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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number:  1-11893

GUESS?, INC.

(Exact name of registrant as specified in its charter)

(213) 765-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

As of June 5, 2009, the registrant had 92,020,058 shares of Common Stock, $.01 par value per share, outstanding.

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GUESS?, INC.
FORM 10-Q
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PART I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements.

GUESS?, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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GUESS?, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 2, 2009

(unaudited)

(1)           Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Guess?, Inc. and its subsidiaries (the “Company”) contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed consolidated balance sheets as of May 2, 2009 and January 31, 2009, and the condensed consolidated statements of income, the condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows for the three months ended May 2, 2009 and May 3, 2008. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they have been condensed and do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended May 2, 2009 are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.  The Company has made certain reclassifications to the prior year’s consolidated financial statements to conform to classifications in the current year. These reclassifications had no impact on previously reported results of operations.

The three months ended May 2, 2009 had the same number of days as the three months ended May 3, 2008.

Recent Accounting Pronouncements Adopted

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Positions (“FSP”) Statement of Financial Accounting Standards (“SFAS”) No. 157-1 (“FSP 157-1”) and FSP SFAS No. 157-2 (“FSP 157-2”). FSP 157-1 amends SFAS 157, “Fair Value Measurements,” to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions. FSP 157-2 relates to the measurement of fair value for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted FSP 157-2 effective February 1, 2009 for all nonfinancial assets and liabilities as required. Refer to Note 13 for additional information. The adoption of FSP 157-2 did not have a material impact on the Company’s financial position or results of operations for the three months ended May 2, 2009.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”), “Business Combinations,” which replaces FASB Statement 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value in purchase accounting. SFAS 141R amends SFAS No. 109, “Accounting for Income Taxes,” to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. The Company adopted SFAS 141R on February 1, 2009 and will apply the provisions of the statement to all future acquisitions from such date.

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Accounting for Noncontrolling Interests,” which clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. The Company adopted SFAS 160 on February 1, 2009. Refer to Note 3 for further information. The provisions of SFAS 160 have been applied prospectively with the exception of reclassifying noncontrolling interests to equity in the Company’s consolidated balance sheets and recasting consolidated net earnings to include net earnings prior to fiscal 2010 attributable to both the controlling and noncontrolling interests, which are required to be adopted retrospectively.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities,” which amends SFAS 133 and expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives. The Company adopted SFAS 161 on February 1, 2009 and has included the expanded disclosures in Note 14.

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In June 2008, the FASB Emerging Issues Task Force (“EITF”) issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” which requires unvested share-payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class method of computing earnings per share. FSP EITF 03-6-1 also requires retrospective application to all periods presented. The Company adopted FSP EITF 03-6-1 on February 1, 2009 and applied it retrospectively to all periods presented. Refer to Note 2. The adoption of FSP EITF 03-6-1 resulted in a reduction in diluted earnings per common share of approximately $0.01 for each of the three months ended May 2, 2009 and May 3, 2008.

Recent Accounting Pronouncements Issued

In April 2009, the FASB issued FASB Staff Position FAS No. 107-1 and APB 28-1 (“FSP 107-1”), “Interim Disclosures about Fair Value of Financial Instruments.”  FSP 107-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. The Company will adopt FSP 107-1 in the second quarter of fiscal 2010 and include the required disclosures in its consolidated financial statements in interim reporting periods.

In May 2009, the FASB issued SFAS No. 165 (“SFAS 165”), “Subsequent Events.”  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS 165 is effective for interim reporting periods ending after June 15, 2009. The Company will adopt SFAS 165 in the second quarter of fiscal 2010.

(2)           Earnings Per Share

Basic earnings per share represent net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share represent net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards are excluded from the dilutive impact of common equivalent shares outstanding in accordance with FASB SFAS No. 128, “Earnings per Share,” and FSP EITF 03-6-1 under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities.  Under the two-class method, earnings attributable to nonvested restricted stockholders are excluded from net earnings attributable to common stockholders for purposes of calculating basic and diluted earnings per common share.

The computation of basic and diluted net earnings per common share attributable to common stockholders is as follow (in thousands):

For the three months ended May 2, 2009 and May 3, 2008, equity awards granted for 1,191,691 and 546,880, respectively, of the Company’s common shares were outstanding but were excluded from the computation of diluted weighted average common shares and common share equivalents outstanding because their effect would have been anti-dilutive.

In addition to the nonvested restricted stock awards (participating securities) discussed earlier, the Company also excluded 563,400 nonvested stock options granted to certain employees from the computation of diluted weighted average common shares and common share equivalents outstanding, because they are subject to certain performance-based annual vesting conditions which had not been achieved by the end of the three months ended May 2, 2009.

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In March 2008, the Company’s Board of Directors terminated the previously authorized 2001 share repurchase program and authorized a new program to repurchase, from time-to-time and as market and business conditions warrant, up to $200 million of the Company’s common stock (the “2008 Share Repurchase Program”). Repurchases may be made on the open market or in privately negotiated transactions, pursuant to Rule 10b5-1 trading plans or other available means. There is no minimum or maximum number of shares to be repurchased under the program and the program may be discontinued at any time, without prior notice. During the three months ended May 2, 2009, the Company repurchased 407,600 shares under the 2008 Share Repurchase Program at an aggregate cost of $5.3 million.

