Good day, everyone and welcome to the Guess’ Third Quarter Fiscal 2022 Earnings Conference Call. I would like to turn the call over to Fabrice Benarouche, Vice President of Finance and Investor Relations. Sir, you may begin..

Thank you, operator. Good afternoon, everyone and thank you for joining us today. On the call today with me are Carlos Alberini, Chief Executive Officer and Katie Anderson, 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 outlook, including potential impacts from the coronavirus pandemic.

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. Comments will also reference certain non-GAAP or adjusted measures.

GAAP reconciliations and descriptions of these measures can be found in today’s earnings release. Before turning the call to Carlos, I would like to mention that we will be participating in a fireside chat at the Virtual Morgan Stanley Global Consumer Conference on Wednesday, December 1 at 9:55 a.m. Eastern.

The fireside chat will also be available via live webcast. Details on how to connect to the live webcast will be available on our Investor website at investors.guess.com. We hope to see you there. Now, to Carlos..

Thank you, Fabrice. Good afternoon, everyone and thank you for joining us today. I am very pleased to report another strong performance this quarter, which exceeded our expectations for revenue growth, operating margin expansion and bottom line results.

Revenues increased 13% for the quarter versus last year and adjusted operating profit reached $70 million, delivering an adjusted operating margin of almost 11% and adjusted earnings per share of $0.62 versus $0.58 last year and $0.32 in the pre-pandemic third quarter.

This performance was driven by the hard work, vision and dedication of our teams around the world, the business transformation that we have executed and the amazing product and strong momentum of the Guess’ brand. Paul and I wanted to thank our teams for their strong contributions, particularly during these challenging times.

We are very proud of all of you. I strongly believe our company is positioned better than ever to expand its distribution, gain market share and increase profitability. We have a strong balance sheet and solid cash generation power to support our business growth and return excess cash to our shareholders.

Our Board’s commitment is evident with the previously announced plans to our unused $200 million share repurchase authorization and today’s approval to double our dividend. We firmly believe our stock is trading below its intrinsic value and plan to execute share repurchases opportunistically.

Over the last 2 years, we have successfully executed a full transformation of our business. And what better proof that our strategy is working than our results this fiscal year, where we are guiding to double our operating margin and profit from pre-pandemic levels.

The first piece of this transformation is the elevation of our brand, including launching our first global line, elevating the quality and sustainability of our product, upgrading our marketing and visual merchandising, optimizing full-price selling, remodeling our store fleet and enriching the customer experience.

Paul has led this critical initiative. And together with the product and creative teams, they have been doing an incredible job. The second piece of the transformation is the reset of our business model.

We have optimized our distribution in both retail and wholesale by removing unproductive stores and accounts, reducing our product offering to result in a simpler business with more productive SKUs from our global line.

We have also remained laser focused on margin expansion with improvements coming from IMU optimization, lower occupancy and cost reductions, including the consolidation of certain functions in Europe.

A financial extension of this effort during the third quarter, we completed an intra-entity transfer of certain intellectual property rights from the U.S. to Switzerland, more closely aligning our IP rights with our business operations. We are operating in a more capital efficient way, turning inventory faster with less non-productive assets.

This transformation has repositioned this company’s ability to deliver strong growth, significant profitability and superior shareholder returns into the future. Sustainability remains a key focus for our brand and we are committed to being part of the solution to climate change.

We have aggressive internal targets to reduce corporate greenhouse gas emissions by 50% and supply chain emissions by 30% by 2030 and to achieve net zero by 2050. In fact, last month, we signed an open letter to G20 leaders calling for policies that align with these goals.

We also supported the United Nations Conference of Youth to ensure the collective youth voice on climate negotiations is heard. We are actively working on a climate action roadmap that includes store efficiency measures, investment in renewables and changes to the way that we create and produce our product.

I couldn’t be prouder of our leadership in this very important area. Let me add some color to our third quarter results. Our retail and wholesale businesses in North America have remarkable performance in the period, with significant increases in operating profit and margin expansion.

