Victor Herrero - CEO Sandeep Reddy - CFO

Susan Anderson - B. Riley FBR Omar Saad - Evercore ISI John Kernan - Cowen and Company Janine Stichter - Jefferies Dana Telsey - Telsey Advisory

Good day, everyone, and welcome to the Guess? Third Quarter Fiscal 2019 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 the 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 Mr. Victor Herrero. Sir, you may begin.

Good afternoon, everyone. I am very pleased to report another quarter of strong operating performance with double-digit revenue growth, adjusted operating profit growth of 70% and adjusted operating margin finishing higher than our expectations, despite unexpected currency headwinds. This was our second consecutive quarter of double-digit revenue growth and the first time in eight years that we achieved double-digit revenue growth in the third quarter. It is important to know that this is another quarter of positive comps in all regions. This is an exciting time for our company and our turnaround is gaining momentum as we relentlessly execute the five strategic initiatives I laid out over three years ago. As we review the results of different regions, I will point out the link between our results and execution of these strategic initiatives. Let’s start with Europe. European revenues for the quarter grew 15% in U.S. dollar and 20% in constant currency continuing the momentum from the successful implementation of our strategic initiative to elevate the quality of our sales and merchandizing organization. The growth was driven by new store openings, an increase in wholesale revenues and positive comps, including e-commerce, up 8% in U.S. dollar and up 12% in constant currency. The comp increase marked the 13th consecutive quarter of positive comps for the European region. During the quarter, we opened 20 directly operated stores in Europe. We opened stores in Italy, Spain, Turkey, Greece, UK, Hungary, Germany, Austria, Russia and Poland. This quarter is the first time the number of directly operated stores in Europe has exceeded the number of directly operated stores in the Americas. Our European wholesale business also continued to be very strong. We closed our fourth consecutive season of double-digit growth in spring/summer 2019, extending our progress in our strategic initiative to revitalize the wholesale channel. Encouragingly, the growth of the European wholesale channel is still coming predominantly from higher same-door buys indicated increasing productivity for the wholesale partners. The European segment margin contracted by 120 basis points primarily due to the pressure for incremental distribution costs related to the move of our distribution center. The pressure from this distribution cost on segment margin moderated comparing to the first half of the year. Moving to Asia, third quarter revenues were up 20% in U.S. dollar and 22% in constant currency. Revenue growth in the region was driven by positive comps, including e-commerce, up 8% in U.S. dollar and up 9% in constant currency. And by new store openings, performance in the quarter was driven by strong performances in China and Japan as this market continued to take larger shares of our Asian business. Our e-commerce business in China, especially within mall, continues to grow at terrific speed. This year, Singles Day or 11/11 was again strong for Tmall and Alibaba. While I won’t talk about our 11/11 results this year until we report our fourth quarter, I just want to remind you that we were already ranked within the top 100 international brands last year and we have consistently exceeded the growth of Tmall’s Singles Day growth climbing in the ranking every year since we started selling on Tmall a few years ago. Our relationship with Tmall and the reach it gives the Guess? brand is a superb complement to our brick and mortar presence where we still have a lot of white space. That’s why I’m confident that it’s just a matter of time before China becomes our second biggest market in the world. During the quarter, we opened 17 directly operated stores in Asia on a net basis, including 13 stores in China. Within China, we opened stores in Harbin in the North; Beijing and Dalian in the Northeast; Luoyang, Wuhan, Shiyan and Shanza in Central; Haikou in the South; and Shanghai, Shantou, Guangzhou and Zhanjiang in the Southeast. Operating margin of the Asian segment contracted 180 basis points in the quarter driven by country mix. We are still on track to expand margins for the year including the benefit of an earlier Chinese New Year this year. As you can see, we are executing very well our strategic initiatives to build a major business in Asia and have our sights on our long-term revenue goal of $750 million for the region. Turning to Americas Retail, we are thrilled with the continued turnaround in this business. Revenue for the quarter finished almost flat in U.S. dollar and up 