(3)           Stockholders’ Equity

A reconciliation of the total carrying amount of total stockholders’ equity, stockholders’ equity attributable to Guess?, Inc. and stockholders’ equity attributable to noncontrolling interests for the three months ended May 2, 2009 is as follows (in thousands):

(a) The gain of $11.0 million related to foreign currency translation adjustments for the three months ended May 2, 2009 reflects the impact of the increase in certain foreign currency values relative to the U.S. dollar during that period.  As of May 2, 2009, approximately 48% of the Company’s assets were denominated in currencies other than the U.S. dollar.

(b) The consolidated statements of comprehensive income are presented net of taxes.  The income tax expense on unrealized gain on hedges, unrealized loss on investments and SERP prior service cost and actuarial valuation loss amortization was $0.7 million, $0.0 million and $0.2 million, respectively, for the three months ended May 3, 2008.

(c) Total comprehensive income consists of net earnings, Supplemental Executive Retirement Plan (“SERP”) related prior service cost and actuarial valuation loss amortization, unrealized gains or losses on investments available for sale, foreign currency translation adjustments and the effective portion of the change in the fair value of cash flow hedges.

(4)           Accounts Receivable

Accounts receivable consists of trade receivables primarily relating to the Company’s wholesale businesses in Europe, North America and Asia. The Company provided for allowances relating to these receivables of $23.3 million and $21.3 million, at May 2, 2009 and January 31, 2009, respectively. In addition, accounts receivable includes royalty receivables relating to licensing operations of $15.7 million and $20.7 million at May 2, 2009 and January 31, 2009, respectively, for which the Company recorded an allowance for doubtful accounts of $0.5 million at both May 2, 2009 and January 31, 2009. The accounts receivable allowance includes allowances for doubtful accounts, wholesale sales returns and wholesale markdowns. Retail sales returns allowances are included in accrued expenses.

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(5)           Inventories

Inventories consist of the following (in thousands):

As of May 2, 2009 and January 31, 2009, inventories had been written down to the lower of cost or market by $22.4 million and $20.0 million, respectively.

(6)           Income Taxes

Income tax expense for the interim periods was computed using the effective tax rate estimated to be applicable for the full fiscal year. The Company’s effective income tax rate decreased to 33% for the three months ended May 2, 2009 from 36% in the three months ended May 3, 2008, primarily due to a higher estimated proportion of annual earnings in lower tax jurisdictions.

(7)           Segment Information

The business segments of the Company are retail, wholesale, European and licensing. Management evaluates segment performance based primarily on revenues and earnings from operations.  Corporate overhead, interest income and interest expense and other income and expense are evaluated on a consolidated basis and are not allocated to the Company’s business segments.

Net revenue and earnings from operations are summarized as follows for the three months ended May 2, 2009 and May 3, 2008 (in thousands):

Due to the seasonal nature of the Company’s business segments, the above net revenue and operating results are not necessarily indicative of the results that may be expected for the full fiscal year.

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(8)           Borrowings and Capital Lease Obligations

Borrowings and capital lease obligations are summarized as follows (in thousands):

On September 19, 2006, the Company and certain of its subsidiaries entered into a credit facility led by Bank of America, N.A., as administrative agent for the lenders (the “Credit Facility”). The Credit Facility provides for an $85 million revolving multicurrency line of credit and is available for direct borrowings and the issuance of letters of credit, subject to certain letters of credit sublimits. The Credit Facility is scheduled to mature on September 30, 2011. At May 2, 2009, the Company had $24.5 million in outstanding standby letters of credit, $4.3 million in outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.

The Company, through its European subsidiaries, maintains short-term borrowing agreements, primarily for working capital purposes, with various banks in Europe. Under these agreements, which are generally secured by specific accounts receivable balances, the Company can borrow up to $222.1 million, limited primarily by accounts receivable balances at the time of borrowing, except for one borrowing agreement which is partially secured by a $10.0 million standby letter of credit issued under the Company’s Credit Facility. Based on the applicable accounts receivable balances at May 2, 2009 and the standby letter of credit, the Company could have borrowed up to approximately $212.0 million under these agreements. However, the Company’s ability to borrow outside the Credit Facility through foreign subsidiaries is generally limited to $185.0 million under the terms of the Credit Facility. At May 2, 2009, the Company had $28.6 million of outstanding borrowings and $9.9 million in outstanding documentary letters of credit under these agreements. The agreements are primarily denominated in Euros, have no financial ratio covenants and provide for annual interest rates ranging from 1.3% to 6.1%. The maturities of the short-term borrowings are generally linked to the credit terms of the underlying accounts receivable that secure the borrowings.

The Company entered into a capital lease in December 2005 for a new building in Florence, Italy. At May 2, 2009, the capital lease obligation was $16.4 million. The Company entered into a separate interest rate swap agreement designated as a non-hedging instrument resulting in a swap fixed rate of 3.55%. This interest rate swap agreement matures in 2016 and converts the nature of the capital lease obligation from Euribor floating rate debt to fixed rate debt. The fair value of the interest rate swap liability as of May 2, 2009 was approximately $0.8 million.

From time-to-time the Company obtains other short term financing in foreign countries for working capital to finance its local operations.

