Victor Herrero - CEO Sandeep Reddy - CFO

Omar Saad - Evercore ISI John Kernan - Cowen & Company Dana Telsey - Telsey Advisory Group Janet Kloppenburg - JJK Research Richard Magnusen - B. Riley & Co. Betty Chen - Mizuho Securities Erinn Murphy - Piper Jaffray

Good day everyone. And welcome to the Guess? Second Quarter Fiscal 2017 Earnings Conference Call. On the call are Victor Herrero, Chief Executive 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. I’ll now turn the call over to Victor Herrero.

Good afternoon, everyone. As you saw on our earnings release today, we reported both our second quarter adjusted earnings per share and adjusted operating profit margin finished above the high end of our guidance. This call marks the anniversary of my first earnings call a year ago when I laid out the five strategic initiatives. We have been making very good progress on all the initiatives and continued execution of this strategic initiative will be the critical enabler of the three-year plan that I announced to you in March of this year. On the first initiative, which is to elevate the quality of our sales and merchandizing organization, we have completely transformed the way we operate. The foundation to effective selling is a deep share knowledge of product and product performance in the organization. This knowledge is now beginning to pass seamlessly from the stores to our designers, merchants, and sourcing teams in a virtuous cycle so that lessons learned are incorporated in the product development and planning cycle. The result is improvement of the product assortment, which is already beginning to translate into higher revenue particularly in Europe. Our second initiative which is to build a major business in Asia, we have spent the year building out infrastructure, we need to launch our growth plan in Greater China and Southeast Asia. The result is that we are on track to open 65 directly operated stores on a net basis in Asia this year, mostly in Greater China. During the quarter, we opened 16 stores on a net basis across Asia. Specifically in China, we opened 10 stores across Beijing, Chengdu, Changsha, Chenzhou, Wenzhou, Chongqing, Qingdao, Shenyang and Wuxi. I’m pleased with the progress that we are making to build our business in Asia. Our third initiative, which is to reinforce a strong culture of purpose and accountability throughout the organization, I’m laser focused on the execution of our strategy and our three-year plan. Monitoring of the business now happens on a daily, weekly, and monthly basis with key performance indicators being measured, shared, and discussed across the organization through informal and formal review processes, and managers are being held accountable for the results being delivered. The results of this initiative are sure to be reflected in our three-year plan. On our fourth initiative, which is to improve our cost structure, we announced the global cost reduction plan earlier this year that we expect will generate $25 million in annualized savings. The result is that we are on track with execution of this plan, the full impact of which will be felt in the next fiscal year. Finally, on our fifth initiative, which is to revitalize the wholesale business, we have been working actively with our wholesale partners over the past year to implement the same principles that are driving our retail business. The result is that, Europe, our largest wholesale market, returned to growth in Fall Winter 2016 season, and we fully expect the trend to continue for a Spring Summer 2017 season. Before I turn it over to Sandeep to discuss the financial results of the quarter, I want to give you some color on trends that we are seeing in the business. On our last earnings call, I highlighted that Guess? is a global company, with a growing proportion of our business coming from outside the U.S. Our international business, which accounts for more than 60% of our sales continues to thrive. Our strongest business regionally continues to be Europe, where revenues in the quarter grew 7% in U.S. dollars and 6% in constant currency. Retail comps were strong and were up in the low-double