Our licensing business also reported a strong quarter, all driven by the strong momentum our brand is enjoying in the marketplace. Our Europe segment performed well, positively impacted by a shift in business to LLY due to the timing of inventory receipts.

And I am proud to say that we closed the Spring/Summer order book for our European wholesale business this quarter, with orders up 12% to LLY. And our sales campaign for the pre-fall/winter season is looking promising for double-digit growth as well. These results clearly signal that we are continuing to gain market share.

Our Asia segment had a challenging quarter and continued to be impacted by the COVID situation and global restrictions in several countries, including China, Japan and Taiwan. I am really encouraged by the momentum that we saw in the third quarter in our top line, which of course starts with our brand and our product.

We had strong performance in dresses, sweaters, outerwear and denim as well as our high-end Marciano brand. North America saw a pop in mid-tops, while Europe remained strong in that region. Our men’s business outperformed in North America and in accessories, sales of handbags and watches were solid in both regions.

I believe the strength that we have been seeing in categories like denim, Marciano, handbags, dresses and outerwear bodes well for the future as these provide us key levers to drive same-store sales growth. Guess’ is a true lifestyle brand and is poised to capitalize on current consumer trends.

Casualization is here to stay, which will help fuel continued growth in categories like denim. We have a diversified denim offering, with silhouettes, including skinny, straight leg, mom jean and mini flare and see this as key opportunity for future growth.

At the same time, we see consumers returning to social activities and fashion-oriented products, which is zeroing in other key areas of our business like dresses and Marciano.

Regarding our store fleet, we opened 55 new stores so far this year, most of which were pop-ups with new Guess’ and factory stores, but also specialty concepts like accessories, activewear, Marciano, kid’s and our Gen Z concept Guess’ originals.

We continue to believe that we have substantial white space for new stores in many of our markets and stores are a key pillar to represent the large attributes of our brand, provide a tool for new customer acquisition and complete the omnichannel experience.

In connection with the elevation of our brand, we embarked on a remodeling program that will ultimately touch roughly 630 stores. Including new stores, this will represent 80% of our entire fleet in Europe and North America by the end of next year.

We continue to invest in technology, including upgrades to our store infrastructure to drive efficiencies and enhance the customer experience. Our e-commerce business continues to grow, with sales in North America and Europe in the third quarter, up 15% to last year and 37% to LLY.

This is a source of both revenue and profitability growth for our brand and it represents a material go-forward opportunity for us. And we continue to make progress on our customer centricity initiatives, including omnichannel capabilities and advanced data analytics and customer segmentation.

In Europe, we are rolling out omnichannel and ship-from-store capabilities in all countries and we have launched a new gift card application for the holidays. Regarding customer analytics, we have nearly 6 million contactable customers in our databases in North America and Europe and have added 1 million new customers this year so far.

Over 85% of these customers provide us with their mobile phone number and over 20% with their home address, so we can leverage SMS marketing and mailers.

As part of the Customer 360 project, we recently launched our CRM platform, which gives us a 360-degree view of our customer and enables us to improve the way we segment and personalize our communication, marketing and promotional strategies. This is fully implemented in Europe and early results are very promising.

The same application will be implemented in North America next year. We will continue to drive innovation in this area and fund investments in technology and customer analytics.

Regarding inventory and the supply chain, it will come as no surprise that our product development cycle has been impacted by the unprecedented challenges that the world is facing on the supply and logistics side. Our team is doing an incredible job mitigating these challenges to the extent possible.

Our work to consolidate our vendors going from over 500 to around 935 as well as the execution of the global line, which reduced SKUs by over 40%, has enabled us to leverage higher volumes to push through production. We have ordered product in advance to allow for extended lead times and our inventory levels at the end of Q3 reflect this.

We maintain a globally diversified sourcing strategy, which has helped us to limit impacts when areas experience disruptions.