(9)           Share-Based Compensation

The following table summarizes the share-based compensation expense recognized under all of the Company’s stock plans during the three months ended May 2, 2009 and May 3, 2008 (in thousands):

Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $19.5 million and $45.5 million, respectively, as of May 2, 2009. This unrecognized expense assumes the performance-based equity awards vest in the future. This cost is expected to be recognized over a weighted-average period of 1.9 years. The weighted average fair values of stock options granted during the three months ended May 2, 2009 and May 3, 2008 were $8.88 and $16.49, respectively.

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On April 14, 2009, the Company made an annual grant of 1,105,400 stock options and 106,400 nonvested stock awards/units to its employees.

On May 1, 2008, the Company granted 167,000 nonvested stock awards to certain employees which are subject to certain annual performance-based vesting conditions over a five year period.  On October 30, 2008, the Company granted 563,400 nonvested stock options to certain employees which are scheduled to vest over a four year period, subject to the achievement of performance-based vesting conditions for fiscal 2010.  During the first quarter of fiscal 2010, the Compensation Committee determined that the performance goals established in the prior year were no longer set at an appropriate level to incentivize and help retain employees given the significant, and greater than previously anticipated, deterioration of the economy that had occurred since the goals were established. In April, 2009, the Compensation Committee modified the performance goals of the outstanding performance-based stock awards and options to address the challenges associated with the current economic environment. The modifications did not have a material impact on the consolidated financial statements of the Company.

(10)         Related Party Transactions

The Company and its subsidiaries periodically enter into transactions with other entities or individuals that are considered related parties, including certain transactions with entities affiliated with trusts for the respective benefit of Maurice and Paul Marciano, who are executives of the Company, Armand Marciano, their brother and former executive of the Company, and certain of their children (the “Marciano Trusts”).

Leases

The Company leases warehouse and administrative facilities, including the Company’s corporate headquarters in Los Angeles, California, from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were three of these leases in effect at May 2, 2009 with expiration dates in February 2010, December 2014 and July 2018.

Aggregate rent expense under these related party leases for the three months ended May 2, 2009 and May 3, 2008 was $1.0 million and $0.9 million, respectively. The Company believes the related party lease terms have not been significantly affected by the fact that the Company and the lessors are related.

Aircraft Arrangements

The Company periodically charters aircraft owned by MPM Financial, LLC (“MPM Financial”), an entity affiliated with the Marciano Trusts, through an independent third party management company contracted by MPM Financial to manage its aircraft. Under an informal arrangement with MPM Financial and the third party management company, the Company has chartered and may from time-to-time continue to charter aircraft owned by MPM Financial at a discount from the third party management company’s preferred customer hourly charter rates. The total fees paid under these arrangements for the three months ended May 2, 2009 and May 3, 2008 were approximately $0.1 million and $0.2 million, respectively.

These related party disclosures should be read in conjunction with the disclosure concerning related party transactions in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.

(11)         Commitments and Contingencies

Leases

The Company leases its showrooms and retail store locations under operating lease agreements expiring on various dates through January 2023. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 6%, when specific sales volumes are exceeded. Some leases include lease incentives, rent abatements and fixed rent escalations, which are amortized and recorded over the initial lease term on a straight-line basis. The Company also leases some of its equipment under operating lease agreements expiring at various dates through August 2013.

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Incentive Bonuses

Certain officers and key employees of the Company are eligible to receive annual cash incentive bonuses based on the achievement of certain performance criteria. These bonuses are based on performance measures such as earnings per share and earnings from operations of the Company or particular segments thereof, but they may also be based on other objective or subjective criteria as determined by the Compensation Committee of the Board of Directors. In addition to such annual incentive opportunities, Paul Marciano, Chief Executive Officer and Vice Chairman of the Company, shall be entitled to receive a $3.5 million special cash bonus based on the achievement of a pre-established licensing performance target in calendar year 2008, subject to the receipt by the Company in 2012 of a fixed cash rights payment of $35.0 million, which is due in January 2012 from one of its licensees. In connection with this special bonus, the Company will accrue an expense of $3.5 million, plus applicable payroll taxes, through December 2012.

Litigation

In 2006, the Officers of the Florence Customs Authorities (“Customs Authorities”) began an import customs audit with respect to the Company’s Italian subsidiary, Maco Apparel S.p.A. (“Maco”), in Florence, Italy, which was acquired on January 3, 2005. Maco was the Italian licensee of GUESS? jeanswear for men and women in Europe. As part of the audit, the Customs Authorities considered whether the Italian subsidiary should have included the royalty expense payable to Guess?, Inc., the parent company, as part of the cost of the product subject to customs duties. The Customs Authorities have subsequently reviewed specific transactions which occurred in 2003, 2004, 2005 and 2006 and provided a preliminary assessment that the royalty expenses are subject to customs duties and related penalties. The Company is disputing the Customs Authorities’ assessment and intends to vigorously defend its position. In addition, under the terms of the Maco purchase agreement, the seller is required to indemnify the Company for 90% of any loss with respect to Maco for periods prior to the acquisition. The Customs Authorities have filed several claims which are heard independently within various sections of the Florence Provincial Tax Commission. Each claim represents a portion of the period under review. The first hearings with the Florence Provincial Tax Commission commenced on October 29, 2007. Judgments for a number of the claims have been received that were favorable to the Company on certain aspects of the claims and unfavorable on other aspects of the claims. The Company intends to appeal the unfavorable aspects of the judgments. Based on a request by a judge from the Florence Provincial Tax Commission, the Company and the Customs Authorities are exploring the possibility of an out of court settlement. While the Company continues to believe in the strength of its position, the Company recorded an accrual in the fourth quarter of fiscal year 2009 based on the settlement negotiations. Both the amount of the accrual and the possible risk of loss in excess of the accrual are not considered by the Company to be material to its financial results or financial position.