digit, driven by strong traffic on conversion and sales and merchandising initiative implemented since last year are clearly showing results. I should note that although our business in the UK is a relatively small portion of our total business in Europe, our retail business there continues to be strong both before and after the Brexit vote. Our European e-commerce business is also growing very rapidly as we expand our online offering [ph] to cover large number of smaller markets in Europe. Considering the strong trends we are seeing in retail in Europe, we have decided to accelerate our store opening plans in Europe -- for Europe, and will now open 55 directly operated stores on a net basis this year, which is 10 stores more than we have initially planned. Roughly a quarter of these stores will be open in Russia, where our newly formed joint venture partnership has started operating since earlier this year, and where our business is tracking in line with our projections. During the quarter, we opened 19 directly operated stores in Europe, including our first stores in Turkey, Ireland and Sweden. Additionally, we added new stores to our fleet in Italy, Spain, Portugal, Switzerland, Netherland, Russia, and Poland. Moving to Asia, second quarter revenues were down 6% in US dollars and down 4% in constant currency, as we were up against a sales of G by Guess products that was phased out of Korea last year. Similar to the first quarter, we had positive comps in Korea, Mainland China, and Japan. However, revenue growth was below our expectations in Greater China as we continue to transition to a more direct model. The sharp decline in tourist traffic in Hong Kong and Macau was also a headwind in the quarter. As I mentioned before, we are on track to open 65 directly-operated stores on a net basis in Asia this year, mostly in Greater China. Moving to the Americas which includes the U.S., Canada, Mexico, and Brazil. Revenues for the quarter decreased 3% in US dollars and 1% in constant currency. Our comps for the U.S. and Canada were down 2% in US dollars and constant currency, both revenues and comps were at the high end of our guidance for the Americas Retail segment with the G by Guess concept being our best performing concept and comping positive. Continued weakness in tourist doors was a major contributing factor to the negative comps overall, but consistent with our expectation given the strength of the dollar. In America, we have decided to postpone 10 of our new store openings to next year. So we are increasing our store openings in Europe by 10 stores and reducing our store openings in America by 10 stores. We believe this is a wiser allocation of capital that will result in a higher return on investment. We want sound [ph] strategies, not projects. In terms of improving our profitability in the Americas, as we have mentioned before, we have a lot of flexibility as roughly half of our existing leases in the U.S. and Canada are either expiring or have kick out process in the next three years, which makes it easier for us to close unprofitable stores. The timing of these lease expirations also afford us the opportunity to renegotiate our leases and to reduce our rent expense. Since last year we have renegotiate 32 leases with better rents. As I said on our last earnings call, the first six months of the year was a transition period. This transition period is now behind us and the investments we have made so far should result in revenues increases for the company in the third quarter, accelerating into the fourth quarter. And I expect this momentum to continue into the second and third year of our three year plan. One last point before I turn it over to Sandeep, I have been at Guess? for one year now and I feel more confident today about the future of our company that anytime in the last 12 months. I think our strategy is sound I think we have the right team to execute our strategy, and I am determined to do it. This is why I keep reinvesting my dividend and buying more Guess? stocks every quarter and that's why when a stock is granted to me I don't sell a Guess? share to pay the resulting income tax. Sandeep?