We are also moving roughly 10% of our apparel sourcing to locations that are closer to the final distribution to cut down transit times and cost as well as exploring alternative shipping methods like trains to move products faster between China and Europe.

And we are certainly investing in air transportation when it makes sense to get our product in time to sell. This year, we have grown to about a 7% usage of air freight versus a prior year average of about 3%. In addition, as with the rest of the industry, we are experiencing increases in raw material costs like cotton.

We have contracts for certain raw materials that cover us into Q3 next year and simultaneously are looking at alternative options like recycled cotton made of post-consumer waste products. All of this is obviously resulting in elevated costs, which we have built into our outlook.

Importantly, we have been successful in increasing prices with AURs up 15% to 20%, alongside our elevation and product quality to mitigate the impact these cost increases are having on our profitability.

As of the end of Q3, we had over $100 million of inventory in transit, representing almost 25% of our total ownership compared to 12% in pre-pandemic Q3.

A lot of this product will support our post-holiday business, primarily to service our European wholesale business, and our on-hand inventory today is completely aligned with our demand expectations for the upcoming holiday season. I feel strongly about our plans for the holiday business. We have a lot of newness coming to stores.

Our assortment and the elevated quality of our product is clearly resonating with our customers as evidenced by our strong product to the fourth quarter. In North America, traffic is gaining momentum recently, and we are experiencing good conversion and strong AURs.

Recent improvements in trends in our tourist locations suggest that we are getting a boost from the change in travel restrictions implemented in the U.S. earlier this month. In Europe, we have also seen positive sequential momentum in sales comps at the start of the quarter driven by material increases in traffic as AUR also remains strong.

As we have done all year, we plan to continue to be less promotional than in the past, especially with storewide level discounts. We are increasing marketing to fuel customer acquisition.

We are expanding the use of direct mail and catalog pieces, planning to send out 1.2 million pieces during the quarter as well as increasing our investment in digital marketing to drive traffic to our sites. We have bought key products featured in our marketing campaigns in significant depth.

We have also added video capabilities to show product attributes more effectively. When you put it all together, we see top line growing in excess of 20% in the fourth quarter period versus last year and operating profit exceeding $100 million.

This represents an increase in both the top and bottom line to our previous outlook for the year, and Katie will give us more color on this in a few minutes. Looking past this year, we remain confident in our longer term goals to reach revenue of $2.8 billion and operating margins of 12% in fiscal year 2024.

In closing, let me just say that I could not be prouder of what our team has accomplished during the last 2.5 years since I’ve been back. We have highly dedicated people who share an incredible passion to pursue our purpose. And on this team, when we commit to something, we deliver. We committed to elevating our brands. We are delivering.

I think Paul and our product teams have done extraordinary work with this. And today, we have one line of product for the entire world across all categories, and our products are the best they have been in our company’s history highly elevated, of great quality and very consistent with the DNA of the Guess’ brand.

We committed to transforming the business, we are delivering. We have reacted to every aspect of our business model, including our store portfolio, digital business, sourcing and logistics operations and systems infrastructure. We’re also committed to expanding our margins, and we are delivering here too.

We now expect to reach an 11% operating margin this year, double our margin of 2 years ago and well ahead of our initial plans. While these are all significant accomplishments, I strongly believe that the best is yet to come for us.

We are in an inflection point at Guess’, and I’m very confident that our business is well positioned to generate superior returns in the future and our results will be here to prove it. You have our commitment. With that, let me pass it to Katie to review our financials in more detail.

Katie?.

Thank you, Carlos. Good afternoon, everyone. I’m excited to tell you more about our financial performance this quarter, which truly exceeded our expectations. We tripled earnings to pre-pandemic levels and are raising both our top and bottom line outlook for the year. The brand is showing strong momentum going into the holiday season.

And despite the challenging supply chain, we have the product to support this demand. These results are, again, a testament of our organization’s commitment to win, flexibility to adapt during volatile times and pure grit. I love being part of this passionate team. Now let me take you through the details on the quarter.