On May 6, 2009, Gucci America, Inc. filed a complaint in the U.S. District Court for the Southern District of New York against Guess?, Inc. and Guess Italia, S.r.l. asserting, among other things, trademark and trade dress law violations and unfair competition. The complaint seeks injunctive relief, unspecified compensatory damages, including treble damages, and certain other relief. A similar complaint has also been filed in the Court of Milan, Italy. The Company plans to defend the allegations vigorously.  The Company believes that it is too early to predict the outcome of this action or whether the outcome will have any impact on the Company’s financial condition or results of operations.

The Company is also involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s consolidated results of operations or financial position. No material amounts were accrued as of May 2, 2009 related to any of the Company’s legal proceedings.

(12)         Supplemental Executive Retirement Plan

The components of net periodic pension cost for the three months ended May 2, 2009 and May 3, 2008 were as follows (in thousands):

As a non-qualified pension plan, no funding of the SERP is required. However, the Company expects to make periodic payments into an insurance policy held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The cash surrender value of the insurance policy was $16.9 million as of May 2, 2009 and is included in other assets. The amount of future payments may vary, depending on the future years of service, future annual compensation of the participants and investment performance of the trust. As a result of the increase in value of the insurance policy investments, the Company recorded mark-to-market gains of $1.2 million and $0.4 million in other income and expenses during the three months ended May 2, 2009 and May 3, 2008, respectively.

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(13)         Fair Value Measurements

Fair value is defined in SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect assumptions about what market participants would use in pricing the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

SFAS 157 requires the use of observable market data if such data is available without undue cost and effort.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of May 2, 2009 and January 31, 2009 (in thousands):

The fair values of the Company’s available-for-sale securities are based on quoted prices. Fair value of the interest rate swaps are based upon inputs corroborated by observable market data. The foreign exchange forward contracts are entered into by the Company principally to hedge the future payment of inventory transactions by non-U.S. subsidiaries. The fair values of the Company’s foreign exchange forward contracts are based on quoted forward foreign exchange prices at the reporting date. Deferred compensation obligations to employees are adjusted based on changes in the fair value of the underlying employee-directed investments. Fair value of these obligations is based upon inputs corroborated by observable market data.

(14)         Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts and swaps to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules as required by SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivatives and Certain Hedging Activities,” for certain of these hedges.

In March 2008, the FASB issued SFAS 161 which amends SFAS 133 and expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives.  The Company adopted SFAS 161 on February 1, 2009 and the required disclosures are provided below.

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The Company’s objective is to hedge the variability in forecasted cash flow due to the foreign currency risk. Various transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars, British Pounds or Swiss Francs and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their local functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British Pound intercompany liabilities. In addition, certain operating expenses are denominated in Swiss Francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. The Company enters into derivative financial instruments, including forward exchange contracts and currency swaps, to manage exchange risk on certain anticipated foreign currency transactions. The Company does not hedge all transactions denominated in foreign currency.

The impact of the credit risk of the counterparties to the derivative contracts are considered in determining the fair value of the foreign currency forward contracts. As of May 2, 2009, credit risk has not had a significant effect on the fair value of the Company’s foreign currency contracts.

The Company also has interest rate swap agreements which are not designated as hedges for accounting purposes, to effectively convert a portion of its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s variable rate debt, thus reducing the impact of interest rate changes on future interest cash flows. Refer to Note 8 for further information.

The fair value of derivative instruments in the consolidated balance sheet as of May 2, 2009 was as follows (in thousands):

The following table summarizes the gains (losses) recognized on the derivative instruments for the three months ended May 2, 2009 (in thousands):

(1) The ineffective portion was immaterial during the three months ended May 2, 2009 and was recorded in net earnings and included in interest income/expense.

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Forward Contracts Designated as Cash Flow Hedges

During the three months ended May 2, 2009, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$8.0 million and US$6.3 million, respectively, to hedge forecasted merchandise purchases that were designated as cash flow hedges at May 2, 2009.  As of May 2, 2009, the Company had forward contracts outstanding for its European and Canadian operations of US$26.0 million and US$34.5 million, respectively, that are expected to mature over the next nine months and Swiss Franc-Euro forward contracts outstanding for its European operations of CHF13.5 million that are expected to mature over the next nine months. The Company’s derivative financial instruments are recorded in its consolidated balance sheet at fair value based on quoted market rates. The U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of the U.S. dollar forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income within stockholders’ equity, and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Swiss Franc forward contracts are used to hedge certain anticipated Swiss operating expenses over specific months. Changes in the fair value of the Swiss Franc forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income within stockholders’ equity, and are recognized in SG&A in the period which approximates the time the expenses are incurred.

As of May 2, 2009, accumulated other comprehensive income included an unrealized gain of approximately US$5.5 million, net of tax, that will be recognized as a reduction to cost of goods sold or SG&A over the following 12 months at the then current values on a pre-tax basis, which can be different than the current quarter-end values. At May 2, 2009, the unrealized net gain of the remaining open forward contracts recorded in current assets in the condensed consolidated balance sheet was approximately US$4.1 million.