1% in constant currency. This is a very strong result considering the significant number of stores we have closed since the same time last year. Comp sales, including e-commerce, for the quarter were up 3% in U.S. dollar and up 4% in constant currency marking our third consecutive quarter of positive comps. Importantly, we were significantly less promotional than last year with higher AURs and better conversion driving the comp. As I reiterated a few times over the past couple of years, we have been relentlessly executing our initiative to elevate the quality of sales and merchandizing organization in this region. And though it took a while to happen, this is now showing in the improvement in comp trend. While all our strategic initiatives are being executed globally, let me take a moment to remind you of how the different elements of this strategic initiative to elevate the quality of our sales and merchandizing organization have reinforced each other to drive the better sales results. Number one, deep knowledge of product of every store associate driving their service to the customer. This is achieved by rigorous training and workshops to impart this knowledge to our associates. Number two, a strategic of partnering with a number of celebrities and influencers using social media to rapidly connect with a broad target customer base and create brand buzz. On the subject, we are really excited about our partnership with J Balvin, the Reggaeton star from Colombia who will be the face of our spring campaign next year. Number three, the visual merchandizing in our window and in store have evolved to ensure that the display emphasize best seller and diversity of our 25 product categories in our lifestyle brands versus being category focused. Number four, we have higher product managers who ensure that product feedback from our store associates based on our customer interaction is relied back to the merchants, designers, sourcing, planning and our location teams in a seamless flow of information that is incorporated into the product development cycle. At the end, it isn’t any one thing that drives these strategic initiatives but a number of small elements that combine to have a collective impact of our sales performance. Americas Retail operating margins in the quarter expanded 330 basis points marking the fifth consecutive quarter of operating margin expansion. This was achieved through lower markdowns, better IMUs, and negotiated rent reductions. Both IMU and rent reductions have been key drivers of our strategic initiative to improve our cost structure and hence improve profitability in Americas Retail. IMU improvement have come from, number one, simplifying SKUs architecture by price point rationalization. Number two, strategically identifying new sourcing countries for our supplier base to drive better cost while maintaining or improving quality. Number three, from public platforming to get scale economies across multiple styles in addition to faster replenishment. Brand reduction have come from a very disciplined approach of using lease expirations and kick-outs as opportunities to drive rent down to levels that generate better profitability for the stores in the fleet. Staying in the American region, I want to take a moment to talk about the Americas Wholesale business. Revenue grew 15% in U.S. dollar and 18% in constant currency and was driven by a strong performance in our U.S. department store and specialty business. The strategic initiative to revitalize the wholesale business is driven by the same principle that drives our retail business; that is focus on product, high quality, visual merchandizing and rotation of inventory. As we approach the final quarter of the year, I am elated that the company has delivered strong results for the first nine months but more importantly we are now expecting to deliver double-digit revenue growth for the full year. If achieved, this will be the first time in eight years that our full year revenues grow in double digits. Importantly, we continue to make progress on our margin improvement. And at the high end of our guidance we expect to be very close to a 5% company operated margin, up less than 3% two years ago – up from less than 3% three years ago. And as I look forward to next year, this is what I see at this time. There is a lot of runway left in Europe and Asia, so I expect the store and revenue growth to continue into next year. As the Americas business has improved, I expect the cadence of the store closure in the region to ease. I see more opportunities to reduce costs, particularly in logistics and distribution and that will be a key driver of margin expansion in addition to revenue growth for next year and beyond on the path to our 7.5% operating margin goal. In conclusion, we are laser-focused on executing our plans, extending our turnaround and finishing the year on a strong note. Sandeep?