Third quarter revenues were $643 million, up 13% to last year and up 4% compared to LLY. This exceeded our expectations as our Americas Retail, European wholesale and licensing businesses all outperformed.

Overall, the 4% revenue increase to pre-pandemic LLY was a result of growth in our European business, driven by wholesale, including a shift into sales from Q2 to Q3 as well as e-commerce. This was partially offset by permanently closed stores and negative same-store sales in Europe and Asia.

Excluding sales from the over 170 stores that we have closed since the pandemic, Q3 revenue would have been up 9% to LLY. And let me just remind you that these stores are accretive to operating profit by about $20 million on a run rate basis. Let’s talk a bit about sales performance by segment.

In Americas Retail, revenues were up 30% versus last year and down 5% versus LLY, better than our expectations. Again, this quarter, the decline to LLY was driven entirely by permanent store closures, which are worth roughly 7% of sales. Store comps in the U.S. and Canada were up 2% in constant currency versus LLY. Same-store sales in the U.S.

remained positive despite continued negative traffic trends with positive conversion and AUR growth over 20%. I’m happy to report that sales in our over 70 stores in Canada have improved substantially, driven by a material increase in traffic in that region as the pandemic there is beginning to wane.

This quarter, we continued to be a lot less promotional, lapping all store events on holidays like Labor Day that we didn’t do this year, which had an impact on our top line, but of course, a benefit to our bottom line.

I can’t help but point out the increase in profitability that we have brought to this segment that is allowing us to capitalize on our positive sales trends. Operating margin in Q3 was over 14% versus less than 1% in the prior 2 years and operating profit is 15x when it was in pre-pandemic LLY, even on lower sales.

What an incredible business transformation. In Europe, revenues were up 3% versus last year and 19% versus LLY. The increase to LLY is primarily a result of growth in our wholesale business. As you might recall from last quarter, our shipments for the fall/winter season were a few weeks delayed due to challenges with the supply chain.

So we had a shift in sales from Q2 into Q3. But even absent the shift, this business had positive momentum, and we are gaining market share here. While our retail business continues to be pressured by pandemic-related traffic decline, we saw a significant sequential improvement in our sales since last quarter.

Store comps for Europe were down 13% in constant currency versus LLY, a 7% improvement from down 20% last quarter as a result of improved traffic and continued increases in AUR. In Asia, revenue was down 8% to last year and 31% to LOI. Nearly half of this decline was driven by the permanent store closures.

Our store comps were down 25% in constant currency versus LLY, 5% better than Q2 with negative sales comps in South Korea and China, more moderate than other areas in the region. This region has struggled with the resurgence of COVID-19 as well as the lack of consumer confidence, which is deeply impacting our sales.

Our Americas wholesale sales were up 64% to last year and 5% to LOI driven by higher sales in the U.S. and licensing revenue continues to outperform, up 37% to last year and 20% to LLY in Q3, driven by strong performance in shoes, perfumes and watches.

Total company gross margin for the quarter was 45.7%, more than 800 basis points higher than 2 years ago. Our product margin increased 340 basis points this quarter versus LLY primarily as a result of lower promotions and higher IMU, partially offset by business mix and increased freight, which was worth about 100 basis points this quarter.

Occupancy rate decreased 500 basis points driven by business mix, lower rents and permanently closed stores. Adjusted SG&A for the quarter was $223 million compared to $206 million 2 years ago.

The increase is the result of variable costs for both the e-commerce and wholesale businesses mostly in Europe, which grew materially to LLY as well as higher performance-based compensation. Adjusted operating profit for the third quarter was $70 million versus $55 million last year and $23 million 2 years ago.

This is a 27% increase to last year and an over 200% increase to pre-pandemic levels. Our balance sheet remains strong. We ended the third quarter with $391 million in cash, $26 million higher than last year’s sales at the end of Q3. Our cash balance was impacted by an $80 million U.S.

tax payment made in connection with the IP transfer that Carlos mentioned. We expect to recoup this amount in Switzerland over the next 5 to 10 years. Inventories were $482 million up 23% in U.S. dollars and 22% in constant currency versus last year and down 8% in constant currency to LLY.

This increase reflects our strategy to secure goods in advance of the holidays and Q1 in light of the global supply chain disruptions and elongated transit time. Year-to-date capital expenditures were $41 million, up from $12 million in the prior year but below pre-pandemic levels, mainly driven by investments in new stores, remodels and technology.

Free cash flow for the first three quarters of the year was negative $41 million, driven down by the $80 million U.S. tax payments that I previously mentioned. Excluding this tax payment, our free cash flow would have been positive $39 million. Let me touch on capital allocation.

We are confident in our ability to generate sustainable and profitable growth and ample free cash flow. As a result, we have the runway not only to fund our growth initiatives, but also return incremental capital to our shareholders. As you recall, last quarter, we expanded our share repurchase program to $200 million.

Today, we announced that our Board of Directors has approved a 100% increase in our quarterly dividend from $0.1125 to $0.225. As a reminder, our dividend was [indiscernible] before we executed the $300 million convertible note to fund share repurchases in April of 2019. So now, let’s talk about our go-forward expectations.

We are raising our outlook for the fourth quarter and the full fiscal year. For the fourth quarter, we are expecting revenue to be down mid-single digits versus LLY, driven by timing in our wholesale business and permanently closed stores, partially offset by growth in our e-commerce business.

I wanted to note that in light of the recent developments with the pandemic in Europe, we have built in more prudent assumptions for revenues for our European retail business in the fourth quarter. In terms of profit, adjusted operating margin for the fourth quarter is expected to be about 100 basis points better than LLY.

Gross margin is expected to expand by around 500 basis points to LLY, driven primarily by business mix, lower occupancy cost, lower promotions and improved IMU. And as with the rest of the industry, we are seeing some cost pressures, particularly in freight, which are built into these numbers.

We anticipate that the adjusted SG&A rate will be up around 400 basis points as cost savings are offset by business mix, investments in labor and higher incentive-based compensation. For the year, we now expect revenue to be down in the low single digits versus LLY and adjusted operating margin to reach just over 11% for the year versus 5.6% in LLY.

This represents a doubling of adjusted operating margin with margin expansion of over 550 basis points to our pre-pandemic business despite a lower revenue base.

To break it down for you, this margin expansion comes from about 250 basis points of lower promotional activity, 200 basis points of IMU improvement, 150 basis points of lower occupancy expense and 200 basis points of channel mix and onetime benefits.

This was partially offset by about 150 basis points of higher inbound freight and 100 basis points of increases in D&A, mostly higher performance-based compensation for this year. We are very confident in the sustainability of these margin improvements.

We realized that the current environment of significant demand and limitations in product availability have triggered broad increases in margin in our industry.

In our case, most of our margin improvement has come from concrete changes in our business model that Carlos walked you through earlier and are not circumstantial but more permanent in nature. This margin expansion, combined with the potential for future top line growth at Guess’, is very powerful.

For these reasons, we remain confident in our longer term goals, and we look forward to sharing our outlook for the next fiscal year with you when we report Q4. With that, I will conclude the company’s remarks, and let’s open up the call to your questions..

[Operator Instructions] Our first question comes from Susan Anderson from B. Riley FBR. Your line is now open..

Hi, good evening. Nice job on the quarter. I guess maybe just to start off, I would like to get your thoughts around – the U.S. retail growth was obviously very strong.

Maybe if you could talk about the drivers there in terms of product categories, what’s doing well, men’s versus women’s? And also, are you seeing new customers come into the store, or is this more existing customers come back? Then also just on that front, too, the op margin there was very, very strong.

So, if you could talk about just kind of like the drivers there versus the more flattish op margin in 2019? Thanks..

Yes. Thank you, Susan. Americas Retail has been transformed in a pretty significant way when you think about the makeup of our business. And most of the big levers that we have been referring to are present in the transformation of that business in a significant way.