At January 31, 2009, the Company had forward contracts outstanding for its European and Canadian operations of US$21.0 million and US$38.5 million, respectively, and Swiss Franc-Euro forward contracts outstanding for its European operations of CHF18.0 million. At January 31, 2009, the unrealized net gain of these open forward contracts recorded in current assets in the consolidated balance sheet was approximately US$8.1 million.

The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (in thousands):

Foreign Currency Contracts Not Designated as Cash Flow Hedges

The Company also has foreign currency contracts that are not designated as hedges for accounting purposes.  Changes in fair value of foreign currency contracts not qualifying as cash flow hedges are reported in net earnings as part of other income and expense.  For the three months ended May 2, 2009, the Company recorded a net loss of US$3.6 million for the Canadian dollar, Euro, British Pound and Swiss Franc foreign currency contracts, which has been included in other income and expense.  At May 2, 2009, the Company had Canadian dollar foreign currency contracts to purchase US$35.5 million expected to mature over the next 9 months; Euro foreign currency contracts to purchase US$70.0 million expected to mature over the next 9 months; Euro foreign currency contracts to purchase CHF4.3 million expected to mature over the next 9 months and Euro foreign currency contracts to purchase GBP7.1 million expected to mature over the next 12 months.  At May 2, 2009, the net unrealized gains of these Canadian dollar, Euro, Swiss Franc and British Pound forward contracts recorded on the condensed consolidated balance sheet were approximately US$4.7 million.

At January 31, 2009, the Company had Canadian dollar foreign currency contracts to purchase US$36.5 million, Euro foreign currency contracts to purchase US$104.0 million and Swiss Franc foreign currency contracts to purchase CHF5.3 million. At January 31, 2009, the net unrealized gains of these Canadian dollar, Euro and Swiss Franc forward contracts recorded in current assets in the Company’s consolidated balance sheet were approximately US$13.7 million.

(15)         Subsequent Events

On June 4, 2009, the Company announced a regular quarterly cash dividend of $0.10 per share on the Company’s common stock. The cash dividend will be payable on July 2, 2009 to stockholders of record at the close of business on June 17, 2009.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context indicates otherwise, when we refer to “we,” “us” or the “Company” in this Form 10-Q, we are referring to Guess?, Inc. and its subsidiaries on a consolidated basis.

IMPORTANT NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including documents incorporated by reference herein, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may also be contained in the Company’s other reports filed under the Securities Exchange Act of 1934, as amended, in its press releases and in other documents.  In addition, from time-to-time, the Company through its management may make oral forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects and proposed new products, services, developments or business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “continue”, and other similar terms and phrases, including references to assumptions.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. These forward-looking statements may include, among other things, statements relating to the Company’s expected results of operations, the accuracy of data relating to, and anticipated levels of, future inventory and gross margins, anticipated cash requirements and sources, cost containment efforts, estimated charges, plans regarding store openings and closings, plans regarding business growth, e-commerce, business seasonality, results of litigation, industry trends, consumer demands and preferences, competition, currency fluctuations and general economic conditions. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances. Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements. Important factors that could cause or contribute to such difference include those discussed under “Item 1A. Risk Factors” contained in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

General

The business segments of the Company are retail, wholesale, European and licensing operations. Information relating to these segments is summarized in Note 7 to the Condensed Consolidated Financial Statements. The Company believes this segment reporting reflects how its four business segments are managed and each segment’s performance is evaluated. The retail segment includes the Company’s retail operations in North America. The wholesale segment includes the wholesale operations in North America and our Asian operations. The European segment includes wholesale and retail operations in Europe and the Middle East. The licensing segment includes the worldwide licensing operations of the Company. The business segment operating results exclude corporate overhead costs, which consist of shared costs of the organization. These costs are presented separately and generally include, among other things, the following unallocated corporate costs: information technology, human resources, global advertising and marketing, accounting and finance, executive compensation, facilities and legal.

We derive our net revenue from the sale of GUESS?, GUESS by MARCIANO and G by GUESS men’s and women’s apparel, and our licensees’ products through our worldwide network of retail stores, wholesale customers and distributors, as well as our on-line sites. We also derive royalty revenues from worldwide licensing activities.

We acquired Focus Europe S.r.l. (“Focus”), our former licensee for GUESS by MARCIANO products in Europe, the Middle East and Asia, in December 2006, and its subsidiary, Focus Spain S.A. (“Focus Spain”), in October 2007. We also acquired BARN S.r.l. (“Barn”), our former kids licensee in Europe, in January 2008. Each of these entities is reported in our European segment. G by GUESS is our newest retail concept that was launched in early fiscal 2008 and is included in our retail segment. Our South Korea business, which we have operated directly since January 2007, and our Greater China business, launched in April 2007, are also relatively new businesses for us and are reported in our wholesale segment.

The three months ended May 2, 2009 had the same number of days as the three months ended May 3, 2008.

The Company reports National Retail Federation (“NRF”) calendar comparable stores sales on a quarterly basis for our full-price retail and factory outlet stores in the U.S. and Canada.  A store is considered comparable after it has been open for 13 full months. If a store remodel results in a square footage change of more than 15%, or involves a relocation or a change in store concept, the store is removed from the comparable store base until it has been opened at its new size, in its new location or under its new concept for 13 full months.

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Executive Summary

Global Economic Developments

As expected, the global economic downturn has continued into fiscal 2010.  In particular, real estate and financial lending markets remain suppressed and unemployment levels continue to rise. These and other factors have negatively impacted consumer spending for discretionary items during the current quarter resulting in a significant slowdown in customer traffic and a highly promotional environment.  These same conditions have spread to many international markets.  If the global macroeconomic environment continues to be weak, or deteriorates further, there will likely be a negative effect on the Company’s revenues and earnings across all of our segments for the remainder of the current fiscal year.

In addition, the deterioration in the global economic environment has resulted in significant volatility in the global currency markets.  The majority of our international operations are conducted in currencies other than the U.S. dollar, primarily the Canadian dollar, the Euro and the Korean Won. The volatility over the past year has resulted in a substantial strengthening of the U.S. dollar against these three currencies when comparing the rates in the first quarter of fiscal 2010 to the prior year quarter. A relatively stronger U.S. dollar will result in our international earnings translating into lower U.S. dollar amounts.  These conditions could negatively impact our results of operations and the Company’s ability to generate both revenue and earnings growth. In addition, certain transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars and thus are exposed to exchange rate fluctuations when converted to their local currencies.  These types of transactions include U.S. dollar denominated purchases of merchandise and intercompany liabilities.  Fluctuations in exchange rates can impact the profitability of our foreign operations and reported earnings and are largely dependent on the transaction timing and magnitude during the period that the currency fluctuates.  The Company enters into derivative financial instruments, including forward exchange contracts and currency swaps, to manage exchange risk on certain foreign currency transactions. The Company does not hedge all transactions denominated in foreign currency.

The Company

Net earnings attributable to Guess?, Inc. was $32.5 million, or diluted earnings of $0.35 per common share, for the three months ended May 2, 2009, compared to net earnings attributable to Guess?, Inc. of $47.8 million, or diluted earnings of $0.50 per common share, for the three months ended May 3, 2008. The adoption of the new accounting pronouncement, FSP EITF 03-6-1, during the three months ended May 2, 2009 negatively impacted diluted earnings per common share by $0.01 for each of the quarters ended May 2, 2009 and May 3, 2008 (adjusted as required by FSP EITF 03-6-1), respectively. Refer to Note 2 of the Condensed Consolidated Financial Statements for further information.

Total net revenues decreased 9.8% to $441.2 million for the three months ended May 2, 2009, from $489.2 million for the three months ended May 3, 2008.  The decrease in total revenues was primarily driven by the unfavorable translation impact of changes in foreign currency exchange rates on revenues of $44.8 million across all our major international operations. All our segments reported lower revenues in the three months ended May 2, 2009 compared to the same prior year period. The European segment represented the largest decline in revenues primarily due to the unfavorable impact of the stronger U.S. dollar when translating the Euro denominated revenues into U.S. dollars and a shift in revenues into last year’s fourth quarter as a result of earlier wholesale deliveries.

Gross margin (gross profit as a percentage of total net revenues) declined 500 basis points to 40.2% for the three months ended May 2, 2009, compared to the same prior year period. The decline was primarily attributable to lower product margins in our European segment, including the unfavorable impact of the stronger U.S. dollar on product purchases, and occupancy deleverage in our retail and European segments.

Selling, general and administrative (“SG&A”) expenses decreased 10.9% to $129.5 million for the three months ended May 2, 2009 compared to $145.3 million for the three months ended May 3, 2008. The decrease was primarily driven by the favorable impact of the strengthening U.S. dollar when translating foreign denominated expenses into U.S. dollars, cost reductions in marketing and advertising spending, and lower volume related expenses. SG&A expense as a percentage of revenues (“SG&A rate”) decreased 40 basis points to 29.3% for the three months ended May 2, 2009, compared to the prior year quarter, primarily driven by cost savings initiatives.

Earnings from operations decreased 36.7% to $48.0 million for the three months ended May 2, 2009, compared to $75.9 million for the same period a year ago. Operating margin declined 460 basis points to 10.9% for the three months ended May 2, 2009 compared to the prior year quarter due to the lower gross margin partially offset by the lower SG&A spending as a percentage of net revenues. The decrease in earnings from operations included an unfavorable currency translation impact of $6.5 million for the three months ended May 2, 2009 compared to the prior year quarter.

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Other income, net, (including net interest income) totaled $1.4 million for the three months ended May 2, 2009, compared to other expense, net, of $0.4 million for the three months ended May 3, 2008. The current quarter’s amount includes mark-to-market gains related to our insurance policy investments, partially offset by mark-to-market losses related to the revaluation of foreign currency forward contracts and other foreign currency transactions during the three months ended May 2, 2009.

Our effective income tax rate decreased 300 basis points to 33.0% for the three months ended May 2, 2009, compared to 36.0% in the prior year quarter primarily due to a higher estimated proportion of annual earnings in lower tax jurisdictions.

The Company had $312.6 million in cash and cash equivalents as of May 2, 2009, up $52.2 million compared to $260.4 million as of May 3, 2008. Total debt, including capital lease obligations, as of May 2, 2009, was $45.0 million, down $21.0 million from $66.0 million as of May 3, 2008. Accounts receivable decreased by $38.2 million, or 12.1%, to $277.4 million at May 2, 2009, compared to $315.6 million at May 3, 2008. Changes in currency translation rates reduced the trade accounts receivable balance at May 2, 2009 by approximately $36.9 million compared to the prior year quarter end. Inventory remained relatively flat at $203.4 million as of May 2, 2009, compared to $202.8 million as of May 3, 2008. The inventory balance at May 2, 2009 includes a negative translation impact of approximately $18.1 million due to currency fluctuations compared to the prior year quarter end.