Thank you, Victor, and good afternoon. During this conference call all of our comments for the second quarter are on an adjusted basis which excludes the impact of a gain on sale of an investment, which was recorded during the quarter. In addition our comments may also reference certain non-GAAP measures. Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures. Before I get into a more detailed discussion on our results, I would like to highlight that we are very pleased with the sequential improvement on our P&L in the second quarter relative to the first quarter. Revenues moves from a decline of 6% in the first quarter to being flat and our operating margin GAAP improved from a 600 basis point decline in the first quarter to a 190 basis point decline. This was better than our expectations and we are now at the end of the six month transition period we highlighted in March this year. Second quarter revenues were $545 million roughly flat in U.S. dollars and constant currency versus prior year and came in at the low end of our guidance in constant currency, mainly driven by lower than expected revenues in Asia. Total company gross margin decreased 220 basis points to 34.1% due to the negative impact of currency and increased markdowns in the Americas. SG&A as a percentage of sales decreased by 30 basis points versus prior year due to cost savings from the global cost reduction plan, anniversary of nonrecurring charges from last period and partially offset by investments in new stores openings internationally and build out of our infrastructure in China. Operating income for the second quarter was $16 million. Operating margin finished down 190 basis points at 2.9%, including the negative impact of foreign currency of roughly 70 basis points. Our adjusted effective second quarter tax rate was 42%, up from 37% in the prior year second quarter due primarily to a geographic shift to the jurisdictions where our profits are generated and from discrete items. During the quarter we recorded a gain of $22 million in other income related to the sale of a non-core minority interest investment in a privately held apparel company. This $22 million gain and the related tax impact are excluded from our adjusted earnings per share of $0.14. Adjusted diluted earnings per share finished above the high end of our guidance at $0.14 and includes a negative impact of roughly $0.04 due to foreign currency movement. This compares to a diluted earnings per share of $0.21 in last year’s second quarter. Moving on to the balance sheet, accounts receivable was up 1% in U.S. dollars and flat in constant currency as we begin to see a stabilization in our wholesale revenues particularly in Europe. Inventories were $380 million, up 13% in the U.S. dollars and constant currency versus last year. The increase is driven by timing of receipts, inventory for new stores and a buildup of inventory in the U.S. and Canada that we expect to be sold through during the remainder of the year either in market or redeploy to other markets around the globe where we have full price open to buy and the product matches their needs. Free cash flow was an outflow of $62 million compared to an inflow of $32 million in the prior year, a decrease of $94 million. This decrease was driven by changes in working capital, lower earnings and increased capital expenditures. This pressure on free cash flow was in line with our expectations as we end the six month transition period and have set the platform for growth in the back half and years two and three of the three year plan. We ended the quarter with cash and cash equivalence of $415 million compared to last year’s $471 million, including $35 million related to the sale of our minority interest investment that I discussed earlier. Cashless debt at the end of the second quarter was $391 million compared to $464 million last year. Moving on to the guidance, I should point out that our outlook for the third quarter of fiscal 2017 and the full fiscal year 2017 excludes any restructuring cost associated with the global cost reduction plan. Also guidance for revenues and comp sales by segment is included in a supplemental table attached to our earnings release. As a reminder our previous full year guidance assumed an improvement in comps in the Americas Retail segment for the second half as we left the headwinds from the tourist doors from last year. So far in August, we have not seen the improvement in tourist doors that we were expecting and are lowering our sales expectations for the back half of the year accordingly. In Europe, we are expecting that top-line growth in the back half of the year will be fueled by positive comps in our Retail business, revenues generated from new stores, as well as growth in our wholesale order book. In Asia, the first half of the year was impacted by the closure of a G by Guess concept in Korea. This will not be a headwind going into the second half of the year. We also expect the revenues for the second half of the year to benefit from the new stores that we are opening in China as well as positive comps from existing stores there. Considering all these factors for the third quarter of fiscal 2017 guidance for the company, we expect revenues for the third quarter to be up between 4.5% and 7.5% in constant currency, driven by the expected growth in Europe and China, partially offset by an expected decline in the Americas. At prevailing exchange rates, we estimate that currency will be a roughly half of a percentage point tailwind on consolidated revenue growth for the quarter. For the quarter, we expect gross margins to be down roughly flat, as we expect lower currency headwind compared to the first half of the year and better IMUs. The SG&A rate is expected to change slightly compared to last year, as we start to leverage costs due to the projected sales increase. We are planning an operating margin for the quarter between 3.5% and 4.5% including the impact of currency headwind of roughly 30 basis points. This would be another quarterly sequential improvement in operating margins at the high end of guidance, as we would swing to margin expansion in the quarter relative to the margin decline in the first and second quarters. Earnings per share is planned in the range of $0.11 per share to $0.16 per share. The impact of currency on earnings per share in the quarter based on prevailing rates is expected to be immaterial. We expect consolidated revenues for the year to be up between 2.5% and 4.5% in constant currency. At prevailing exchange rates, we estimate that currency will be roughly half of a percentage point tailwind on consolidated revenue growth for the year. For the full year, we expect gross margins to be down slightly, due to foreign currency headwinds and mix partially offset by better IMUs. 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 partially offset by over $10 million of savings, driven by our global cost reduction plan. We have updated our expectation on the adjusted full year tax rate from 36% to 40%, due to a geographic shift to the jurisdictions where our profits are generated and some discrete items recorded in the second quarter. We are planning an adjusted 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. Despite a lower guidance on the top-line, we have swiftly removed to reduce expenses and ensure we remain on a path to expand our operating margins for the rest of the year. Adjusted earnings per share is planned in a range of $0.62 per share and $0.75 per share. The earnings per share guidance includes a currency headwind of roughly $0.11per share. I should note that the previous guidance was $0.55 to $0.75, so we are increasing the low end of our guidance for the year by $0.07. As Victor mentioned earlier, we have a change in allocation of capital for the year, with an increase in investments in stores in Europe offset by a reduction of investment in stores in the Americas. CapEx for the year is expected to range from $90 million to $100 million. The Board of Directors has approved a quarterly dividend of $0.225 per share payable to shareholders of record at the close of business on September 7, 2016. In conclusion, we are pleased with the sequential improvement in financial performance we saw in the second quarter, and are expecting the improvement to continue through the back half of the year, as a result of execution of our strategic initiatives. With that, I will conclude the company’s remarks and open the call up for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from Omar Saad from Evercore ISI. Please go ahead.