Thank you, Victor, and good afternoon. During this conference call, our comments reference certain non-GAAP or adjusted measures. Please refer to today’s earnings release for GAAP reconciliations or descriptions of such measures. Third quarter revenues were $605 million, up 10% in U.S. dollars and 13% in constant currency versus the prior year quarter. I would like to highlight that this was our ninth consecutive quarter of revenue growth. More importantly, this was the first time in eight years that we grew sales by double digits in the third quarter. Total company gross margin increased 160 basis points to 36.4% driven by less markdowns, higher IMUs and overall leverage, partially offset by the negative impact of occupancy deleverage from high European logistics costs related to the transition of our new distribution center. This was our sixth consecutive quarter of gross margin expansion for the company. Adjusted SG&A as a percentage of sales increased by 30 basis points mainly driven by pressure from distribution expenses in Europe. Adjusted operating earnings for the third quarter was $22 million, an improvement of 70% versus adjusted operating earnings last year, primarily driven by sales growth and gross margin expansion offset by the increase in SG&A. Adjusted operating margin finished 130 basis points better than last year at 3.7%, including a positive impact of foreign currency of roughly 20 basis points. This marks the fourth consecutive quarter where we’ve expanded adjusting operating margins for the company. Please refer to our press release from today for additional information on operating margins by segment. I would like to point out that we recorded $5.8 million of non-operating expense due to unrealized losses on mark-to-market adjustments related to non-operating assets and net revaluation losses on foreign exposures. This compared to non-operating income of $2.2 million in the third quarter of last year. Our third quarter adjusted tax rate was 32%, up from 25% last year driven by the mix of statutory earnings. Adjusted diluted earnings per share finished within the range of our guidance at $0.13. The negative impact of currency on earnings per share in the quarter was $0.02 and was worst than contemplated in our guidance in August by $0.04. The $0.13 in adjusted EPS represents an 8% improvement compared to adjusted EPS of $0.12 in last year’s third quarter and includes a negative foreign currency impact of roughly 17%. Moving on to the balance sheet. Accounts receivable was $286 million, up 21% in U.S. dollars and 24% in constant currency and includes the impact of classification changes from the adoption of ASC 606 revenue recognition standard. Inventories were $549 million, up 15% in U.S. dollars and 18% in constant currency versus last year, as we position ourselves for a strong holiday season, and includes the impact of classification changes from the adoption of the ASC 606 revenue recognition standard. Free cash flow was negative $123 million, a reduction of $23 million versus a negative $100 million in the prior year driven by changes in working capital and increase in capital expenditures. We ended the quarter with cash and cash equivalents of $139 million compared to last year’s $233 million. Cash less debt at the end of the third quarter was $99 million compared to $192 million last year. This is after having returned $74 million in dividends and $49 million in cash paid for share repurchases to shareholders in the last 12 months. Since the start of our dividend program in 2007, we have returned over $1.5 billion to our shareholders in the form of dividends and share buybacks. Moving on to the guidance, I should point out that our outlook for the fourth quarter and full year of fiscal 2019 does not assume any asset impairment charges. The outlook includes the adoption of ASC 606 revenue recognition standard, which became effective in the first quarter. Also, guidance for revenues and comp sales for the total company and by segment is included in the supplemental table attached to our earnings release. For the fourth quarter of fiscal 2019, we expect revenues for the quarter to be up 7.5% to 9.5% in constant currency, including a 2.5% negative impact from anniversarying the 53rd from last year’s fourth quarter. At prevailing exchange rates, we estimate that currency will be roughly a 3.5 percentage point headwind on consolidated revenue growth for the quarter. Our gross margin is expected to be up due to IMU improvement from our supply chain initiatives, lower markdowns and lower rents. The SG&A rate is expected to be up compared to last year, primarily due to an increased investment in digital marketing and advertising as well as higher European distribution costs. We are planning an operating margin for the quarter between 9.5% and 10% with a minimal impact from currency. Earnings per share is planned in the range of $0.69 per share to $0.76 per share and does not assume any further share buybacks. Excluding currency, this represents a 21% increase in adjusted EPS after absorbing the negative impact of anniversarying last year’s 53rd week as well as a 90 basis point improvement in adjusted operating margin for the quarter at the high end of our guidance. Our tax rate for the fourth quarter is estimated to be 25%. We expect consolidated revenues for the year to be up 10% to 10.5% in constant currency after taking into account the comparative negative impact of 1% from the 53rd week in the prior year. At prevailing exchange rates, we estimate minimal currency impact on consolidated revenue growth for the year. For the full year, we expect gross margins to be up due to improved IMUs in both the Americas and Europe, lower markdowns and lower rents. The SG&A rate is expected to be up for the year due to an increase in investment in digital marketing and advertising as well as European distribution costs. Our adjusted tax rate for the year is estimated to be 25%. This includes the benefits to our effective tax rate resulting from lower U.S. federal tax rates resulting from the tax reform. We are planning an adjusted operating margin between 4.5% and 4.8% with 10 basis points negative currency impact on operating margin and our guidance assumes foreign currencies remain roughly at prevailing rates. We are raising the lower end of our adjusted earnings per share guidance for the year to a range of $0.96 to $1.03 per share. The earnings per share guidance includes a currency tailwind of roughly $0.01 per share. This compares to our prior guidance of $0.94 to $1.03, which included a $0.06 currency tailwind. In other words, we have effectively increased our guidance by $0.05 at the top end excluding the impact of currency. In fact, since the beginning of the year, currency has moved against us by $0.14 and that has been fully absorbed as we have maintained or increased guidance throughout the year. The high end of our new guidance represents a 47% increase over last year’s adjusted EPS. Excluding currency impacts, the high end of our guidance represents a 46% increase in adjusted EPS and represents an adjusted operating margin improvement of 120 basis points. CapEx for the year is now expected to range from $95 million to $100 million as we continued to invest in our retail expansion in Europe and Asia and in our technology infrastructure to support that long-term growth. 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 December 12, 2018. With that, I will conclude the company’s remarks and open the call up for your questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. The first question in the queue is from Susan Anderson with B. Riley FBR. You may begin.

Hi. Good evening. Very nice quarter. Congratulations.

Thank you, Susan.

I guess I wanted to maybe dig in a little bit on the European margin. It’s definitely nice to see that trajectory continue there. I guess any thoughts you could give on kind of returning to margin growth there? Should we continue to see this trajectory and potentially return to positive growth next year? And then any update you could give on the old DC in Europe and kind of thoughts around shutting that down or keeping it open?

Hi, Susan. It’s Sandeep. So I think on the European margins in the quarter, as you saw, we actually contracted by 120 bips and this was definitely an improvement and we said we would moderate in the back half. I think we contracted by 200 bips in the second quarter. And I think where we are, we continue to make progress. We expect to continue to make progress through the fourth quarter, through the end of the year. And if you go back to the prepared remarks, I think Victor was mentioned that one of the things as we look forward to next year in terms of opportunities from a cost structure perspective is definitely potential savings on distribution costs. And we believe that as we start realizing those savings on distribution costs, we will definitely get to a place where margin expansion resumes for Europe and that’s our full expectation at this time.

Great. That’s helpful. Go ahead.

And then I think on the distribution center itself, it’s a broader discussion. One thing is of course the opening of the distribution center but I think more important is with the volumes actually pacing so far ahead of what we initially expected a couple of years ago. I think it’s just more an issue of making sure that we have capacity for future growth. We’ve talked about so much white space in front of us in Europe in a number of the different markets. So we just need to equip ourselves to have enough run way from a capacity standpoint. And that’s a lot of what’s been going on this year and has caused lot of the margin pressure that you’ve seen this year.

Great. And then one follow-up question on the Americas Retail, very nice profit improvement there, which is good to see. I guess any early thoughts on where you think this business could be longer term? And then I guess just in terms of the brand in North America, how are you feeling about the brand in the U.S.? It’s clearly resonating better with the consumer. Is this Guess? benefiting from retro '80s, '90s or you’re obviously doing a good job attracting more consumers into the brand? And I guess how much staying power do you think these positive comps have?

Hi, Susan. This is Victor. So basically in Americas Retail as you may know, I’ve been three years and a half with the company and we’ve been trying to turnaround this business for the last three years and a half. And I think that we have seen that now for the last three quarters and also we’re guiding positive comps for the fourth quarter that this is happening at this moment. The brand relevancy in the U.S. and in North America is very strong and we are seeing that. We are starting to see positive comps. Even on total sales we were flat even though we closed so many stores last year. It’s a combination between the cool product that we are having in the stores plus the sexy and DNA product that we have been always as well having in the stores. An important thing that I want to tell you as well is that all these positive comps is coming as well from conversion, from AUR and also as well by product consistency. I think that right now the new customer and the existing customer, they expect from us the product that we are delivering. And in my remarks I was saying a lot of things about how we are doing the visuals, how we are doing – for example, we have a product manager that is helping or is in daily contact with all our store managers in order to have some customer feedback in order afterwards to continue improving our product portfolio. So all these kind of activities are also linked with all the celebrity endorsements that we’ve been doing for the last three years and a half. And for example in the next season, our new face for the company – for the campaign will be José Balvin which is a Colombian Reggaeton singer that I think is going to be also helping the relevancy of the brand. And we are continuing also doing a lot of things in terms of Instagram celebrities in terms of continuing with other digital initiatives that are helping as well and our expanding the relevancy of the brand.

Great. Nice job again. Good luck. Thanks. See you guys.

Thank you.

Thank you. The next question in the queue comes from Omar Saad with Evercore ISI. Your line is open. Please proceed.

Thanks. Good evening. Nice quarter, guys. Thanks for taking my question. I wanted to actually focus on Europe a little bit. It’s been a bit of a controversial market for a lot of the apparel companies we follow. The weather was very warm over this summer. It looks like you had a really nice acceleration on the comp store sales level. Maybe if you could help give us a feel for the landscape there, what you’re seeing, what’s driving your business? Did you have an effect in weather, especially as it got cooler over there and the temperatures became more seasonal or is it really brand specific, product specific, what you’re putting in the market that’s resonating that drove that acceleration? Thank you.

So, Omar, I think we’re really thrilled with the performance in Europe. This is the 13th consecutive quarter of positive comps that we’ve had over there. And I think it’s actually very interesting but I would actually link the answer to exactly what Victor was saying about the Americas Retail, because we’ve talked about the strategic initiative to elevate the quality of the sales and merchandizing organization. This initiative has been implemented globally from the get-go. So the results have started coming more recently in the Americas in the last three quarters, but it’s been coming for a while in Europe. And I think what you’re seeing is an acceleration that you saw in the quarter coming a lot from execution of the strategic initiatives in Europe. The product’s resonating great. The performance that we’re seeing is driven by both traffic and conversion. And so it’s really very exciting. And I think weather was a factor but not a huge factor. Last year it was more of a factor than this year. But I think the encouraging thing to us is there’s a big consistency on performance whichever channel we’re talking about, whether it’s in stores, whether it’s on e-commerce and all our Web sites, across all the different markets in which we actually play. And the wholesale business has just been fantastic for us. The fact that we’ve had four consecutive seasons of double-digit increases mostly driven by productivity of our wholesale partners really speaks to the sustainability of this trend that we’re seeing. And that’s why we’re so excited about the white space beyond and the fact that there’s so much traction that’s coming from all of the things that we’ve been doing over the last three years. We don’t see any headwinds that impacted us in the third quarter and I think as we look forward, we’re very confident of what’s coming in the fourth quarter and frankly into next year as well. And the distribution center problems that we’ve talked about earlier are really in some ways a good problem to have because it’s because of the business expanding so much in scale and perhaps much, much faster than we anticipated.

Omar, I want to say that I’m very, very proud of what we are doing in Europe. Of course, the weather is affecting us like everyone else, but I think that basically we are building a very sustainable business and there is still a lot of white space, I think we are performing very well in every single channel which I think is a very important thing. I think landlords, they are calling us at this moment in order to tell us we want guests in our shopping malls. So I think that what we are facing at this moment in Europe is something great and we are very happy and hopefully we can continue doing this in the next coming quarters.

Well put, guys. Thank you. Best wishes for holiday.

Thank you, Omar.

Thank you.

Thank you. The next question in the queue comes from John Kernan with Cowen and Company. Your line is open, sir. Please proceed.

Good afternoon, Victor and Sandeep. Congrats on the continued momentum.

Thank you.

Thank you.

Victor, I just want to go back to comments you made in your prepared remarks. You talked about more opportunity in logistics. Certainly the margin recovery in North America has been pretty incredible this year. I think your EBIT dollars have improved over $37 million just in the last 12 months. I know IMU and lower markdowns and better rents have been a factor within that. But now it seems like you’re pointing to better logistics and distribution costs also being a catalyst for margin improvement in Americas Retail. Can you talk to the timing of that? Is that something we can expect next year to be additive to the IMU and markdown benefits and rent benefits you’ve been seeing?