Retail

Our retail segment, comprising North American full-priced retail and factory outlet stores and e-commerce, generated net sales of $207.6 million during the three months ended May 2, 2009, a decrease of $4.3 million, or 2.1%, from $211.9 million in the same prior year period. The decrease was driven by a decline in comparable stores sales of 10.0%, which included the unfavorable translation impact of currency fluctuations for the three months ended May 2, 2009, compared to the prior year quarter. This decline was partially offset by a larger store base, which represented a net 9.7% increase in average square footage compared to the prior year quarter. Retail earnings from operations decreased by $4.8 million, or 21.2%, to $18.0 million for the three months ended May 2, 2009, compared to $22.8 million for the same prior year period. In addition, the operating margin decreased by 210 basis points to 8.7% for the three months ended May 2, 2009, compared to 10.8% for the three months ended May 3, 2008. The declines in both earnings from operations and operating margin were driven by the unfavorable impact of the negative comparable stores sales on occupancy costs and slightly lower product margins, partially offset by a lower SG&A rate.

In the quarter, we opened six new stores and closed two stores in the U.S. and Canada. At May 2, 2009, we operated 429 stores in the U.S. and Canada, comprised of 193 full-priced GUESS? retail stores, 104 GUESS? factory outlet stores, 52 GUESS by MARCIANO stores, 35 GUESS? Accessories stores and 45 G by GUESS stores. This compares to 391 stores as of May 3, 2008.

Wholesale

Wholesale segment revenues decreased by $9.2 million, or 12.3%, to $65.9 million for the three months ended May 2, 2009, from $75.1 million in the same prior year period. This decrease was driven by lower sales in our North American wholesale business and the unfavorable impact of currency translation of our South Korean and Canadian businesses. Wholesale earnings from operations decreased by $5.2 million, or 40.9%, to $7.4 million for the three months ended May 2, 2009, compared to $12.6 million in the same prior year period.  The decrease in earnings from operations was mainly driven by lower sales volumes in the North American wholesale business, lower North American wholesale product margins and the unfavorable translation impact of the stronger U.S. dollar on the South Korean business. Operating margin decreased by 540 basis points to 11.3% for the three months ended May 2, 2009, compared to 16.7% for the prior year period. The decrease was driven by the lower product margins in our North American wholesale business and higher occupancy costs in Asia.

Europe

In Europe, revenues decreased by $33.0 million, or 18.5%, to $145.7 million for the three months ended May 2, 2009, compared to $178.7 million for the same prior year period. Currency translation fluctuations accounted for $24.4 million of the decrease in net revenue from our European operations. Net revenue was also negatively impacted by a shift of wholesale revenues into the fourth quarter of the prior fiscal year that would have normally occurred in the first quarter of the current fiscal year. At May 2, 2009, we directly operated 66 stores in Europe compared to 40 stores at May 3, 2008. Earnings from operations from our European segment decreased by $16.9 million, or 42.1%, to $23.1 million for the three months ended May 2, 2009, compared to $40.0 million in the prior year period. This decrease in earnings from operations compared to the prior year period was driven by the shift in sales, a lower gross margin and an unfavorable impact of currency translation on earnings from operations, partially offset by lower operating costs. Operating margin decreased 650 basis points to 15.9% for the three months ended May 2, 2009, compared to 22.4% for the prior year period due to the lower gross margin, partially offset by a lower SG&A rate. The lower gross margin was driven by the unfavorable impact of the stronger U.S. dollar on product purchases, lower product margins and higher occupancy costs.

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Licensing

Our licensing royalty revenues decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million for the three months ended May 3, 2008. This decrease was driven by lower royalties from watch product sales, partially offset by modest growth in some of our other major product categories. Licensing segment earnings from operations decreased $1.2 million, or 6.1%, to $19.0 million for the three months ended May 2, 2009, from $20.2 million in the prior year quarter.

International Store Count

Outside of the U.S. and Canada, in the three months ended May 2, 2009, together with our partners, we opened 30 new stores, including 19 stores in Europe and the Middle East, 9 stores in Asia and two stores in Central America. We ended the first quarter of fiscal 2010 with 706 stores outside of the U.S. and Canada, of which 501 were GUESS? stores, 46 were GUESS by MARCIANO stores and 159 were GUESS? Accessories stores. Of the 706 stores, 103 were operated by the Company and 603 were operated by licensees or distributors. This store count does not include 162 concessions located primarily in South Korea and Greater China because of their smaller store size in relation to our standard international store size.

Corporate Overhead

Corporate overhead expenses were slightly lower at $19.5 million for the three months ended May 2, 2009 compared to $19.7 million for the prior year quarter.

RESULTS OF OPERATIONS

Three months ended May 2, 2009 and May 3, 2008

NET REVENUE. Net revenue for the three months ended May 2, 2009 decreased by $48.0 million, or 9.8%, to $441.2 million, from $489.2 million for the three months ended May 3, 2008. All segments reported lower revenues with the largest decline in our European segment.

Net revenue from retail operations decreased by $4.3 million, or 2.1%, to $207.6 million for the three months ended May 2, 2009, from $211.9 million for the three months ended May 3, 2008. The decline in comparable stores sales of 10.0%, which included the unfavorable translation impact of currency fluctuations, was partially offset by the benefit of an average of 45 net additional stores during the three months ended May 2, 2009 resulting in a net 9.7% increase in average square footage compared to the prior year quarter. Currency translation fluctuations relating to our Canadian retail stores unfavorably impacted net revenue in our retail segment by $9.1 million.

Net revenue from wholesale operations decreased by $9.2 million, or 12.3%, to $65.9 million for the three months ended May 2, 2009, from $75.1 million for the three months ended May 3, 2008. The decrease was driven by both lower North American wholesale sales and the unfavorable impact of currency translation from our South Korean and Canadian businesses. Our U.S. wholesale business continued to be impacted by the economic downturn as department stores continued to anticipate lower demand and managed their inventories tightly. Our products were sold in the U.S. in approximately 993 doors at the end of the quarter compared to approximately 1,045 doors at the end of the prior year quarter. While our overall Asian wholesale revenues were down in U.S. dollars compared to the prior year period as a result of unfavorable currency fluctuations, we continued to generate revenue growth in local currency in our expanding Asian operations, where we, along with our partners, opened 9 stores and 11 concessions during the quarter. Currency translation fluctuations, relating to both our Canadian and South Korean operations, unfavorably impacted net revenue in our wholesale segment by $9.8 million.

Net revenue from European operations decreased by $33.0 million, or 18.5%, to $145.7 million for the three months ended May 2, 2009, from $178.7 million for the three months ended May 3, 2008. The unfavorable impact of currency translation was the main contributor to the decrease, accounting for $24.4 million of the decrease. The current quarter was also negatively impacted compared to the prior year period by the shift of wholesale revenues into the fourth quarter of the prior fiscal year that would have normally occurred in the first quarter of the current fiscal year. At May 2, 2009, we directly operated 66 stores in Europe compared to 40 stores at the prior year quarter end. European retail revenues increased by 2.1% in U.S. dollars for the three months ended May 2, 2009, compared to the prior year quarter, reflecting the benefit of the new stores, mostly offset by the unfavorable impact of currency translation and negative comparable stores sales.

Net royalty revenue from licensing operations decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million for the three months ended May 3, 2008. This decrease was driven by lower royalties from watch product sales, partially offset by modest growth in some of our other major product categories.

GROSS PROFIT. Gross profit decreased by $43.7 million, or 19.8%, to $177.5 million for the three months ended May 2, 2009, from $221.2 million for the three months ended May 3, 2008. The decrease in gross profit primarily resulted from the following:

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·                 Gross profit for the retail segment decreased by $7.2 million, or 9.5%, to $68.2 million for the three months ended May 2, 2009, from $75.4 million in the prior year period. The overall decline in sales, including the unfavorable translation impact of currency fluctuations, the higher occupancy costs associated with the increased store count and lower product margin were the main drivers of the decrease in gross profit.

·                 Gross profit for the wholesale segment decreased by $6.5 million, or 24.5%, to $20.0 million for the three months ended May 2, 2009, from $26.5 million in the prior year period. The decrease in gross profit was primarily due to the decline in sales and the lower product margins in our North American wholesale business and the unfavorable impact of currency translation on our South Korean business due to the stronger U.S. dollar compared to the Korean Won.

·                 Gross profit for the European segment decreased by $28.6 million, or 29.9%, to $67.3 million for the three months ended May 2, 2009, from $95.9 million in the prior year period. The lower gross profit resulted from lower sales due to the shift of wholesale shipments into an earlier quarter and the unfavorable impact of the stronger U.S. dollar on both the translation of the segment gross profit into U.S. dollars and lower product margins for those products purchased in U.S. dollars.

·                 Gross profit for the licensing segment decreased by $1.4 million, or 6.0%, to $22.1 million for the three months ended May 2, 2009, from $23.5 million in the prior year period.

Gross margin decreased 500 basis points to 40.2% for the three months ended May 2, 2009, from 45.2% for the three months ended May 3, 2008. The decline was attributable to lower product margins in our European, retail and wholesale segments and occupancy deleverage in our retail and European segments.

The Company’s gross margin may not be comparable to other entities since some entities include all of the costs related to their distribution in cost of product sales and others, like the Company, exclude the wholesale related distribution costs from gross margin, including them instead in selling, general and administrative expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by $15.8 million, or 10.9%, to $129.5 million for the three months ended May 2, 2009, from $145.3 million for the three months ended May 3, 2008. The decrease was primarily driven by the favorable impact of the strengthening U.S. dollar when translating foreign denominated SG&A expenses into U.S. dollars, cost reductions in marketing and advertising spending and lower volume related expenses. The cost savings initiatives focused on maintaining tight controls over our operating and overhead expenses and focusing our advertising and marketing efforts primarily on promotional events during peak periods. Accordingly, the Company was able to reduce the SG&A rate by 40 basis points to 29.3% for the three months ended May 2, 2009, compared to 29.7% for the three months ended May 3, 2008.

EARNINGS FROM OPERATIONS. Earnings from operations decreased by $27.9 million, or 36.7%, to $48.0 million for the three months ended May 2, 2009, compared with earnings from operations of $75.9 million for the three months ended May 3, 2008. The decrease in earnings from operations primarily resulted from the following: