three-year plan possible. One last point before I turn it over to Sandeep.

As I truly believe in the potential of the Guess? brand, ever since I started working at Guess?, I have reinvested 100% of my dividends to purchase more stock in our company and I intend to continue doing so for the foreseeable future..

Thank you, Victor, and good afternoon. During this conference call, our comments may reference certain non-GAAP measures. Please refer to today’s earnings release for GAAP reconciliations or descriptions of such measures.

Moving on to the results, diluted earnings per share was $0.57, which includes a negative impact of roughly $0.19 due to foreign currency movement. This compares to a diluted earnings per share of $0.63 in last year’s fourth quarter. Earnings per share declined 10% versus prior year, including the negative foreign currency impact of roughly 30%.

Fourth quarter revenues were $658 million, up 1% in constant currency and down 6% in US dollars versus prior year. This was within the range of our guidance with a stronger than expected performance from Europe being offset by weaker than expected results in our Asian business.

Total company gross margin decreased 90 basis points to 36.5% primarily due to the negative impact of currency. This decline in gross margin was worse than our expectations as we were more promotional than we planned to be in Americas Retail over the holidays and in Europe during the markdown period.

SG&A as a percentage of sales decreased by 100 basis points versus prior year, primarily driven by lower impairment charges. Operating earnings for the fourth quarter was $70 million. Operating margin finished up 10 basis points to 10.6%, including the negative impact of foreign currency of roughly 180 basis points.

Our effective fourth quarter tax rate was 30%, down from 31% in the prior year’s fourth quarter. Moving on to segment performance, revenue for the Americas Retail segment increased 1% in constant currency and decreased 3% in US dollars. We finished the quarter with comps up 2% in constant currency and down 1% in US dollars.

E-commerce which continues to be one of our top priorities slowed versus our expectations in the quarter as we anniversaried some of the initiatives from last year, but we still delivered top line growth of 9%, marking the 18th consecutive quarter of growth in the US and Canada.

In terms of product trends in constant currency, our women’s category comped positive driven by dresses, knit tops and wovens. On the accessories side, we saw an improving trend in our handbag category as we comped positive. Footwear also improved sequentially to finish roughly flat.

The watch category continued to be soft and was down as has been the case all year. In Europe, fourth quarter revenues were up 6% in constant currency and down 5% in US dollars. Retail comps in the region were very strong and were up in the high single digits for the quarter.

This was above the high end of our expectations and we’re very pleased with the continuing strength in the business as we posted a comp increase in the low double digits in Spain and Portugal and a high single digit comp increase in Italy.

In addition to the strong retail performance, we had a smaller than expected decline in our wholesale shipments due to a shift in timing between the fourth quarter and the first quarter of next year. In Asia, fourth quarter revenues were down 14% in constant currency and down 18% in US dollars.

We were encouraged by the improving performance in mainland China, where we achieved mid-teens comps in our retail stores. The sharp decline in tourist traffic into Hong Kong continues to be a headwind in that territory.

In Korea, where we have completed the phase-out of our G by GUESS product line, we saw a continuation of the sequential improvement in comp trends relative to the first half of the year. In Americas Wholesale, fourth quarter revenues were down 1% in constant currency and down 9% in US dollars.

Royalties generated from sales by our licensee partners were down 7% at $25 million. This was slightly below our expectations for the quarter, driven by broadly weaker results across our smaller licensees.

In a year like this with significant headwinds from currency, we think it is important to focus on the underlying results excluding the impact of currency. For this reason, we have provided a table in the press release that shows the impact of currency on sales of all segments.

For the full fiscal year, consolidated revenues were down 1% in constant currency and down 9% in US dollars as the negative impact of currency on sales for the year was approximately $191 million. Operating earnings were $121 million, down 4% from prior operating earnings of $126 million.

Overall, our operating margin of 5.5% was up 30 basis points from last year’s operating margin. We estimate that currency fluctuations negatively impacted operating margins for the company by approximately 140 basis points. For the fiscal year, earnings per share were $0.96, a 14% decrease from prior year’s earnings per share of $1.11.

We estimate the negative impact of currency on earnings per share was approximately $0.43 or 39%. Moving on to the balance sheet, accounts receivable was up 7% in constant currency and up 3% in US dollars. The constant currency increase in accounts receivable was driven by timing and collection of non-trade accounts receivable.