Well, basically – John, thank you. We are not only – we have opportunities to reduce costs in distribution, in logistics, in IMU, in markdowns, being less promotional. So there are several things that we’ve been doing for the last three years. But particularly right now in Europe as we’ve been experiencing such a tremendous growth, we believe that at this moment I think we can stabilize much more our distribution centers in order to reduce the costs that we’ve been facing for the last few quarters. And regarding the U.S., I think that – as you can see, all these positive comps is driven by conversion and by AUR. And I think this is something that is very important to let you know, because at the same time what we are trying to be is less promotional, the product is better product I think because if not, you won’t have a better conversion. But as you may now, I think this could be sustainable. I think we are guiding positive comp for the fourth quarter and I’m very confident that we are going to do, because already past one month. And I think the thing is that you have several KPIs in order to continue being – delivering positive comps for the next few quarters. And you have the conversion, you have the AUR, you have the traffic, you have the product consistency. You have several things that are going to help us I think and sometimes it will be the conversion in the U.S., sometimes it will be the traffic, sometimes it will be another thing. So definitely we are very optimistic on the performance of Americas Retail on the coming quarters.

Got it. Thank you. And then I guess jumping to Asia, the revenue growth here through the first nine months has been fantastic. There has been a little bit of margin pressure the last couple of quarters obviously due to a lot of the investments and store growth you’re making there. When do you think there can be an inflexion in the overall margin level within Asia? I think we can all see the top line white space. Just wondering when you kind of get to that operating margin target that you’ve talked about for that region.

John, it’s Sandeep. So I think we already said for this year we’re still expecting margin to expand for the year. There’s been a bit of choppiness. Obviously we expanded in the first quarter and I think have contracted with the last couple of quarters. But I think overall for the year, we still expect to come out ahead. And really what we see is as the portfolio markets gets more and more stable and Australia and Singapore were recent additions, you’re going to have continued margin expansion. And the low double digit margin goal that we have for the region is definitely within reach. And you can see that if you go back a couple of years, we’re almost at breakeven and now we’re give or take 5%. So it can move pretty quickly. And so that’s why we think that there’s a lot of opportunity to move pretty quickly in margins in Asia and it’s just a matter of time. And I think the revenue growth is there to be seen.

I want to add, John, as well that I think China and I mentioned this on my remarks that could become the second largest market for us in the future, because we are very positive on our performance, our brand relevancy over there. I think we are in more than 50 cities at this moment in China presence on brick and mortar. We are having an excellent relationship with Tmall and other marketplaces in China. So everything is going as good as I believe is going in Europe.

Got it. And then just a follow up on that point on Europe. You guys seem quite optimistic about the overall opportunity there. Sandeep, did you comment on what your order books look like for spring/summer fiscal '20?

Yes, I think for spring/summer 2019 season is up double digits. And we closed that during the course of the quarter. And we’re really thrilled. It’s the fourth consecutive quarter of double-digit growth in the order book. So we’re just going from strength-to-strength. And like I said, most of the growth is coming from same-door buys. So it’s the same customers who are getting better and better sell-throughs and their productivity is improving.

One fine question just on the Venlo DC. Obviously there were some expenses associated with that in the first half of this year. We’re fully passed those expenses at this point, correct, as we go into the fourth quarter and next year?

Well, I think there’s – there basically are expenses that are still ongoing even in the third quarter. And if you go back to the prepared remarks, we attributed a lot of the expense pressure to some of the distribution costs. But as we were saying, we’re expecting some moderating in the back half. It’s started – the margin contraction narrowed. We expect this to continue into the fourth quarter. But as we actually go into next year, we see opportunity, massive opportunity because what we’ve done really, John, is we’ve invested in building the infrastructure for our long-term growth potential. And it’s clear that the long-term growth potential was always there but it’s accelerated so much that it’s come so much quickly – so much more quickly than we expected that we had to retool to make sure that we had the capacity to fulfill that growth. And that’s what we’re really been doing all year. And it’s gone beyond the initial plan of the Venlo DC. It’s gone to an overall distribution strategy in Europe and making sure we have infrastructure to support the long-term growth.

Got it. Thanks, guys. Best of luck.

Thank you.

Thank you. The next question in the queue comes from Janine Stichter with Jefferies. Your line is open.

Hi, everyone. Nice job. I want to ask a little bit about traffic. I think you talked about the comps in the Americas being led by AUR but you’re also seeing moderating traffic declines there. Is there something you’re still seeing? And then any change in tourism you saw during the quarter? And then also just wanted to dig into the comments on Asia about country mix. Understanding that you have kind of a different operating model in each country that you operated in there. Can you talk a little bit about what drove that and if that’s something you expect to continue? Thank you.

Yes. So I think on the traffic trends, Janine, we’ve talked about the fact that traffic trends were still negative but moderated slightly in the front half. It really didn’t change – it got maybe marginally worse in Q3. But I think what has really started accelerating for us is apart from the AURs that we were benefitting from, conversion is really kicking in. So the product’s really resonating. And I think we are expecting that to be a key driver of our comp improvement even in the fourth quarter as we go into the fourth quarter. But I’d say on the traffic side, the mall is the mall and traffic has been down. I think you all have information to see that. However, we’re basically making a lot of investments in driving traffic into the stores and to our Web sites longer term and that’s why we make the investments in marketing that we are, the celebrity endorsements that we’re doing and all the events that we’re doing. The Farmer’s Market, for example, is all about creating brand buzz. We talked about in the past we’ve actually participated in things like ComplexCon in LA. And all these things create a tremendous amount of buzz which ultimately drives much more qualified traffic to our stores, to our Web sites and people who are our customers who are connecting with the brand and that’s not a transaction, it’s a relationship with the brand and that’s what we’re trying to do. And I think over time we believe the traffic too will turn in our favor and that’s why we’re making those investments. So that was on the traffic. Janine, I think you also asked about the country mix in Asia. So I think on the country mix in Asia, a big piece of it obviously is Australia because we made the investments last year in that business and I think we basically have to lapse some of those investments before that pressure for margin basically starts abating. And I think the margin profiles of some of the countries are a little bit different as well. And when it’s a small margin and a small value that we’re talking about, the percentages are a bit more sensitive. But I think overall we still feel like for the year we’re good. We’re expecting to expand margins. And the idea is that we get to the low double digits over time. And that’s why we’re very confident. We’ve done this before with Japan and China where we made investments. It took a while for margins to come, but they came. Now we went into Australia, Singapore and made those investments. It’s no problem. The margin expansion will come next year.

Great. Thank you.

Thanks.

[Operator Instructions]. The next question in the queue comes from Dana Telsey with Telsey Advisory. Your line is open, ma’am.

Good afternoon. As you think of the progress that you’ve made both on wholesale and at retail, at the beginning of the year you talked about the interactions with store level managers to corporate, the more analytical approach that you would be taking with money maps in the stores to determine bestsellers and the speed to market in the supply chain. Now it’s obviously 11 months later. Where are you do you feel in terms of that path to reaching where you want to be, how far along are we as you think about '19, what are the next evolutions that we see in those areas? Thank you.

Well, we are as far as the comp is positive. And definitely I think we will continue developing this to more extent and trying to – it was not only at the beginning of the year. I think we’ve been implementing this for the last three years. And right now I think we’re seeing the results. But definitely it’s something that we believe that has to be put in our business model. And these kind of things, the interaction between the stores and the headquarters, the interaction of everyone in the store in order to get some product feedback from the customers that afterwards will impact our collections are essential in our business model. Not only in North America, we’ve been doing this and implementing this in all around – in the other two regions as well.

And the uptick in denim where we’re seeing the improvement in denim everywhere, how much of an impact is that? And are you noticing different trends in Europe, Asia or the U.S. in that core category?

What I can tell you is that the key categories apart of denim is dresses, sweaters and outwear where we are seeing at this moment. And in terms of fashion trends, I think that we are seeing a lot of animal prints, florals, leather dressing as well, embellishment, exaggerated shoulders, elevated athleisures. So we are seeing all these things but at the same time we are seeing an important increase on the denim category and basically it’s all around the three regions.

Got it. Thank you.

Thank you.

As there are no more questions at this time, we will conclude today’s conference. Ladies and gentlemen, now disconnect.