So, starting with margins and what we have done to really improve our sourcing and consolidating vendors and doing more with less and integrating a lot of the pieces that are part of that supply chain to really deliver a better margin, we are sourcing from the best countries. Cost has been optimized as well. So, that’s the first big thing.

The second big thing is about lower promotions. We have done a lot to reduce promotional activity, and this has impacted Americas Retail in a significant way as well. We have also increased prices, and we have done this very strategically.

We have an opportunity here that we see to really deliver on the demand that the customer is having and showing us. Our traffic has improved in North America, and that is a big driver of our improvements in our profitability as well. But the most important thing here, too, is what we have done on occupancy and our optimization of our footprint.

We have closed a lot of underperforming stores. We have also renegotiated a lot of leases. Just in globally, the number is like 400 leases that we have renegotiated. And as a result of all these pieces, we are doing more with less. We have integrated the GBG business into our factory outlet business. I think that has also proven to be a very good move.

The stores are doing significantly better, and we have eliminated significant costs as a result of that integration. Put it all together, it’s very, very compelling. You asked about what we are seeing with the customers, we mentioned that we have seen a lot of new customers shopping with Guess’.

The numbers that we provided were more global, but there is a fair share of that number that relates to North America. We were very pleased with our e-commerce business and how it’s integrating the omnichannel level with the stores. So, you put it all together, we are very, very happy with everything that we are seeing here.

And we believe that this is just the beginning because when you think about many of the levers that I referred to, like price increases or many other things that we started like being less promotional, we are just seeing a partial year for those.

So, in the third quarter, you saw some activity, but we expect that this will – once it annualizes, it’s going to have even a more important impact on the year, so very, very happy overall. We are doing a lot in direct mail. I think I mentioned that during my prepared remarks as well.

And the biggest – the lion’s share of what we are doing impacts North America. Of the 1.2 million pieces that I referred to, about 800,000 are delivered in North America.

So, we feel that this is a great, very effective way to reach the customer and also to present our new lines and the quality, the elevation of the product is all depicted in the elevation of the images as well. So, we feel that this is going to be powerful as well. Of course, the fourth quarter is the most profitable quarter.

So, we have high expectations for the fourth quarter for this business as well. And we feel that now is we have to turn our sights on growth.

Just we have a great business model, produces great margins, but we think that we can grow and there are a lot of places in North America, where we have been before, we were very successful at the time, and we feel that this is a time for us to come back. So, don’t be surprised if you start seeing growth in this business as well..

Great. That’s really helpful. Thanks for all the detail. I guess if I could add one follow-up. I am just curious, in Europe, how that’s performed as those countries opened up over the summer there.

And then also, I guess as we look forward over this winter, are you concerned that, that could slow down again, given some increased lockdown in certain countries there? Thanks..

Yes. Well, so as you know, we have a big business in Europe, and it’s very critical for us to win. We think that the brand has an incredible momentum right now. And the reason why we can say that with a lot of confidence is we are talking to our customers on the wholesale side. And we are seeing that our growth and we are seeing growth.

I think as we mentioned, we were up 12% spring/summer line. And now we are in the market with a pre-fall/winter line, and we are seeing that double digits are there for us as well.

So, when you think about, okay, with all these lockdowns and slower activity, how can it be that we could be up, and we think that there is only one answer, and that is we are gaining market share. We have dealt with these customers in a very effective way. We took care of them during the tough times.

We reserve product for them, and we haven’t seen cancellations, which is very unusual. So – but going back, just we saw an uptick in our business and we were getting excited about that, and we see that there is an opportunity for us to really capitalize on the next 10 weeks, which are very critical in that region as well.

Yes, Austria just announced another round of lockdown for three weeks. But we think that what they are trying to do is to really anticipate and really deal with the virus situation, so then they can reopen and people can shop for the holidays. So, we think that there may be some movement about when the sales take place.

But we think that this is not going to be that damaging for us. And of course, if that is all it is, Austria only represents 14 stores for us. Yes. No. So, just to close on that, we think that we have seen how things play out. We have a very strong e-commerce business that is growing at a very fast rate.

And we also have good businesses with – on marketplaces. So, you put it all together, we think that we can weather the storm. But, as Katie mentioned, we did consider this in our outlook to have a more moderate expectation for the business. But we have inventory to do more business if the demand is there..

Okay, great. Thanks so much. Good luck this holiday..

Thank you, Susan..

[Operator Instructions] Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open..

Good afternoon everyone and nice to see the progress. Carlos, can you give us an update on the global product line now? It certainly seems like you are seeing the benefits. Is anything differing? How is the denim category doing? And with inflation in cotton, how are you thinking about price increases going forward? Thank you..

Yes, Dana, let me start and then maybe Katie can also jump in on denim.

So, the global line has been just an incredible initiative for us because not only we are seeing significant efficiencies as a result of that, but even more importantly, we are now in a position to offer a consistent assortment of products all over the world, across all regions, which is something we never have.

Now we have colored palettes that are more coordinated. We have differentiation between the lines, Guess’ and Marciano. And this is one representation of each of those lines in a very – with a lot of integrity. We have a tighter presentation in stores and enhanced visual merchandising. We have elevated also the customer experiences.

And of course, we have been able to really price each product based on the perceived value of that product based on the competitive landscape, and we think that we are really well balanced across the board. This has enabled us to reduce our promotional activity. And I think that, that has been a major advantage, and it is impacting our bottom line.

So, it has also helped us to optimize our supply chain. So, we are leveraging the global line to drive cost down. We are doing global buys that are focused on key vendors. So, that is also resulting in an improvement in cost, and we are sourcing from low-cost countries where we can.

But now with all the supply chain issues, we are bringing sourcing to newer countries – countries that are closer to the ultimate distribution of the product and about 10% of what we are sourcing we plan to move into those countries.

With respect to product, we are very happy with the initial read that we are getting in all the products that are part of this new assortment. But we also have a lot of newness coming. And we see that, especially on the dressy side, the customer is craving that. They are looking for newness. They are looking for new prints.

They are looking for new styles, when it comes to denim. And we predict that we have a nice assortment, but there is more to come.

So Katie, do you want to mention about denim and how you feel?.

Yes, sure. I mean as Carlos said, we are seeing good performance in denim in North America and Europe. And with the whole – with trends in capitalization, we see this continuing.

And I think going forward this is going to be a key lever that we have to grow our same-store sales along with some other categories that are doing well, outerwear, handbags, etcetera. And then Dana, you also asked about cotton and inflation, and Carlos mentioned pricing a little bit. We are going to go in two ways about it.

We have – looking for alternative sources for cotton, and we have contracts for the next year. And then also, as Carlos said, we have been successful in pricing. Our AURs are up 15% to 20%. We saw that strong AUR starting out this quarter, and we see that continuing..

And by the way, the AUR increase is a combination of being less promotional with – combined with the price increases, and about 50-50 of that AUR increase is coming from each of those two components. And we are excited about that because we think that these changes are here to stay. They are very fundamental to the way we are structuring the business.

And yes, of course, there are some abnormal circumstances that we see today with supply and demand not being in balance. But we think that the things that we are changing and what we have changed are a lot more fundamental and more of a permanent nature, as Katie said in her prepared remarks..

Thank you..

Thank you. At this time, we have no further questions in queue. I will turn the call back over to Carlos for closing comments..

Alright. Thank you. Well, I just want to say we are in front of the most significant period of the year for us. Just we have a lot of business that we are expecting to get. We have a great team. We are well positioned, and we have the inventory, and that is so important during this time.

We have bought inventory to really be able to satisfy this demand, and we think we are super well positioned in the inventories here. We want to thank you all for participating today and we wish you a Happy Thanksgiving and Happy Holidays and we hope to talk to you very soon. Thank you so much..

Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you for your participation. You may now disconnect..