Inventories were $312 million, up 2% in constant currency and down 2% in US dollars versus last year. During the fourth quarter, we completed the purchase of our US distribution center in Kentucky for $28.8 million.

The purchase provides the company greater flexibility in execution of the long-term revenue plan for the Americas that Victor communicated earlier. Subsequent to the end of the fourth quarter, the company entered into a $21.5 million financing arrangement to partially fund the purchase.

Adjusted free cash flow for the year excluding the distribution center purchase was $124 million compared to $82 million in the prior year, an increase of $42 million. This improvement was driven by changes in working capital and lower capital expenditures.

We ended the year with cash and cash equivalents of $445 million compared to last year’s $483 million. We have continued to demonstrate our commitment to delivering value to our shareholders in the form of dividends and share buybacks and returned $121 million to our shareholders during the year.

Since the start of our dividend program in 2007, we have returned to over $1.2 billion to our shareholders in the forms of dividends and share buybacks. Moving on to the guidance, as Victor mentioned earlier on the call, we expect fiscal year 2017 to include the transition period as we set the platform for our long-term growth goals.

We expect currencies to be a headwind as the foreign currency hedges we had in place last year in the first half at favorable rates have rolled off resulting in an expected currency transaction headwind this year. Our full-year guidance assumes that the currency headwinds will impact EPS by roughly $0.11.

In order to give better visibility to the underlying trends in our outlook, we will also provide constant currency metrics when applicable. Consistent with Victor’s fourth initiatives to improve our cost structure, we have started a global cost reduction plan to generate future savings that we expect to fully realize in fiscal 2018.

Our outlook for the first quarter of fiscal 2017 and the full fiscal year 2017 excludes any restructuring costs associated with this plan. The global cost reduction plan includes a plan to reduce non-store payroll by elimination of positions in all regions in which we operate. It also includes a plan to reduce other operating expenses.

Please note that guidance for revenues and comp sales by segment is included in a table in the press release. Please refer to this table for guidance by segment, as we will only provide color on underlying segment drivers for the company guidance in the prepared remarks.

In Americas Retail, our focus for fiscal 2017 will be driving revenue growth through e-commerce expansion, store openings, and comp growth. Our plan on a net basis is to open roughly 15 stores in the US and Canada during the year, primarily in the factory and G by GUESS concepts.

The reason we’re focusing on factory and G by GUESS is both because of the attractive economics on potential new stores as well as the whitespace we see for further development of both these concepts.

So far in the first quarter, Americas Retail comps have been down in the low single digits in constant currency as we continue to see significant headwinds in our tourist stores. We expect this headwind from tourist stores to continue through the first half of the year.

As a reminder, revenue growth for the Americas Retail segment in the first quarter will be negatively impacted by the net store closures from the last nine months of last year. In Europe, we will be focused on growing our store base, comps and e-commerce. Overall, this is a very similar strategy to the Americas.

Our plan on a net basis is to open roughly 45 owned and operated stores across Europe during the year. Slightly less than a third of these stores will be openings by our newly formed JV partnership in Russia. We are excited by this new partnership as we believe it will accelerate the development of our operations in Russia.

We have confidence in the effectiveness and profitability of the store rollout, given the improvement in productivity in our existing store base in the past year as well as the attractive economics on potential new stores.

Our retail comps for the region so far in the first quarter have been up in the low 20s, driven by strong performance during the markdown period that is now behind us. We expect comps to slow in the remainder of the quarter, but still finish strongly up in the mid teens.

In Europe Wholesale, we expect the shift in timing of revenues out of the first quarter into the fourth quarter to negatively impact our first quarter EPS by $0.03. As a reminder, our spring-summer book was down 8% excluding the shift.

Trends from our fall-winter order book are showing a sequential improvement versus the spring-summer book and we forecast to finish roughly flat in orders for the season.

Moving to Asia, as Victor has mentioned previously, we have more than doubled our capital allocation for the year, primarily for the opening of new stores as we see a lot of whitespace especially in greater China. Our plan on a net basis is to open roughly 65 owned and operated stores in Asia.

So far in the first quarter, comps in mainland China continue to be positive as we see strong demand for our brand there. However, Hong Kong continues to be negatively impacted by the steep decline in tourist traffic.

In Korea, we are seeing a continuing of the momentum from the back half of last year and have been comping positive so far in the quarter. As a reminder, revenue growth for the Asia segment in the first quarter will be impacted by the phase-out of the G by GUESS concept in Korea that was only closed late last year.

With regards to our first quarter fiscal 2017 guidance for the company, which we recognize is below where we would have liked, note that it’s impacted by some discrete events such as the negative impact from foreign exchange, lower wholesale shipments including the shift in timing I referred to earlier, increased advertising and marketing investments, some timing of expenses, and the anniversary of non-operating income from last year.

For the total company, we expect revenues for the first quarter to be down 1.5% to down 0.5% in constant currency, driven by the anniversary of store closures from last year and lower wholesale sales.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 2 percentage points for the quarter. For the quarter, we expect gross margins to be down due to currency headwinds, partially offset by IME improvements.

The SG&A rate is expected to be up in the quarter as a percentage of sales due to investments in advertising and marketing and some timing of expenses. We are planning an operating margin for the quarter of between minus 5% and minus 4%, including the impact of currency headwinds of roughly 130 basis points.

Earnings per share is planned in the range of a loss of $0.20 per share to a loss of $0.17 per share and it’s not assuming any share repurchases in the quarter. The negative impact of currency on earnings per share in the quarter is estimated at $0.04.

For the total company, we expect consolidated revenues for the year to be up between 7% and 9% in constant currency, driven by an increase in store openings, positive comps and e-commerce growth.

At prevailing exchange rates, we estimate that the impact of currency headwinds on consolidated revenue growth will be approximately 1 percentage point for the full year. For the full year, we expect gross margins to be roughly flat as the foreign currency headwinds are expected to be offset by better IMUs and occupancy leverage.

The SG&A rate is expected to be up for the year due to investments in advertising and marketing to fuel our top line growth as well as a reset of planned incentive compensation versus prior year levels, partially offset by slightly over $10 million of savings driven by our global cost reduction plan.

Our expectation of the tax rate is 34% for the full year. We are planning an operating margin between 4% and 5%, including the impact of a currency headwind of roughly 50 basis points and our guidance assumes foreign currencies remain roughly at prevailing rates. Earnings per share is planned in the range of $0.65 per share and $0.85 per share.

The earnings per share guidance includes a currency headwind of roughly $0.11 per share. Excluding currency impacts, the top end of our guidance reflects flat EPS and operating margin versus last year.

A question you may ask is why are we not seeing EPS growth in the first year when the three-year goal outlined by Victor call for a 20% compound annual growth rate in EPS? As a reminder, Victor said that the first half of this year would be a transition period.

Capital investment in new stores and cost reduction plans vital to our three-year revenue and operating margin goals start getting executed during the first year of the three-year plan, but the returns extend over the second and third year of the plan. We are confident and indicating some earnings growth in the plan.

For this year, we are planning to ramp up our CapEx significantly to fund the new store growth Victor commented on. CapEx for the year is expected to range from $90 million to $100 million net of [thinned] allowances. With that, I will conclude the company’s remarks and open the call up for your questions..

[Operator Instructions] And our first question comes from Erinn Murphy from Piper Jaffray..

A couple of questions, I think Victor for you is really [indiscernible] that you see continuing, has anything changed in your assumptions for pricing for the products both in the US, Europe as well as China?.

Erinn, this is Sandeep. I’m sorry; you just broke up in the middle of your question.

Could you please repeat it?.

I was curious if anything has changed in your assumption for pricing in US, Europe and in China as you think about the path to continued positive comp?.

No, not at all. I think that the price alignment that we did a few months ago has been giving good results and I believe that this is going to be without changing for the foreseeable future..

So you don’t see any further changes in pricing, what you have right now you feel very comfortable with, just to reiterate..

I’m comfortable and we are seeing already the results, because we are growing quite significantly in Europe, we are growing as well in China and we are quite stable in the US..

And then on Asia, you talked about a $200 million incremental revenue opportunity over the next three years. I think last time you spoke to us on the street, Victor, you talked about a $750 million opportunity over time, so that would be an incremental $500 million roughly from where you’re at today.

So is that now off the table or just help us [indiscernible] three-year versus maybe the longer-term outlook for you guys?.

Erinn, I will just take this and answer the question. So if we go back to the first call that Victor was on, we talked about a goal of $750 million, but five years or more out, not in a shorter time period.

So I think what we’re saying right now is this particular three-year plan that we’ve communicated to you contemplates an increase of $200 million over the three-year period. But this $750 million in total is the goal that Victor talked about.

So versus the $240 million that we did this year, it’s a cumulative $500 million or more that we’re talking about over time, five years or more. And so we feel that with this increase in the first three years, we’re very much on track with the cadence of growth and as the base starts building, it’s certainly within reach..

And our next question comes from Dana Telsey from Telsey Advisory Group..

Certainly a lot of moving pieces in place.

As you think about that three-year plan to get the operating margin to 7.5%, I think it was double digits a couple of years ago, given the expense initiatives, the cost reductions going on, help bridge the gap and why not a higher operating margin target long-term?.

So I think there is a number of pieces in this that I’d like to actually get to and we’ll get to the three-year, but I think it really needs to – it’s important to understand the cadence of earnings growth.

So I think first off, when you look at Q1 itself, it’s a tough number when you look at a $0.20 change versus LY and there are few moving pieces in that number of discrete impacts.

And so in that really let’s say about a quarter of it in terms of the decline is coming from the softer wholesale shipments in Europe, part of which was the timing shift that I talked about earlier. Another quarter of it is the FX impact, which I telegraphed last time on the call as well.

And the remainder of it is coming from SG&A and non-operating income. And within SG&A, we’ve actually said very clearly that we’re investing in advertising and marketing to drive our future growth in sales.

And there is also some timing of expenses, which is occurring in Q1, but I think you should look at SG&A really on a full-year basis because I think there is some different cadence across the different quarters.

So when we actually say, okay, this is what happened in Q1, let’s roll forward into the full year fiscal 2017 and we’re saying that, look, on the wholesale business for Europe, we’re seeing some change in trend. We’re very glad to see a sequential improvement versus spring-summer 2016.

So we’re assuming really flat wholesale for the balance of the year. And then from a revenue standpoint on the retail side, one thing to remember is now that we are getting into the second quarter and beyond, we lap the closures from last year. So that’s no longer a headwind from a top line perspective.

Then, I think we also talked about on Americas Retail specifically, we’re actually going to – by the end of the first half lap the tourist headwind that we have, and that should be another tailwind from a revenue standpoint.

And then most importantly, I think Victor’s initiatives have already borne fruit as evidenced by Q4 and some of the other things that are going on in Europe as well. So we see this as being a sequential driver of incremental comp as well as we go into the back half of the year.

And also from a P&L point of view, the foreign exchange headwind starts to abate as we get pass the first half. And so the earnings, if you look at them, are actually weighted similarly for last year.

When you look at the ratio or the proportion of Q1 versus the remaining three quarters, it’s not that different when you go back and take a look at what the expected growth is going to be from the last nine months versus last year. So it makes sense; it’s really because of the timing of investments that we’re making.

And the results that we’re going to get will actually be coming later on in the course of the plan.

And therefore, when you look at the three-year plan, same kind of logic, but expect it goes from one year to three years out and investments having made in opening of new stores and the global cost reduction plan gives us some benefit in fiscal 2017, it’ll give us a little bit more benefit in fiscal 2018. But [indiscernible] investment mode.

We are actually growing our number of property stores from about 800 odd stores to – by almost 50% over the three years. So it’s going to take some time for the revenues to actually build through and deliver the profitability we’re looking at. And one last very important point is that you talked about double digit operating margins some years ago.

We’re talking about a very different channel structure in this growth plan that we’re articulating. It’s going to be much more heavily weighted towards retail than in the past which is very wholesale oriented. So looking at it from that perspective, I think it should be an important dimension.

And last but not least, we’ve come off a year where FX was a massive headwind. And so I think when you put all these pieces together, the 7.5% operating margin assumes currencies remain at prevailing rates which are quite significantly different from where things were when we had double digit operating margins..

And our next question comes from John Kernan from Cowen and Company..

This is [Christy] on for John.

Could you just give us a sense on the licensing front? Are there any changes planned for fiscal 2017 in terms of adding or dropping, I believe you have some – potentially some contract renewals that we should be aware of perhaps on watches, and how this sort of – I mean, I know the guidance was given for a flat expectation for the three-year plan, but can you go through the cadence of how that should flow out as well?.