Thank you, good afternoon. Nice quarter guys.

Thank you.

Wanted to ask first about the decision to kind of shift some of the capital allocation around store openings. Maybe you can elaborate a little bit more about the decision to reduce the number of openings in North America and which regions and which formats, channels we're talking about here that maybe are little bit less confident in. And then but also to increase the allocation towards Europe, again which countries what opportunities are you seeing there that give you the confidence to kind of shift those store openings overseas. Thanks.

Thank you, Omar. A couple of answers to your question, the first one is that basically we are postponing 10 stores opening from this year and next year, and it is not only in North America, it is in the Americas which is four markets, which is U.S., Canada, Mexico, and Brazil. And then regarding the European business, the thing is that we opened three markets this quarter, and basically we continue seeing opportunities for the expansion in several key markets for us at this moment, which will be Russia, Turkey as well as Spain, Poland, and several other markets that we will -- maybe open in the future.

Okay, thanks that's helpful. And then if I could do one follow-up, a lot of the product changes as you've kind of evolved merchandizing and design and sourcing organization. Product changes in Europe versus U.S. obviously that you can see in the comps, the consumer acceptance is pretty strong. What are the differences between what you're doing in the Europe and the U.S. and maybe when can we start to think about a timeframe of when we could see an inflection in the consumer response in the North America business?

I think we are having or we are taking global initiative all around the world not only in Europe, in Asia, and also particularly in North America, now in the U.S. and Canada. The point at this moment is that I think at this initiative, we’re very well embraced by our customers in Europe and in Asia and is taking a little bit more timing in the U.S. The total outfit that is what we are trying to present to have in our stores more than being a specialty company saying that I mean we are basically well known by needs, by shorts or by trousers. What we are trying to do and what we are trying to have filling in our stores that we are basically a total outfitted company instead of being a product specialist. So, all the initiatives that we are doing, they are global initiatives. And I think we are seeing a little bit of momentum at this moment in G by Guess already in the U.S. and hopefully we will see in the others in the near future.

Thank you, good luck.

Thank you.

And our next question comes from John Kernan from Cowen & Company. Please go ahead.

Victor and Sandeep, good afternoon. Congrats on some of the momentum in Europe.

Thanks, John.

Thank you.

I wanted to follow-up on the Europe question. Obviously, some top-line momentum there, can you talk about current trends there? Can you talk about how the backlog and the order book trends are building for spring 2017? And can you talk about some of the margin opportunity you see there over time?

Yeah so I think John one of the things that we're going to stop doing going forward is talking about the current quarter trends. I'm not really going to talk about what those trends are. But you have our guidance; our guidance is in retail to be up high-single digits to low-double digits. And I think in terms of the order book itself, I think Victor said in the prepared remarks we were very pleased to see an order book expansion in the Fall Winter ‘16 market. We expect to see a similar thing as far as Spring/Summer ’17, so we are very happy about that. And I think also what you probably did notice was a narrowing of the operating margin gap in the second quarter in the European business, so as the top-line growth starts kicking in as we move into the back half, currency no longer has a big headwind. So we should start seeing some meaningful profitability improvement of the European business.

Adding to that, I want to say that, I mean, at the end we opened in this third quarter shops in more than 10 markets. And I think all the markets more or less are responding positively to our business and to the Guess? brand.

That’s helpful. Thanks. Obviously, within the three-year plan, there is a significant amount of store growth that you’re expecting, so can you help us understand that how that’s going to affect your SG&A rates going forward? Obviously, there has been recently -- Q1 there is deleverage this quarter, you’ve leveraged a little bit. Can you just help us understand the effects on your income statement as a lot of the expenses from these stores comes online?

Yeah, John. So I think in terms of store openings, what I would say is over time, I don’t think it’s going to be negative impact on SG&A in terms of leverage. But initially, as you are starting up, you could see some pressure. And I think maybe more in the case of China, especially as we’re opening up new stores. There is a bit of pressure that you have seen in the second quarter, it may actually continue a little bit more as we go through this year. But as you actually move into years two and three of the three-year plan, we start to leverage, and that’s the assumption that was built into the three-year plan.

Okay, that’s helpful. If I could just sneak one more question in the licensing business. Obviously, it’s been in line with your guidance this year. Can you help us understand, what gets this business to stabilize going forward? How do your licensing partners feel? Obviously, watches is a big category for you and it’s under a lot of disruption right now. But can you help us understand, what -- how that licensing business stabilizes? Because right now, it’s a pretty significant chunk of your free cash flow?

Yeah, I think John on the licensing business, we’ve said this before that we have many long-term relationships with our licensing partners and those are ongoing. Where we’ve had seen some softness and from the beginning of the year, we guided the numbers to be pretty soft is because we have been seeing broad weakness in the licensing channel business by and large. But specifically in the second quarter, we saw watches decelerating versus our expectations. And it’s a category that remains tough. So I think we really need to see some category stabilization for the watches category to see that even out. But I think overall, we need the business trends to start improving, to start seeing the licensing business improving in trend as well.

Okay, thank you. Best of luck.

Thank you.

Thank you.

And our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.

Good afternoon, everyone. As you think about the product assortment, how is denim performing? And how are the product changes being accepted by men -- by both on the men side and on the women side? And just secondly, how -- what’s your game plan for inventory? And with the closures on some of the wholesales stores, how do you see the penetration mix of wholesale versus stores and particularly in North America going forward? Thank you.

Regarding how is denim performing, I think as I mentioned before, it’s an important thing is how the collection is performing now. Denim is performing fine, we have enough denim to cover all our needs, but what is important is that the collection is working. And we believe that the collection has to be basically from now on, we need to talk more about the collection about all the things that we are trying to do in order to have a total outfit. And as you can see, for example, we are trying to spread all this product development through our windows. And I think what is important at this moment, we are not so dependent on denim, or we are not so dependent on short, or we are not so dependent on needs. What is important is that we are dependent on our collection, and we are going to be very focus on product.

Yeah, just to follow-up on the inventory situation. I think we’re up 13% for the quarter. And if you look at our forward sales projection, it’s beginning to narrow in terms of a gap. And I think we’ve seen 5% to 8% growth in Q3. And if you do the math on our full year guidance, you’ll see that the implied growth is in the double-digits in Q4. So we’re pretty comfortable with the inventory levels that we have are appropriate given the fact that we have a number of store openings that have actually already occurred in the second quarter and are expected to come in the back half. And specifically in the U.S. and Canada, there may be a bit of buildup of inventory, and note it’s not excess inventory, but it’s build-up of inventory mostly of non-seasonal product, where we can either actually utilize it within the U.S. and Canada, or in some cases, we’re able to redeploy it to other international markets around the globe. And all this in already in our gross margins guidance for the year.

And this redeployment of inventory in some other areas of the globe is very important thing for us. Because maybe in the past we were not so focused on doing that. But right now whenever we have excess inventory anywhere in the world, maybe we are flexible to send it to any of the 90 markets where we are present at this moment.

And then penetration of wholesale, how do you see that as a portion of the business go forward?

Obviously, I think there is a massive shift from what our expectations were wholesale to retail perspective. So we'd expect it to continue at the rate at which it is.

Thank you.

And our next question is from Janet Kloppenburg from JJK Research. Please go ahead.

Hi, everyone and congrats on the progress. I just had a couple of questions on Europe. Obviously the brand is really resonating there. I'm just wondering on that comp, I think you said it was driven by traffic and conversion, I wondered if there was some pricing in there too? And or I can't remember if price are up year-over-year, maybe you could talk about that. And I also wondered given that level of improvement, where you disappointed that operating margins for the European region weren’t better they were basically flat. But should we start to see an operating margin improvement in that region as you look forward? And just lastly for Victor, given that half of the leases I think you said in North America expiring in the near-term. I'm wondering if we could look forward to some store closures as you reallocate capital to markets where you're seeing better performance. I mean, outside of the U.S. Thank you.

Last year when we started with the initiative or when we implemented the initiative what we did in the Europe it was a price alignment. And so basically there was a kind of a different prices among all the European countries. And what we decided is to basically standardize the prices taking as a benchmark the U.S. market. And basically is what we did so it means that we didn't reduce prices. What we did is we reduced prices in some cases and we increased prices in other case. So this is basically the strategy that we did, but basically what I think one of our success in Europe is all the implementation of the initiative that we did in the past are working very well there. I think we elevate and we have a better product, a stronger product for our existing customers, for new customers. And that's why I think is the success of the European market. Regarding what you were saying is that we just, yes we have half of our lease portfolios we will review on the next three years through a lease expiration or kick out clause. And basically in both cases what we are doing is we renegotiate with the landlords and depending on whatever we agree on something we extend the lease and we don't extend the lease for really long time we try to extend the lease for a short period of time maximum to have a break clause after year three. And -- but in case we don't make any -- we don't reach any agreement with the landlord what we do is closing the stores. And we are not really scared of closing the stores. Whenever we close a store we close a store because, I mean, we didn't agree with the landlord on a rent reduction. And this is what we are going to do in the future and we are -- we've been doing for the past.

And Janet I think -- sorry just going back to your question on the European operating margins. We're actually very pleased with where our operating margins finished, because if you recall there is still a currency headwind in the second quarter and that impacted mostly Europe or materially Europe. So excluding the currency headwinds actually our margins would have been up nicely and as I said earlier to one of the questions from John, we expect that with the revenue growth and the currency no longer being a headwind in the back half operating margins should expand meaningfully.

Another point that I want to mention about Europe is that instead of being as promotional. So the promotional cadence is going to be basically twice a year. It means that during the normal period, which is in June-July and December-January. But we are not going to be promotional the way that maybe you can be in other markets like the U.S. So definitely we will try to go through full prices during the season and later on having the seasonal clearance.

Okay. Thanks a lot and good luck.

Thank you.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Jeff Van Sinderen from B. Riley & Company. Please go ahead.

Thanks for taking my call. This is Richard Magnusen in for Jeff Van Sinderen. I have several questions, one of them is if you could break out the brick and mortar and e-com performance in the comps for domestic? And also, if you could give us some details on traffic and conversion within domestic market. And then regarding trends in denim, especially I know you made remark on not giving out too much for the current quarter, but if you could offer any more color on how our denim started in Q3?

Yeah, Richard, this is Sandeep. I think in terms of comps for the second quarter it's actually in our press release. You'll see it over there. But e-com added about a point to comps to the brick and mortar comps. So we finished it down to constant currency. So roughly a point of the benefit from there came from e-commerce. And in terms of trends in the current quarter unfortunately Richard as we said we really aren't going to talk about the current quarter trends.

Okay. And then I needed some detail regarding operating margins for European segment, but in terms of just the various other segments, when do you see these different operating margins begin to inflect positively?

We don't get into too much specificity on operating margins by segment. But what I would say is by and large as the sales expansion continues, we should start seeing some operating margin improvement across all the segments in the business and that's the expectation within the three year plan.

Okay. And my final question is can you give us anymore color on G by Guess from the MARCIANO brand performance?

Well G by Guess as we were saying to you in the call. I mean, we are very happy and pleased because, I mean, we come positive for the quarter regarding other brands we didn't comment anything because basically we believe that they will have as I mentioned Europe is improving and hopefully G by Guess right now is positive comps and then let’s see the other brands in the future.

Okay, thank you very much.

Thanks.

And our next question comes from Betty Chen from Mizuho Securities. Please go ahead.

Thank you. Good afternoon, thanks for taking our questions and congrats on the nice improvement. We were curious if you can talk a little bit more about China, it seems like Mainland China is doing very well, any more color on whether that customer is buying or behaving any differently than what we are seeing in the Americas? And then the second question we had was we certainly can understand the tourism headwind, is it possible to talk about maybe the non-tourist stores performance in the Americas so that we can maybe get a better appreciation of how the stores maybe benefiting from the initiatives? Thanks.

Regarding China basically we are coming from a franchisee model to direct model. This is going to take a little bit of time. But at the same time both in the first quarter and the second quarter we comp positive in Mainland China. At the same time in terms of if you wonder I give you some color is in terms of a promotion what the promotional cadence will be exactly the same as in Europe. We’ll try to not be promotional during the season and then during the seasonal period or seasonal clearance period will be promotional, particularly as I mentioned before in the December-January during the winter season and June-July during the spring season. So this is one of other thing. Another important thing that I want to tell you is I mean we are basically training our people as quickly as possible to become a great store managers, great operational people and to become basically the successful people and basically that our brand will be successful in China. Another thing about China is that we are very pleased with our cooperation with T Mall and JD where we are one of the companies that are much more -- we are very active with both of them, trying to embrace any type of situations and any type of comments that they have, because I mean, as you may know T Mall is one of the best platform I would say as comparable to Amazon in the U.S., but in China and we are very pleased with that. For example, what we are going to do is before the 11/11 in China, which is a Singles Day which is one like the Black Friday here or the Severe Monday in the U.S., basically, we will among the 100 brands, which will be -- we’ll have the Omni channel facilities in e-commerce in the T Mall platform. And we are very pleased that we were selected one of those brands and particularly because how active we are and how we try to cooperate with them as much as possible to become a real partner and to become very successful in their platform.

So Betty on the second question you had about the tourism and the non-tourist stores. If you look at the first half of the year, broadly things didn’t change that much between Q1 and Q2. Although, there was lot of volatility within the quarters. And you had a minus 3 and minus 2 in constant currency, if I recollect correctly. So within that time period, tourism pretty much was in line with our expectations, we expected it to be soft it was. But the non-tourist stores also follow the trend that we expected it too. So it was pretty much in line. And I think the big difference for us was we were banking on an improvement in the tourist stores, because we were lapping the headwind from last year in the back half. We didn’t see those tourist stores improve as we got into August, and that’s why we’ve lowered our expectations for those tourist stores in the back half.

Okay. And how about the tourist stores impact on maybe outlets and any difference in outlet? We’ve been also hearing challenging traffic trends there too?

We didn’t get into specificity by concept, but broadly it’s across all the business.

Okay, all right. Great. Thank you so much for the color and best of luck.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead.

Great. Thanks. Good afternoon and thanks for taking my questions. I have three; the first is if we could back to the licensing segment I mean are there any expense, I know you’ve got kind of the footwear, the handbag, and the watch license. Would it ever make sense to take back the handbag license or any of the other licenses back in house? And then, I guess secondly on the watch business, I know that license come due in fairly January. Can you just speak about kind of how that negotiation is going and just given the secular headwinds in that category, kind of how permitted you are to that? And if there is anything obviously you’re thinking about? That’s my first question. Thank you.

Yeah, sure. Erinn I think on the licensing segment, the one thing I would say is go back a very long way with all our licensing relationships. And because of that, I think we always are open to changes in models, but by and large we feel pretty comfortable that we have long-term relationships that we’re going to actually be working through regardless of the size of the licensee.

Okay.

And then from a watch license perspective, this is again one of the long-term relationships that we have, we had over 20 years relationship with them. So we don’t expect it to follow very different path.

Okay, that’s helpful. And then I guess Sandeep, also for you. On the other income, there was a $5 million gain that’s included in your non-GAAP results. What is that a function of -- I know you broke out the $22 million that you’re backing out really to the sale of the private apparel company, I was just curious on the other $5 million that’s remaining.

Yeah, I think in the total GAAP number of other income, there was about $27 million, $22 million was the one time item that we called out. But the other $5 million was basically a combination of foreign currency, where we actually took some hedge gains in the quarter, as the currency moved a little bit. And that’s part of the currency headwind that we talked about. We said we had a currency headwind of $0.04, initially, we’re expecting a currency headwind of $0.06. So that’s part of it. The other part of it was gains on our pension plans. We had a couple of pennies worth of gains on the pension plans as well. So that’s -- that was the non-operating income impact.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating and you may now disconnect.