So I think from a licensing perspective, I’ll take it in sequence. In Q4, results came in slightly lower than what we expected because some of our smaller licensees came in a bit different from what we had in our forecast.

And then as we go into the new year, it’s the first time we’re guiding for the year obviously and within the licensing business, we rely on the forecast from our licensing partners.

And the projections that they’ve given us at this time are for the business to continue to being soft for the coming year and we expect to see declines in the mid single digits, which is what we’ve guided to. And if you go to the three-year plan, what we’re talking about here is flat licensing revenues.

And I think this really takes into account the fact that there is a projected decline in the first year. So over the second and third year, we’ll have to increase to actually get to flat. And that’s the assumption that is underlying in the licensing projection..

And one quick follow-up, if I may, could you just give us a sense of what your cash flow objective then is for fiscal 2017?.

We don’t specifically guide for cash flow, but what I will say is if you go back to the prepared remarks that Victor was talking about, from a free cash flow perspective, over the three-year period, we expect to be more than covering the dividend basically from what we’re looking at, obviously because we’re ramping up CapEx quite significantly this year, there will be less headroom this year than they will be in the outer years as the profits and cash flow build..

And our next question comes from Eric Beder from Wunderlich Securities..

It sounds a pretty audacious aggressive plan you’re rolling out here for the next three years. Could you talk about what gives you confidence in the US market to expand the store base? I know before Victor joined that you had actually been closing stores in the US.

What was the thought process in the US that you can get an incremental $300 million and that you’re going to open additional stores here?.

Here is the thing. When you’re talking about the growth of $300 million, it’s coming from the Americas, not just from the US. So there is Canada, there is Mexico, there is Brazil which are key components of that region in the first place. Second, if you look at where the growth is coming from, we’re seeing it’s coming from three different sources.

One is e-commerce, the second is comp improvement which we’ve always been saying we’re going to be focused on and the third is store openings. So it’s not the only driver.

And I think if you look at which concepts we’re focusing on, we’re being very, very focused on the factory and G by GUESS concepts, where the profitability of those stores are attractive. The economics are very attractive.

And I think we’ve actually said this previously in previous calls as well that especially the factory stores are where we’ve been focusing on opening. So nothing has really changed from that perspective. And I think overall from a door closure perspective, we did close a number of doors.

And I think where we are really focused on is leveraging the portfolio we have right now to drive more productivity..

In Asia, you talked a lot about China, are there other regions where you see unit expansion potential that you want to tap in the next three years?.

China is going to be the main driver of our growth in Asia. But I mean, for example, this quarter, this first quarter, we are going to open Taiwan as a new market where we don’t have any shops and basically also Japan, Korea, and outside Asia, Russia is going to be a very important part of our growth.

Also, Turkey is going to be also another important market for us. And the good thing about Guess? is that we are presently in more than 90 markets and so we don’t depend only in the US market.

And I think this is a good thing at this moment, because I mean, our growth that you define as an aggressive growth is going to come from other regions that are not going to be the US. So I’m quite comfortable with this $300 million in Europe and the $200 million from Asia, particularly in Asia as I mentioned before is going to be driven by China..

And our next question comes from Betty Chen from Mizuho Securities..

Related to the prior question, I was curious beyond this year in terms of store openings, how many stores should we expect in years two and three to meet the regional sales goals that you’ve laid out? And then also outside of North America, are the store openings also – how should we think about the nameplate where the openings would be as a Guess?, as a Marciano and G by GUESS, et cetera? My second question is for the cost savings, I believe Sandeep you said that it’s about $10 million to be recognized in fiscal 2017.

Any sort of quarterly cadence you can help us think about? And is it all in SG&A and should we expect a balance of that to hit in the next fiscal year or divided into two subsequent years?.

So I think when you ask about the cadence of store openings, it’s actually in Victor’s prepared remarks, effectively to bridge between the guidance that I gave for the year and the three-year plan that Victor talked about.

So we’re guiding to our net 15 stores in fiscal 2017, and we’re guiding for a net 60 stores in fiscal – in the three-year plan for the Americas.

And so I think that probably answers your question on the Americas, but I think it’s the same logic for Europe as well as Asia, where in Europe we’re guiding for a 45 net stores in the next fiscal year and 140 over the three-year period. And in Asia, we are guiding for net 65 stores in the current fiscal year and a net 200 over the three-year plan.

And so, I think from a build perspective, it’s exactly where we want to see it and it’s going to be accelerating as we go along and we’re comfortable with that. Moving on to the cost savings, you are correct, $10 million is expected to be the number for this year and that was incorporated into our guidance. We annualized to $25 million by fiscal 2018.

In terms of quarterly cadence within the year, I’m not going to get into that at this point. There is some choppiness in timing, but it’s in the full-year number..

Sandeep, in terms of the store openings, is it also mainly factory and G by GUESS in other regions outside of North America?.

I think it varies depending on which country, because I think there is going to be a different profile over there. But I think when we talk about factory and G by GUESS, it was specifically more in the Americas which are more retail – which are more mature markets..

There will be a combination between Guess? and factory stores in each market..

And our next question comes from David Glick from Buckingham Research..

Just going back to this new store opening and capital plan, I’m just trying to process the significant change here, you’ve been a net store closer for the last few years and now talking about increasing the store base by 50% in three years, wherein you’re just starting to see some of the fruits of Victor’s labor and strategy here.

So obviously you’re going to be taking on – making significant capital investments and taking on significant lease obligations.

I’m just wondering given your current – if I’m not mistaken high single digit return on invested capital, how this all folds into an ROIC target for the company? Obviously investors want to see this result in improving return on invested capital?.

What I will tell you is, I will repeat what Victor said a bit earlier, a lot of this growth is coming from international locations where we have been seeing tremendous velocity in terms of results. In Europe particularly, we are seeing very good comps in the last two quarters and so far in the first quarter as well.

And on a stack basis, basically we are up in the low singles in the third quarter and on the fourth quarter we were up in the mid singles and now based on the guidance that we have, on a stack basis, we are expecting to be up in the low double digits. So sequentially things are improving in Europe.

And when we look at the pro formas of all the new stores that are coming up on the annual, from a return on invested capital perspective, these are really basically hitting the thresholds. And what we do internally is we always make sure that when we are making investments in new stores, we are looking for 2 to 3 year payback.

And so if a store is going to be opened, there is two criteria. The first criteria, it should be 2 to 3 year payback, and the second criteria is we have an internal hurdle rate from a formal contribution perspective which varies a little bit by concept and by geography.

And obviously this adapts over time as well, but we have this criteria, so we are very, very focused on where we are deploying new capital to ensure that the returns that are being delivered are above the cost of capital..

And our next question comes from Dorothy Lakner from Topeka Capital Markets..

I wondered if Victor could perhaps provide a little bit more color on the first initiative you talked about, elevating the quality of the sales and merchandising organization.

And I know you’ve given some color on that in the past, but I’m wondering if you could talk a little bit more about the things that you feel indicate significant progress there and where you think there’s more work to do.

And then maybe for Sandeep, on the cost cutting initiative, perhaps a bit more color on where the cost-cutting is coming initially and where you think you’re going to be getting savings as you move through the next two years..

Looking at the elevating the sales organization, the first initiative, we’ve made a number of progress there. And if we look at the fact that basically we comp positive in Europe, comp positive in China, comp positive in the Americas in constant currency, I mean, it shows these initiatives are working.

So one of the big initiatives here is really to expand the SKU assortment, because what we feel here is that the US specifically, Europe specifically, they are very, very big countries. And having a homogenous or a monolithic assortment really doesn’t necessarily work most optimally.

So by actually having some more unique SKUs that we could drive to the weather patterns and to the unique needs of each market, this will help us maximize sales.

And to do this we’ve actually implemented a new position called project manager and these people are actually liaison between the stores and the merchant and the designers, so they actually are actually pulling off what the store specific requirements are and making sure that the corporate delivers on those.

So we’ve seen a really, really good result from this initiative..

So from a cost cutting initiative perspective, we talked about $5 million in annualized savings that we’re going after, about two thirds of these costs are expected to come from payroll reductions roughly and the rest of it is coming from other operating expenses.

But here we are being very surgical and focused and we’re trying to make sure that where we are looking for reductions is primarily the Americas and Europe where we have established infrastructures.

And it’s really about a redeployment of resources for investment in markets like Asia, specifically China, where we need to make sure that we have infrastructure to support our growth. And that’s something that is very, very key for us and we’re certainly being very cautious about the way we’ve approached this cost reduction plan..

And our next question comes from Janet Kloppenburg from JJK Research..

I just had a couple of questions. One, Victor, if you would talk about your initiatives on the supply chain and the outlook for lead times to be reduced and the product line to have a quicker response time, enabling you to be more flexible to the business trends. And Sandeep, I just wanted to talk a little bit about the store openings in the US.

They’re focused on factory and G by GUESS.

How has been the performance of these two brands in the last six months? Are there encouraging trends there, and is that why you chose those particular brands to continue or to accelerate expansion in? And lastly, if you could just talk about the margins in Europe, I know the top line trends have been okay there, but I think for the last couple of quarters, they may have been helped by a strong response during the sale period.

And I was just wondering how the full price or maintained margin was tracking in the European retail business..

I can touch on the supply chain initiatives. I have been working very closely with Victor on these. We’ve made significant progress, not only in terms of speed, but also in terms of AUC or average unit cost reductions. We’ve had those in the past few quarters and we are continuing to deliver those.

The first thing is on lead times, we are actually doing a lot of proximity sourcing, so we’re sourcing in Mexico in the local markets where we can react quicker. And we have multiple calendars. Our long-term calendar which includes seldom samples we’ve been able to reduce the lead time across every concept. So we’ve made significant progress.

I mean, Victor is relentless on actually making this trim, trim the calendar there. And then we’ve established a fast track group. So this team is really focused on looking at the way this trends and using available fabric in the market and getting good firm concept into our DC and we’re talking about 6 to 10 weeks here. So it’s very, very quick.

We are also looking to leverage our volumes globally, so we’re working more closely with Europe and the other regions to take in aggregate volumes and really drive those across key suppliers to make sure that we can really leverage those volumes and get good pricing. And of course, this is helped by the reduction in material costs.

We’ve seen fabrics and fuel cost coming down, which has affected rayon and synthetics. So we’ve made some good progress there, along with adopting some core fabrics that we can use with different printing, different colors, but that enables us to really drive speed here..

And one thing that they want to say as well is that all these initiatives is in order to improve our IMU and this is what we’re trying to do quarter-by-quarter. I mean, we will do as well during this three-year plan. And we are taking a lot of initiatives which are helping us to improve our IMUs..

And when do you see that unfolding? Is it unfolding now, Victor?.

One of the things, Janet, there is a $ 0.11 currency headwind in fiscal 2017. That’s being offset partially by these IMU savings that we have..

I think just to add on to what Mike was saying, remember, Janet, because you have been following us for a while, we’ve actually been seeing IMU improvements now for two years and this is the third year that we are talking about IMU improvements. So this is a continuous process.

I think Victor coming in has actually pushed it even further along, but I think as a company we’ve been doing a lot to improve the IMU. Its relentless, we have to be doing it as Victor said, we will not stop doing it.

But from an operating margin perspective, as you look three years out, the expectation and what is incorporated in the guidance for this year is our new you improvement, but really the big global driver for operating margin expansion with the three-year plan is sales leverage..

What about the maintain margin, Sandeep, how has that been trending?.

It’s really doing fine. It’s been doing fine. I think Q4 was an aberration because I think if you look at the cadence of last year, we actually did quite well in the first nine months of the year, but in Q4 especially in the US market things were a lot more promotional than we expected it to be and I think that’s where we lost a bit of ground.

But otherwise, our maintain margin has been fine and if you look at our gross margins are roughly flat for last year and we are guiding to roughly flat again this year and this was after taking the currency headwind that we had, a massive currency headwind last year..

And our next question comes from Richard Magnusen from B. Riley & Company..

Can you give us a bit more on developments at G by GUESS, where you’re seeing strengths and weakness in merchandise content in terms of sell-throughs and more about how you focus on evolving and what we should expect to unfold for G by GUESS in 2016?.

G by GUESS actually, obviously the goal there is to capture a younger consumer, millennial with fashion that trend right at a decent price. Now, one of the things that differentiates G by GUESS and really excites us is that if you look at Guess?, Guess? is about 25% – more or less 25% men, 75% women. But with G by GUESS, it’s actually mixed 50-50.

So we really have strength in the men’s market which is less competitive and we think there is a tremendous opportunity there. Now looking at sales, obviously it’s more fashion than basic, but a lot of those categories that are strong are knit tops, particularly [indiscernible] actually basic denim that was a slight fashion twist is performing okay.

And accessories are going to be handbags and such. So we actually see fairly decent response from our consumer there..

And could you speak more about traffic and conversion trends at your North American stores, any geographic differences in performance outside of tourist and non-tourist markets and what are your expectations for traffic in the near term for the domestic stores?.

In Q4 basically we saw traffic was actually a tailwind and it was a tailwind across the concepts. And we saw – if we look at, AUR was slower, but that was actually offset by increases in UPT and our conversion was actually a tailwind also. So things work.

Coming into Q1, we see a slight reduction in traffic and mainly if we drill that down to your point, the tourist locations actually are performing much, much more poorly and the gap from Q4 has actually widened where we see performance less in the tourist locations than in the non-tourist locations..

And our next question comes from Bridget Weishaar from Morningstar..

Looking at the three-year plan, it looks like the focus is really going to be more on retail. But looking at the wholesale side, we’ve seen a lot of department stores in North America struggle and pulling back on inventory.

Can you discuss with us your thoughts about the wholesale channel and opportunities there and any updates on order books?.

So I think from a wholesale perspective, as Victor mentioned in his prepared remarks, we are looking really to get to stabilize that wholesale channel and then look to actually drive further growth beyond that once we stabilize it.

So specifically within the wholesale channel, the big piece of it is the European wholesale business and over there we’ve been seeing a sequential improvement in trend for the fall-winter 2016 book where we are forecasting to be roughly flat compared to a decline of 8% that we saw in spring-summer 2016.

And I think if you go across to the other side to the Americas, within the US, yes, it is a challenging situation in the department stores, but it’s a relatively small component of business compared to the European business.

And then of course, you have Mexico and Canada which are substantial pieces of our wholesale business as well where the business has been fairly stable. So that really is why I think when you look at the total wholesale channel, you got a fairly stable Mexico and Canada and Europe then what’s driving the outlook.

The US business has been challenging, but it isn’t such a significant portion of our total wholesale business..

And then another question was, on the last call, you noted that the basic denim model had been weak and you were reducing SKUs strategically and working through that excess inventory.

Have you been able to introduce newness there and have you seen improved performance?.

Denim itself has been a challenging category, not just for us, but for other retailers. But in basics, we have been able to make progress and we actually are seeing positive results.

So on women’s basics, we’ve actually reduced the number of SKUs and we’ve been injecting newness quite regularly there, in terms of new washers and before it was pretty basic, now we actually put some destroy and some other fashion touches there.

And we are seeing a very positive reaction there and we are comping positive in the basic denim, but fashion is, we do have weakness there..

And our final question comes from David Glick from Buckingham Research..

I had a couple follow-ups. You mentioned in your plan that the licensing business is expected to be flat over the three-year plan. And I’m just trying to reconcile that with obviously, if you grow your retail store base, I believe you’ll recognize higher licensing revenues from licensed products sold through those stores. That’s the first follow-up.

And then secondly, the higher CapEx and new store opening, how does that impact how you look at working capital and given the increase in CapEx and potentially higher working capital needs of the business, what does the pro forma for cash flow profile look like relative to....

David, you kind tailed off towards the end. So let me see if I – I think I got the first question and I think you’re going into cash flow in the second. So let me answer the first question on licensing. I may have answered it earlier in the call as well.

I think essentially what we’ve gotten from our licensing partners is a projection of revenues for us which are not in the mid-single digits at the aggregate and that’s why I think when we say flat for the three years, there is an implicit assumption of growth in years two and three.

And you’re right, a lot of it is tied to the retail development that we’re doing over the three years, which should generate license products and royalty revenues from those license products as well.

Then I think on the other question is on higher CapEx and working capital needs, that’s definitely embedded and contemplated and that’s why in Victor’s prepared remarks we talked about free cash flow over the three-year time period, roughly covering the dividend.

So I think overall we feel pretty confident in the cash flow projections taking into account this evidence..

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect..