UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2006
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from               to
Commission File Number 1-11893

GUESS?, INC.
(Exact name of registrant as specified in its charter)
Delaware	 	95-3679695	
(State or other jurisdiction	 	(I.R.S. Employer	
of incorporation or organization)	 	Identification Number)	
1444 South Alameda Street
Los Angeles, California 90021
(213) 765-3100
(Address, including zip code, and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 	 	Name of Each Exchange	
Title of Each Class	 	on Which Registered	
common stock, par value $0.01 per share	 	New York Stock Exchange	
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x     Accelerated filer o     Non-accelerated filer o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
As of the close of business on July 1, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was $977,882,152 based upon the closing price of $20.88 on the New York Stock Exchange composite tape on such date (as adjusted to reflect the two-for-one stock split announced on February 14, 2007). For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant. Such exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
As of the close of business on February 20, 2007, the registrant had 93,198,238 shares of common stock outstanding.
DOCUMENTS INCOPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2007 Annual Meeting of Stockholders are incorporated by reference into Part III herein.

TABLE OF CONTENTS
Item	 	Description	 	Page	 	
 	 	 	 	PART I	 	 	 	 	 	
 	1	 	 	Business	 	 	1	 	 	
 	1A	 	 	Risk Factors	 	 	14	 	 	
 	1B	 	 	Unresolved Staff Comments	 	 	21	 	 	
 	2	 	 	Properties	 	 	22	 	 	
 	3	 	 	Legal Proceedings	 	 	23	 	 	
 	4	 	 	Submission of Matters to a Vote of Security Holders	 	 	24	 	 	
 	 	 	 	PART II	 	 	 	 	 	
 	5	 	 	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	 	 	25	 	 	
 	6	 	 	Selected Financial Data	 	 	26	 	 	
 	7	 	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	27	 	 	
 	7A	 	 	Quantitative and Qualitative Disclosures About Market Risk	 	 	44	 	 	
 	8	 	 	Financial Statements and Supplementary Data	 	 	46	 	 	
 	9	 	 	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	 	 	46	 	 	
 	9A	 	 	Controls and Procedures	 	 	46	 	 	
 	9B	 	 	Other Information	 	 	49	 	 	
 	 	 	 	PART III	 	 	 	 	 	
 	10	 	 	Directors, Executive Officers and Corporate Governance	 	 	49	 	 	
 	11	 	 	Executive Compensation	 	 	49	 	 	
 	12	 	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	 	49	 	 	
 	13	 	 	Certain Relationships and Related Transactions, and Director Independence	 	 	49	 	 	
 	14	 	 	Principal Accountant Fees and Services	 	 	49	 	 	
 	 	 	 	PART IV	 	 	 	 	 	
 	15	 	 	Exhibits and Financial Statement Schedules	 	 	50	 	 	
 
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IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K, including documents incorporated by reference herein, we make “forward-looking” statements, which are not historical facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be in the Company’s other reports filed under the Securities Exchange Act of 1934, 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, plans regarding international expansion, e-commerce, business seasonality, industry trends, consumer demands and preferences, competition 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 herein.
RECENT EVENTS
On January 18, 2007, the Board of Directors of Guess?, Inc. (the “Company”) approved a change in the Company’s fiscal year end from December 31 to the Saturday nearest January 31 of each year. The fiscal year change is effective beginning with the Company’s 2008 fiscal year, which began February 4, 2007 and will end February 2, 2008. As a result of the change, the Company had a January 2007 fiscal month transition period which began January 1, 2007 and ended February 3, 2007. The results of the transition period are expected to be reported in the Company’s Form 10-Q to be filed for the new fiscal first quarter ending May 5, 2007 and in the Company’s Form 10-K to be filed for the new fiscal year ending February 2, 2008. Because the fiscal year change was not effective until after the completion of the Company’s 2006 fiscal year, the financial and other information reported herein continues to be reported based on the Company’s prior fiscal calendar.
On February 12, 2007, the Board of Directors declared a quarterly cash dividend of $0.12 per share (on a pre-split basis) on the Company’s common stock and approved a two-for-one stock split of the Company’s common stock to be effected in the form of a 100% stock dividend. The cash dividend and the 2007 stock split will each be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. The Company’s common stock is expected to begin trading on the New York Stock Exchange on a post-split basis on March 13, 2007. All historical share and per share amounts in this Annual Report on Form 10-K have been adjusted to reflect the 2007 Stock Split.
ii

PART I
ITEM 1.                Business.
General
Unless the context indicates otherwise, the terms “we,” “us” or the “Company” in this Form 10-K, are referring to Guess?, Inc. (“GUESS?”) and its subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world’s leading lifestyle collections of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. Our apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, Question Mark and Triangle Design, a stylized G, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and MARCIANO. The lines include full collections of denim and cotton clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets and knitwear. We also selectively grant licenses to manufacture and distribute a broad range of products that complement our apparel lines, including eyewear, watches, handbags, footwear, kids’ and infants’ apparel, leather apparel, swimwear, fragrance, jewelry and other fashion accessories.
Our products are sold through three primary distribution channels: in our own stores, to a network of wholesale accounts and through the Internet. GUESS? branded products, some of which are produced under license, are also sold internationally through a series of licensees and distributors. Our core customer is a style-conscious consumer primarily between the ages of 18 and 32. These consumers are part of a highly desirable demographic group that we believe has significant disposable income. We also appeal to customers outside this group through specialty product lines that include MARCIANO, a more sophisticated fashion line targeted to women, and GUESS Kids, targeted to boys and girls ages six to twelve.
We were founded in 1981 and currently operate as a Delaware corporation.
Business Segments
The business segments of the Company are retail, wholesale, European and licensing. 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 internationally, excluding Europe. The European segment includes both wholesale and retail operations in Europe. The licensing segment includes the worldwide licensing operations of the Company. The business segments’ 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 corporate costs: information technology, human resources, accounting and finance, executive compensation, facilities and legal. Financial information about each segment, together with certain geographical information, for the fiscal years ended December 31, 2006, 2005 and 2004 are included under Note 15 to the Consolidated Financial Statements contained herein.
In 2006, 60.9% of our net revenue was generated from retail operations, 12.3% from wholesale operations, 21.3% from European operations and 5.5% from licensing operations. Our total net revenue in 2006 was $1.19 billion and net earnings were $123.2 million.
Business Strengths
We believe we have several business strengths which help us to successfully execute our strategies. These business strengths include:
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Brand Equity.   We believe that our brand name is one of the most familiar in fashion and is one of our most valuable assets. We believe the enduring strength of the GUESS? brand name and image is due mainly to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality. Our industry is highly competitive and subject to rapidly changing consumer preferences and tastes. The success of our brand depends on our ability to anticipate the fashion preferences of our customers. We have a team of designers who, under the direction of Maurice Marciano, our Chairman, seeks to identify global fashion trends and interpret them for the style-conscious consumer while retaining the distinctive GUESS? image. Through our award-winning advertising, under the creative leadership and vision of Paul Marciano, our Chief Executive Officer, we have achieved worldwide recognition of the GUESS? brand name. By retaining control over advertising and marketing activities from our headquarters in Los Angeles, we maintain the integrity, consistency and direction of the GUESS? brand image worldwide, while realizing substantial cost savings when compared to the use of outside advertising agencies.
We have developed the “GUESS? signature image” and “GUESS? lifestyle concept” through the use of our strong and distinctive images, merchandising display themes, logos and trademarks which are registered in approximately 170 countries.
Advertising and Marketing.   We control all of our worldwide advertising, marketing activities and promotional materials from our headquarters in Los Angeles. GUESS Jeans, GUESS U.S.A. and GUESS?, Inc. images have been showcased globally in dozens of major publications as well as in outdoor and broadcast media.
We communicate the GUESS? image through the use of our signature black and white print advertisements, as well as color print advertisements, designed by our in-house advertising department. Led by Paul Marciano, this team has won numerous awards and contributed to making the GUESS? brand one of the most recognizable fashion brands in the world. We have maintained a high degree of consistency in our advertisements by using similar themes and images. We require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in Company-approved advertising, promotion and marketing.
Retail Distribution.   At December 31, 2006, we operated a total of 336 stores in the U.S. and Canada, consisting of 192 full-price retail stores, 103 factory outlet stores, 25 MARCIANO stores and 16 Guess Accessories stores. At year end, we also operated 24 stores in Europe and three stores in Mexico through a majority owned joint venture. Our retail network creates an upscale and inviting shopping environment and enhances our image. Distribution through our retail stores allows us to influence the merchandising and presentation of our products, build brand equity and test market new product design concepts. Our retail stores carry a full assortment of men’s and women’s merchandise, including most of the GUESS? licensed products. Our factory outlet stores are primarily located in outlet malls generally operating outside the shopping radius of our wholesale customers and our own full-price retail stores.
In 2004, we launched our MARCIANO product line. This line was previously labeled as GUESS Collection and was rebranded as MARCIANO in the third quarter of 2004. The new assortment commands higher price points and it targets a more upscale, contemporary customer. The MARCIANO line is available in approximately half of our full-price GUESS? retail stores in the U.S. and Canada. As of December 31, 2006, we had 25 MARCIANO stores that feature this line exclusively.
In 2004, we also launched a new Accessories store concept. We believe we offer unique positioning in the accessories marketplace with a well-recognized brand name at a more accessible price point than the luxury accessories brands. As of December 31, 2006, we had 16 Accessories stores that carry the full GUESS? accessories line. We continue to sell accessories in our full-price retail and factory outlet stores, and through our licensees. Our accessories are also available in department stores and internationally.
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Licensee Stores.   Our international licensees and distributors operated 386 GUESS? stores in approximately 57 countries outside the U.S. and Canada at December 31, 2006. We plan to open approximately 108 new stores in 2007 primarily through our international licensees and distributors. These stores carry apparel and accessories that are similar to those sold in the U.S., including some that are tailored for local fashion sensibilities. We work closely with international licensees and distributors to ensure that their store designs and merchandise programs protect the reputation of the GUESS? trademarks. Our international licenses and distribution agreements also allow for the sale of GUESS? brand products in better department stores and upscale specialty retail stores.
Wholesale Distribution.   We have both domestic and international wholesale distribution channels. U.S. wholesale customers consist primarily of better department stores and select specialty retailers and upscale boutiques, which have the image and merchandising expertise that we require for the effective presentation of our products. Leading U.S. wholesale customers include Federated Department Stores, Inc. and Dillard’s, Inc. At December 31, 2006, our products were sold directly to consumers from approximately 970 doors in the U.S. These locations include 398 shop-in-shops, an exclusive selling area within a department store that offers a wide array of our products and incorporates GUESS? signage and fixture designs. These shop-in-shops allow us to reinforce the GUESS? brand image with our customers. Many department stores have more than one shop-in-shop, with each one featuring women’s or men’s apparel. Through our foreign subsidiaries and our network of international distributors, our products are also found in major cities throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America.
Licensing Operations.   The desirability of the GUESS? brand name among consumers has allowed us to selectively expand our product offerings and global markets through trademark licensing arrangements, with minimal capital investment or on-going operating expenses. We carefully select our trademark licensees and approve in advance all product design, advertising and packaging materials of all licensed products in order to maintain a consistent GUESS? image. We currently have 21 domestic and international licenses that include eyewear, watches, handbags, footwear, kids’ and infants’ apparel, lingerie, leather outerwear, fragrance, jewelry and other fashion accessories. We have granted licenses for the manufacture or sale of GUESS? branded products in markets which include Africa, Asia, Australia, Europe, the Middle East, North America and South America.
European Operations.   We run our European business with our local European management team who work closely with our wholesale customers, licensees and distributors and also manage our owned stores. Following the acquisition of our European jeanswear licensee in January 2005, we integrated this business with our existing European accessories business. In addition, effective December 31, 2006, the Company acquired 75% of the outstanding shares of Focus Europe, S.r.l. (“Focus”), the Company’s existing licensee for the manufacture, distribution and retail sales of “GUESS by MARCIANO” contemporary apparel in Europe, the Middle East and Asia. The acquisition is expected to further accelerate the Company’s expansion in Europe. While the GUESS? brand is well recognized in Europe, we believe it is under-penetrated and we see significant opportunities to expand distribution. In 2006, we, along with our licensees and distributors, opened 42 stores of all retail concepts combined in Europe. At the end of 2006, Guess and its licensees and distributors operated 102 stores in Europe, 24 of which were Company operated. In 2007, we plan to open approximately 35 stores in Europe primarily through our licensees and distributors.
Business Growth Strategies
We regularly evaluate and implement initiatives that we believe will build brand equity, grow our business and enhance profitability. Our key growth strategies are as follows:
Leveraging the GUESS? Brand.   We believe the GUESS? brand is an integral part of our business, a significant strategic asset and a primary source of sustainable competitive advantage. It communicates a
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distinctive image that is fun, fashionable and sexy. Brand loyalty, name awareness, perceived quality, strong brand images, public relations, publicity, promotional events and trademarks all contribute to brand integrity. Our design teams visit the world’s premier fashion locations in order to identify important style trends and to discover new fabrics. We will continue this practice while promoting our innovative designs through stylish advertising campaigns that advance the GUESS? image. Our marketing programs are designed to convey a uniform style image for the brand and are aimed at increasing the desire of the target group to join our GUESS? customer group.
Retail Store Strategy and Expansion Plans.   Our retail growth strategy is to increase retail sales and profitability by expanding our network of retail stores and improving the performance of existing stores. During 2006, we opened a total of 32 new stores in the U.S. and Canada consisting of eight new full-price retail stores, seven factory outlet stores, 11 MARCIANO stores and six GUESS Accessories stores, while closing 11 stores.
Our retail locations build brand awareness and contribute to market penetration and growth of the brand in concert with our wholesale operations. In 2006, we increased our retail average square footage by 5.3% to 1,621,000 square feet in the U.S. and Canada. We continue to be very selective with new store locations and expect to open approximately 48 new stores in 2007, consisting of 15 full-price retail, four factory outlet, 13 MARCIANO, three GUESS Accessories and 13 G by GUESS stores. In addition, we plan to close approximately 18 stores and convert 19 stores to G by GUESS stores in 2007. The Company is also exploring a joint venture arrangement with its footwear licensee to open a small number of new footwear concept stores in North America.
In 2006, total sales in the U.S. and Canada at our stores open for at least one year increased by 12.8% from 2005 levels. We believe this increase is attributable to our commitment to several ongoing initiatives, including leadership in new product development, a more fashion-focused product mix, the introduction of new product categories, improvements in merchandising and visual presentation, the remodeling of select stores to promote a consistent brand image, an improved retail store inventory allocation system, the continued development of the MARCIANO and Accessories lines and the development of a motivated team of sales professionals to service our customers and provide a favorable shopping experience.
We are also placing additional emphasis on our Accessories line and our MARCIANO line. This includes greater focus on these products in our existing stores as well as continuing to develop and open additional Accessories and MARCIANO stores which exclusively feature these products.
During 2006, we opened 11 MARCIANO and six Guess Accessories stores in addition to the nine and six stores that we opened in 2005, respectively. These store concepts leverage our brand recognition and the reputation we have for sexy, contemporary styling to extend the appeal of our brand. The MARCIANO brand is attracting a slightly older, more sophisticated customer, while the Accessories stores are enabling us to build a more meaningful presence in this high-margin segment. We are targeting customers who already shop GUESS? stores but are looking for an expanded accessories presentation, as well as new customers who did not shop at GUESS? in the past.
As part of our retail growth strategy, in 2007 we are launching our new mid-tier brand store concept, which we call G by GUESS. G by GUESS is aimed to capture a market demographic that shops price points between factory and retail. The G by GUESS brand will only be distributed in G by GUESS stores and will carry apparel for both men and women that is aspirational, timeless and fun. The stores will have a fresh feel, directed toward a full customer experience, with fashion-forward, but not cutting edge fashion. The stores will have a slightly smaller footprint than Guess? stores. We will be rolling out G by GUESS in early 2007 in North America. We expect to convert some Guess? and factory stores and also open some new stores, resulting in approximately 32 G by GUESS stores by year end.
International Expansion.   International expansion continues to be a key to our long term growth strategy. In January 2005, we completed the acquisition of the remaining 90% of Maco, the Italian licensee
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of GUESS jeanswear for men and women in Europe, including the assets and leases of ten retail stores in Europe. In 2006, we, along with our distributors and licensees, opened 125 stores in all concepts combined outside of the U.S. and Canada, bringing the total number of such stores to 413 at year end. In addition, effective December 31, 2006, the Company acquired 75% of the outstanding shares of Focus Europe, S.r.l. (“Focus”), the Company’s existing licensee for the manufacture, distribution and retail sales of “GUESS by MARCIANO” contemporary apparel in Europe, the Middle East and Asia. The acquisition is expected to further accelerate the Company’s expansion in Europe.
We believe there are significant opportunities to continue our international growth, particularly in Europe, where the GUESS? brand is well recognized but under-penetrated, as well as in Mexico, India, the Middle and  the Far East. In South Korea, we began selling directly in approximately 45 points of sales in 2007 including concessions which are owned and operated by us through leasing spaces from major department stores, as well as franchised stores. We opened a showroom in Hong Kong in 2006 and plan to open approximately 20 points of sales in China during 2007, with flagship stores in Beijing and Shanghai, as well as free standing stores in Hong Kong and Macau. In addition, our new joint venture in Mexico is currently distributing through a major department store chain, Liverpool, with 22 shop-in-shop locations and has opened three stand-alone stores.
Our business will also grow as our partners open new licensed stores internationally. We plan to open approximately 108 new retail stores in 2007 outside the U.S. and Canada primarily through our international licensees and distributors. We are working closely with our international distributors and licensees to develop these opportunities and to expand the availability of the GUESS? brand throughout the world.
Continue to Develop Licensee Portfolio.   One of our primary objectives is to maintain the quality and reputation of the GUESS? brand. In order to accomplish this goal, we will continue to strategically reposition our licensing portfolio by constantly monitoring and evaluating the performance of our licensees worldwide and their strength and capabilities to appropriately represent our brand. As part of this process, we will consider bringing in-house apparel licenses, where appropriate, or license lines which we produce as we did with our kids business in 2001. If we determine that licensees are performing inadequately, we will, from time to time, discontinue the existing relationship and seek out a stronger replacement licensee.
In 2006, we entered into a joint venture with Adivina S.A. de. C.V. to oversee the revitalization and expansion of the GUESS? brand in Mexico; we also signed a new license with a European licensee to develop and manufacture lingerie and swimwear under the GUESS? trademark in Europe and certain other countries. In 2005, we successfully renegotiated license agreements with our existing licensees for watches, handbags and eyewear on terms that were significantly improved over our prior arrangements and began shipping our new fragrance line. In addition, in 2004, we signed a new shoe license with Marc Fisher LLC to develop, manufacture, and distribute athletic and fashion footwear under the GUESS? trademark in the U.S. and several countries worldwide and began shipping footwear products in 2005. We believe these are important steps in expanding our presence both domestically and globally. We will continue to strategically examine opportunities to expand our licensee portfolio by developing new licensees that can expand our brand penetration and complement the GUESS? image.
Acquisition Strategy.   We evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives. In December 2006, we acquired 75% of the outstanding shares of Focus, as well as the leases and assets of four retail stores in Italy. Focus, based in Italy, has served as the licensee, manufacturer, distributor and retailer of GUESS by MARCIANO contemporary apparel for men and women in Europe for the past 10 years. The agreement included the purchase of inventory, certain fixed assets and the transfer of leases for the retail locations.
In January 2005, we completed the acquisition of the remaining 90% of Maco Apparel, S.p.A. (“Maco”), the Italian licensee of GUESS jeanswear for men and women in Europe, that the Company did
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not already own from Fingen S.p.A. and Fingen Apparel N.V., as well as the assets and leases of ten retail stores in Europe. The agreement included the purchase of inventory and receivables, the assumption of certain liabilities, and the transfer of leases for the GUESS retail locations. The stores are located in Rome, Milan, Paris, Amsterdam, London, and certain other European cities.
With the Focus and Maco acquisitions, we now directly manage our adult apparel businesses in Europe. We believe the combination of the manufacture and distribution of all our European apparel lines under the GUESS? umbrella allows us to take advantage of economies of scale and provides an opportunity to further expand our wholesale and retail operations in this region.
Improved Product Sourcing.   Over the past year, we initiated significant changes within our supply chain operations: re-defining calendars, streamlining processes and building core competencies within our product areas. These new processes are providing calendar alignment and timely delivery to our western hemisphere retail and wholesale divisions, while also incorporating the development calendars and market timing of our Asian and European businesses. This globalization of operations will enable us to begin integrating our European, North American and Asian-based supply chains. This, in turn, supports our long term strategy of developing a global core product assortment, through collaboration between our U.S. and Italy based design teams. To better support the design process, we formed a new Product Development team responsible for driving calendar deadlines, assortment plans and financial goals throughout the design process. In addition, this team is responsible for fabric research and development, working directly with global textile mills and suppliers, in order to drive innovation, ensure quality and increase value within our product lines. We are currently developing a Product Lifecycle Management (“PLM”) system that will enable global access and centralized management for our newly defined processes and calendars. Initial roll-out is scheduled for early 2007 with enhancement and refinement to continue throughout 2007, providing comprehensive management of all product related activities from concept to distribution.
In 2006, we significantly increased the sourcing volume placed through our own Hong Kong sourcing office. In 2006, we purchased approximately 89% of our North American finished products from third-party international vendors, primarily in Asia and Mexico. In 2007, we plan to build product development and pre-manufacturing capabilities within, in addition to adding depth to, our existing Asian based sourcing staff. These investments should enable us to shift early stage conceptual development and product engineering to Asia, facilitating closer collaboration with our key suppliers from design inception. Los Angeles will remain the hub of denim development and production, as well as speed-based development and wholesale replenishment program management.
Logistics.   The Company’s primary distribution center is based in Louisville, Kentucky. This 506,000 square-foot facility is near United Parcel Service’s national transit hub and has contributed to the reduction of our shipping time to our stores and wholesale accounts that are east of the Mississippi River. Depending on processing volumes and productivity improvements, we expect that we will continue to reduce operating cost per unit by reducing handling costs in the Kentucky facility and will provide better service to our customers by faster shipping and reduced response times. As of December 31, 2006, this facility was approximately 50% utilized.
We continued to focus on all aspects of our supply chain in 2006. For example, we are planning to implement a new picking system to be completed in 2007 which should reduce our picking costs for merchandise. In the first quarter of 2005, we opened a new warehouse and distribution facility in Montreal, Quebec to replace our existing facility there, and we updated our software systems in our Montreal and Los Angeles warehouse and distribution facilities to be consistent with the software systems used in our primary Kentucky facility. In 2004, we installed an automated product sorter machine in the Kentucky distribution center which has resulted in operating efficiencies. These systems, along with other actions we are taking, should result in lower processing and freight costs in the future.
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E-Commerce.   Our websites, www.guess.com, www.guessfactory.com, www.marciano.com and www.guess.ca are virtual storefronts that promote our brands. Designed as customer shopping centers, these sites showcase our products in an easy-to-navigate format, allowing customers to see and purchase our collections of casual apparel and accessories. Not only have these virtual stores become an additional retail distribution channel, but also they have improved customer service and are fun and entertaining alternative-shopping environments. These sites also provide fashion information, provide a mechanism for customer feedback, promote customer loyalty and enhance our brand identity through interactive content. In 2006, these combined sites experienced growth and generated net sales in excess of the top retail GUESS? store in the chain.
GUESS? Products
We derive net revenue from four primary sources: the sale of our men’s and women’s apparel, and the sale of our licensees’ products, through our network of retail and factory outlet stores in the U.S. and Canada; the sale of GUESS? men’s and women’s apparel and certain accessories to wholesale customers and distributors in North America and the rest of the world except Europe; the sale of GUESS? men’s and women’s apparel and certain accessories to wholesale customers and through our owned stores in Europe; and royalties from worldwide licensing activities.
The following table sets forth our net revenue from our business segments:
 	 	Year Ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
 	 	(dollars in thousands)	 	
Net revenue:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Retail operations	 	$	721,262	 	60.9	%	$	612,862	 	65.5	%	$	518,855	 	71.1	%	
Wholesale operations	 	146,320	 	12.3	 	121,103	 	12.9	 	120,392	 	16.5	 	
European operations	 	252,363	 	21.3	 	153,817	 	16.4	 	42,773	 	5.9	 	
Net revenue from product sales	 	1,119,945	 	94.5	 	887,782	 	94.8	 	682,020	 	93.5	 	
Licensing operations	 	65,239	 	5.5	 	48,310	 	5.2	 	47,242	 	6.5	 	
Total net revenue	 	$	1,185,184	 	100.0	%	$	936,092	 	100.0	%	$	729,262	 	100.0	%	
 
Products.   Our product line is organized into two primary categories: women’s and men’s apparel. To take advantage of contemporary trends, we complement our core basic styles with more fashion-oriented items. We add new styles, treatments and finishes to our denim assortment on a continuous basis.
Our line of women’s apparel also includes the MARCIANO product line, a full collection of better women’s  apparel incorporating a sophisticated, high fashion combination of colors and styles. These products currently are sold primarily through our GUESS? retail stores, our MARCIANO stores and our www.marciano.com website. We continue to believe this product line has significant potential and will continue to focus on increasing penetration in the marketplace.
Licensed Products.   The high level of desirability of the GUESS? brand among consumers has allowed us to selectively expand our product offerings and distribution channels worldwide through trademark licensing arrangements. We currently have 21 trademark licenses. Worldwide sales of licensed products (as reported to us by our licensees) were approximately $753 million in 2006. We recorded net royalties of $65.2 million in 2006. Approximately 71% of our net royalties were derived from our top five licensees in 2006.
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Design
Under the direction of Maurice Marciano, GUESS?, G by GUESS and MARCIANO products are designed by an in-house staff of three design teams (men’s, women’s, G by Guess and MARCIANO) located in Los Angeles, California and an in-house design team based in Florence, Italy. The U.S. and European teams work closely to share ideas and develop products that can sell in both markets. Our design teams travel throughout the world in order to monitor fashion trends and discover new fabrics. Fabric shows in Europe, Asia and the U.S. provide additional opportunities to discover and sample new fabrics. These fabrics, together with the trends observed by our designers, serve as the primary source of inspiration for our lines and collections. We also maintain a fashion library consisting of antique and contemporary garments as another source of creative concepts. In addition, our design teams regularly meet with members of the sales, merchandising and retail operations teams to further refine our products to meet the particular needs of our markets.
U.S. and Canada Retail Operations
At December 31, 2006, our North American retail operations, which includes owned stores in both the U.S. and Canada, consisted of 192 full-price retail, 103 factory outlet, 25 MARCIANO, and 16 Accessories stores which sell GUESS? and MARCIANO-labeled products. Below is a summary of store statistics as of December 31, 2006, 2005 and 2004.
 	 	December 31,	 	
 	 	2006	 	2005	 	2004	 	
Retail stores:	 	 	 	 	 	 	 	
U.S.	 	149	 	152	 	150	 	
Canada	 	43	 	39	 	36	 	
 	 	192	 	191	 	186	 	
Factory stores:	 	 	 	 	 	 	 	
U.S.	 	89	 	85	 	75	 	
Canada	 	14	 	14	 	11	 	
 	 	103	 	99	 	86	 	
MARCIANO:	 	 	 	 	 	 	 	
U.S.	 	18	 	9	 	4	 	
Canada	 	7	 	5	 	1	 	
 	 	25	 	14	 	5	 	
Accessories:	 	 	 	 	 	 	 	
U.S.	 	12	 	11	 	6	 	
Canada	 	4	 	—	 	—	 	
 	 	16	 	11	 	6	 	
Kids stores:	 	—	 	—	 	4	 	
Total	 	336	 	315	 	287	 	
Square footage at year end	 	1,621,000	 	1,563,000	 	1,460,000	 	
Sales per average annual square foot	 	$	447	 	$	401	 	$	369	 	

Retail Stores.   At December 31, 2006, our full price North American retail stores occupied approximately 957,000 square feet and ranged in size from approximately 2,000 to 13,500 square feet, with most stores between 3,000 and 6,000 square feet. Our retail stores carry a full assortment of men’s and women’s GUESS? merchandise, including most of our licensed products. In addition, approximately half of our full-price GUESS? retail stores offer our MARCIANO line that is carried almost exclusively in our company operated stores. In 2006, we opened eight new retail stores and closed seven stores. Sales
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per square foot for our full price North American retail stores, not including factory outlet or new concept stores, increased from $395 in 2005 to $432 in 2006.
Factory Outlet Stores.   At December 31, 2006, our North American factory outlet stores occupied approximately 568,000 square feet and ranged in size from approximately 3,400 to 10,700 square feet, with most stores between 4,000 and 6,500 square feet. They are primarily located in outlet malls generally operating outside the shopping radius of our wholesale customers and our full-price retail stores. These stores sell selected styles of GUESS? apparel and licensed products at a discount to value-conscious customers. We also use the factory outlet stores to liquidate excess inventory and thereby protect the GUESS? image. In 2006, we opened seven new factory stores and closed three stores. Sales per square foot for our North American factory outlet stores increased from $398 in 2005 to $446 in 2006.
MARCIANO Stores.   At December 31, 2006, our MARCIANO stores occupied approximately 68,000 square feet and ranged in size from approximately 1,500 to 5,100 square feet, with most stores between 2,000 and 3,000 square feet. In 2006, we opened eleven MARCIANO stores. We continue to monitor the performance of this store concept carefully. This concept leverages the name recognition of the MARCIANO brand and the reputation we have for sexy, contemporary styling to extend the appeal of our brand. The MARCIANO brand is attracting a slightly older, more sophisticated customer. Sales per square foot for our MARCIANO stores decreased from $721 in 2005 to $704 in 2006 due primarily to new stores opened during the year.
Accessories Stores.   At December 31, 2006, our Accessories concept stores occupied approximately 28,000 square feet and ranged in size from approximately 700 to 3,200 square feet, with most stores between 1,000 and 2,500 square feet. In 2006, we opened six Accessories stores and closed one Accessories store. The Accessories stores are enabling us to build a more meaningful presence in this high-margin segment. Sales per square foot for our Accessories stores increased from $432 in 2005 to $602 in 2006.
International Business
We derive net revenue and earnings outside the U.S. and Canada from three principal sources: (a) sales of GUESS? brand apparel directly to our international distributors who distribute it to better department stores, upscale specialty retail stores and GUESS?-licensed retail stores operated by our international distributors, (b) sales of GUESS? and GUESS by MARCIANO branded apparel by the Company through its owned and operated retail stores and (c) royalties from licensees who manufacture and distribute GUESS? branded products outside the U.S. GUESS? products are sold through distributors and licensees throughout Africa, Asia, Australia, Europe, the Middle East, North America and South America.
At December 31, 2006, our licensees and distributors operated internationally (outside the U.S. and Canada) 386 GUESS? retail and outlet stores. Our retail store license agreements generally provide detailed guidelines for store fixtures and merchandising programs. The appearance, merchandising and service standards of these stores are closely monitored to ensure that our image and brand integrity are maintained. We plan to open approximately 108 new retail stores in 2007 outside the U.S. and Canada primarily through our international licensees and distributors. We also owned and operated 24 GUESS? retail stores in Europe and three GUESS? retail stores through a majority owned joint venture in Mexico at December 31, 2006. In 2006, our European operations accounted for 21.3% of our total net revenues, up from 16.4% in 2005.
While the GUESS? brand is well recognized in Europe, we believe it is under-penetrated and we see significant opportunities to expand distribution. Effective December 31, 2006, the Company acquired 75% of the outstanding shares of Focus Europe, S.r.l. (“Focus”), the Company’s existing licensee for the manufacture, distribution and retail sales of “GUESS by MARCIANO” contemporary apparel in Europe,
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the Middle East and Asia. The acquisition is expected to further accelerate the Company’s expansion in Europe.
Domestic Wholesale Customers
Our domestic wholesale customers consist primarily of better department stores and select specialty retailers and upscale boutiques, which have the image and merchandising expertise that we require for the effective presentation of our products. Leading domestic wholesale customers include Federated Department Stores, Inc. and Dillard’s, Inc. During 2006, our products were sold directly to consumers through approximately 970 doors in the U.S. Our wholesale merchandising strategy is to focus on trend-right products supported by key fashion basics.
We have sales representatives in New York and Los Angeles. They coordinate with customers to determine the inventory level and product mix that should be carried in each store to maximize retail sell-throughs and enhance the customers’ profit margins. The inventory level and product mix are then used as the basis for developing sales projections and product needs for each wholesale customer and for scheduling production. Additionally, we use merchandise coordinators who work with the stores to ensure that our products are displayed appropriately.
A few of our domestic wholesale customers, including some under common ownership, have accounted for significant portions of our net revenue. During 2006, Bloomingdale’s, Macy’s and other affiliated stores owned by Federated Department Stores, Inc. were our largest domestic wholesale customers and together accounted for approximately 5.5% of our consolidated net revenue. During 2006, we continued to see our domestic wholesale operations become a smaller proportion of our overall business as our international businesses expanded. In 2006, our domestic wholesale operations accounted for 8.5% of our total net revenues, down from 9.0% in 2005.
License Agreements and Terms
Our trademark license agreements customarily provide for a three- to five-year initial term with a possible option to renew prior to expiration for an additional multi-year period. In addition to licensing trademarks for products which complement our apparel products, we have granted trademark licenses for the manufacture and sale of GUESS? branded products similar to ours, including men’s and women’s denim and knitwear, in markets such as Europe, the Philippines, South Africa and Mexico. Licenses granted to certain licensees that have produced high-quality products and have demonstrated solid operating performance, such as for GUESS? watches, GUESS? handbags and GUESS? eyewear, have been renewed and in some cases expanded to include new products or markets. In other cases, products that were formerly licensed, such as our women’s knits line, are now being produced in-house. The typical license agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of licensed products or a guaranteed annual minimum royalty that typically increases over the term of the license agreement. In addition, several of our key license agreements provide for specified, fixed cash rights payments over and above our normal, ongoing royalty payments. Generally, licensees are required to spend a percentage of the net sales of licensed products for advertising and promotion of the licensed products and in many cases we place the ads on behalf of the licensee and are reimbursed. In addition, to protect and increase the value of our trademarks, our license agreements include strict quality control and manufacturing standards.
Our licensing personnel in the U.S, Italy and Hong Kong meet regularly with licensees to ensure consistency with our overall merchandising and design strategies, to monitor quality control and to protect the GUESS? trademark and brand. The licensing department approves in advance all GUESS? licensed products, advertising, promotional and packaging materials.
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Advertising and Marketing
Our advertising, public relations and marketing strategy is designed to promote a consistent high impact image which endures regardless of changing consumer trends. Since our inception, Paul Marciano has had principal responsibility for the GUESS? brand image and creative vision. All worldwide advertising and promotional material is controlled through our advertising department based in Los Angeles. GUESS Jeans, GUESS U.S.A. and GUESS?, Inc. images have been showcased globally in dozens of major publications as well as in outdoor and broadcast media.
Our advertising strategy promotes the GUESS? image and products, with an emphasis on brand image. Our signature black and white print advertisements, as well as color print advertisements, have garnered prestigious awards, including Clio, Belding and Mobius awards for creativity and excellence. These awards, which we have received on numerous occasions in our history, are generally given based on the judgment of prominent members of the advertising industry. We have maintained a high degree of consistency in our advertisements, using similar themes and images. We require our licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of GUESS? products in approved advertising, promotion and marketing.
Our advertising department is responsible for all worldwide advertising, which includes approval of all advertising strategies and media placements from our licensees and distributors. We use a variety of media with an emphasis on print and outdoor advertising. We have focused advertisement placement in national and international contemporary fashion/beauty, lifestyle, and celebrity magazines including Vanity Fair, Marie Claire, Elle, W and Vogue. By retaining control over our advertising programs, we are able to maintain the integrity of our brands while realizing substantial cost savings compared to outside agencies.
We further strengthen communications with customers through our websites (www.guess.com, www.guessfactory.com, www.marciano.com, www.gbyguess.com and www.guess.ca). These global media enable us to provide timely information in an entertaining fashion to consumers about our history, products and store locations, and allow us to receive and respond directly to customer feedback.
Sourcing and Product Development
We do not own any production facilities or equipment. We source products through numerous suppliers, many of whom have established long-term relationships with us. We seek to achieve the most efficient means for timely delivery of our products. To remain competitive, in recent years we have increasingly sourced our finished products globally. During 2006, we sourced approximately 89% of our finished products from third-party suppliers located outside the U.S. Most of these finished products are acquired as package purchases where we supply the design and fabric selection and the vendor delivers the finished product. Although we have long-term relationships with many of our vendors, we do not have long-term written agreements with them.
Sources and Availability of Raw Materials
Our products use a variety of raw materials, principally consisting of woven denim, woven cotton and knitted fabrics and yarns. Historically, we make commitments for a significant portion of our fabric well in advance of sales.
Quality Control
Our quality control program is designed to ensure that products meet our high quality standards. We monitor the quality of our fabrics prior to the production of garments and inspect prototypes of each product before production runs commence. We also perform random in-line quality control checks during and after production before the garments leave the contractor. Final random inspections occur when the
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garments are received in our distribution centers. We believe that our policy of inspecting our products at our distribution centers and at the vendors’ facilities is important to maintain the quality, consistency and reputation of our products.
Distribution Centers
We utilize distribution centers at strategically located sites. Until 1999, distribution of our products in the U.S. was centralized in our facility in Los Angeles, California, which we operate and lease from a related party. In January 2000, we opened an automated distribution center in Louisville, Kentucky, to replace the distribution center in Los Angeles as our primary distribution center. Distribution of our products in Canada is handled from a distribution center in Montreal, Quebec that we also lease from a related party. Our European business utilizes an independent distributor with two separate locations in Italy, which services Europe. Additionally, we utilize a contract warehouse in Hong Kong that services the Pacific Rim.
At our distribution center in Kentucky, we use fully integrated and automated distribution systems. The bar code scanning of merchandise, picking tickets and distribution cartons, together with radio frequency communications, provide timely, controlled, accurate and instantaneous updates to the distribution information systems. As of December 31, 2006, this facility was approximately 50% utilized. We continue to monitor our distribution center integration as our business grows and the center matures.
Competition
The apparel industry is highly competitive and fragmented, and is subject to rapidly changing consumer demands and preferences. We believe that our success depends in large part upon our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner and upon the continued appeal to consumers of the GUESS? brand. We compete with numerous apparel manufacturers and distributors, both domestically and internationally, as well as several well-known designers, including some that have recently entered or re-entered the designer denim market. Our retail and factory outlet stores face competition from other retailers, including some of our major wholesale customers. Our licensed apparel and accessories also compete with a substantial number of designer and non-designer lines and various other well-known brands. Many of our competitors, including The Gap, Abercrombie & Fitch, DKNY and Polo Ralph Lauren, among others, have greater financial resources than we do. Although the level and nature of competition differ among our product categories and geographic regions, we believe that we compete on the basis of our brand image, quality of design, workmanship and product assortment.
Information Systems
We believe that high levels of automation and technology are essential to maintain our competitive position and support our strategic objectives and we continue to invest in computer hardware, system applications and networks. Our computer information systems consist of a full range of financial, distribution, merchandising, in-store, supply chain and other systems. During 2006, we implemented new financial and operational systems in Europe to accommodate future growth and provide operating efficiencies. In addition, a new data warehouse and reporting system was implemented to provide enhanced merchandise and analytical reporting. We are currently developing a PLM system to integrate our global supply chain.
Trademarks
We own numerous trademarks, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a
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stylized M, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and GUESS Collection. As of December 31, 2006, we had approximately 2,300 U.S. and internationally registered trademarks or trademark applications pending with the trademark offices in approximately 170 countries around the world, including the U.S. From time to time, we adopt new trademarks in connection with the marketing of new product lines. We consider our trademarks to have significant value in the marketing of our products and act aggressively to register and protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have staff devoted to the monitoring and aggressive protection of our trademarks worldwide.
Wholesale Backlog
The backlog of wholesale orders at any given time is affected by various factors, including seasonality, cancellations, the scheduling of market weeks and manufacturing and shipment of products. Accordingly, a comparison of backlogs of wholesale orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.
U.S. backlog.   The Company maintains a model stock program in its basic denim products which generally allows replenishment of a customer’s inventory within 48 hours. The Company generally receives orders for fashion apparel 90 to 120 days prior to the time the products are delivered to stores. Regarding our U.S. wholesale backlog, the scheduling of market weeks can affect the amount of orders booked in the backlog compared to the same date in the prior year. This year’s backlog for product, as an example, reflected a longer shipping period of about three months for women’s product and one month of men’s product compared to last year’s backlog. We estimate that if we were to exclude the additional orders from this year’s backlog to make the comparison consistent with the prior year, then the current backlog would be up about 11.1% from the prior year. Not taking into account the impact of this change, our U.S. wholesale backlog as of February 17, 2007, consisting primarily of orders for fashion apparel, was approximately $55.5 million, compared to $35.3 million for such orders at February 18, 2006, or up 57.2%.
Europe backlog.   Our European business operates with two primary wholesale selling seasons. The Spring/Summer season, which ships mostly in January, February and March and the Fall/Winter season, which ships mostly in July, August and September. Generally, the other months are relatively small shipping months. However, customers have the ability to request early shipment of backlog orders or delay shipment of orders depending on their needs. Accordingly, a certain amount of orders in the backlog may be shipped outside of the traditional shipping months. As of February 17, 2007, the European operations backlog was approximately $143.7 million. This includes backlog related to the Focus acquisition.  The backlog comprises sales orders for both the Spring/Summer and Fall/Winter seasons. As discussed above, these orders are subject to cancellation and may not be indicative of eventual actual shipments.
Employees
We strongly believe that our employees (“associates”) are our most valuable resources. As of January 19, 2007, we had approximately 8,800 associates, including approximately 7,500 associates in our retail operations, 600 in our wholesale operations and 500 in our European operations.
Except for approximately 21 employees in Italy who are represented by labor unions, none of our associates are represented by labor unions and we are not a party to any labor agreements. We consider our relationship with our associates to be good.
Initiation of Quarterly Dividend and Approval of Stock Split
On February 12, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share on the Company’s common stock and approved a two-for-one stock split of the Company’s
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common stock, each to be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. Because the record date for the initial cash dividend preceded the March 12, 2007 stock split distribution date, the cash dividend will be paid on only pre-split shares. Assuming the Board of Directors maintains the current level of cash dividends, future quarterly dividends per share will be half the current level but will apply to shares on a post split basis. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service requirements, cash paid for income taxes, earnings and liquidity.
Environmental Matters
We are subject to federal, state and local laws, regulations and ordinances that govern activities or operations that may have adverse environmental effects (such as emissions to air, discharges to water, and the generation, handling, storage and disposal of solid and hazardous wastes). We are also subject to laws, regulations and ordinances that impose liability for the costs of clean up or other remediation of contaminated property, including damages from spills, disposals or other releases of hazardous substances or wastes, in certain circumstances without regard to fault. Certain of our operations routinely involve the handling of chemicals and wastes, some of which are or may become regulated as hazardous substances. We have not incurred, and do not expect to incur, any significant expenditures or liabilities for environmental matters. As a result, we believe that our environmental obligations will not have a material adverse effect on our consolidated financial condition or results of operations.
Financial Information About Geographic Areas
See Note 15 to the Consolidated Financial Statements for a discussion regarding our domestic and foreign operations.
Website Access to Our Periodic SEC Reports
We make available free of charge at www.guessinc.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the charters of our Board of Directors’ Audit, Compensation and Nominating and Governance Committees as well as the Board of Directors’ Governance Guidelines and our Code of Conduct are posted on our website. We may from time to time provide important disclosures to our investors, including amendments or waivers to our Code of Conduct, by posting them in the “Investor’s Info” section of the Guess?, Inc. portion of the website, as allowed by SEC rules. Printed copies of these documents may be obtained by writing or telephoning us at Guess?, Inc., 1444 South Alameda Street, Los Angeles, California 90021, Attention: Investor Relations, (213) 765-5578.
ITEM 1A.        Risk Factors.
You should carefully consider the following factors and other information in this Annual Report or Form 10-K. Additional risks which we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us. Please also see “Important Factors Regarding Forward-Looking Statements” on page (ii).
Demand for our merchandise may decrease and the appeal of our brand image may diminish if we fail to identify and rapidly respond to consumers’ fashion tastes.
The apparel industry is subject to rapidly evolving fashion trends and shifting consumer demands. Accordingly, our brand image and our profitability are heavily dependent upon both the priority our target
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customers place on fashion and on our ability to anticipate, identify and capitalize upon emerging fashion trends. Current fashion tastes place significant emphasis on a fashionable look. In the past this emphasis has increased and decreased through fashion cycles. If we fail to anticipate, identify or react appropriately, or in a timely manner, to fashion trends, we could experience reduced consumer acceptance of our products, a diminished brand image and higher markdowns. These factors could result in lower selling prices and sales volumes for our products and could have a material adverse effect on our results of operations and financial condition.
The apparel industry is highly competitive, and we may face difficulties competing successfully in the future.
We operate in a highly competitive and fragmented industry with low barriers to entry. We compete with many apparel manufacturers and distributors, both domestically and internationally, as well as many well-known designers, some of whom have substantially greater resources than we do and some of whose products are priced lower than ours. Our retail and factory outlet stores compete with many other retailers, including department stores, some of whom are our major wholesale customers. Our licensed apparel and accessories compete with many designer and non-designer lines and well-known brands. Within each of our geographic markets, we also face significant competition from global and regional branded apparel companies, as well as retailers that market apparel under their own labels. These and other competitors pose significant challenges to our market share in our existing major domestic and foreign markets. In addition, our larger competitors may be better able than we to adapt to changing conditions that affect the competitive market. Also, the industry’s low barriers to entry allows the introduction of new products or new competitors at a faster pace. Any of these factors could result in reductions in sales or prices of our products and could have a material adverse effect on our results of operations and financial condition.
Changes in the economy and trends in consumer confidence may adversely affect the fashion industry as well as our operating results.
The industry in which we operate is cyclical. Purchases of apparel and related merchandise tend to decline during recessionary periods and also may decline at other times. Reduced levels of consumer spending can also result from (i) changes in interest rates, (ii) the availability of consumer credit, (iii) changes in taxation rates, (iv) consumer confidence in future economic conditions and (v) reduced levels of consumer disposable income. Due to these cyclical factors in the retail industry, we may not be able to maintain our growth in revenues or earnings, or remain profitable in the future.
Actual or potential terrorist acts and other conflicts in recent periods have also created significant instability and uncertainty in the world and may have additional effects in the future. These may include causing consumers to defer purchases or preventing our suppliers and service providers from providing required services or materials to us. These or other impacts could materially and adversely affect our operating results.
We could find that we are carrying excess inventories if we fail to anticipate consumer demand, if our international vendors do not supply quality products on a timely basis, if our merchandising strategies fail or if we do not open new and remodel existing stores on schedule.
Even if we correctly anticipate consumer fashion trends, our vendors could fail to supply the quality products and materials we require at the time we need them. Moreover, we could fail to effectively market or merchandise these products once we receive them. Lastly, we could fail to open new or remodeled stores on schedule, and inventory purchases made in anticipation of such store openings could remain unsold. Any of the above factors could cause us to experience excess inventories and higher markdowns, which in turn could have a material adverse effect on our results of operations and financial condition.
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Our success depends on maintaining good working relationships with our suppliers and manufacturers.
We do not own or operate any production facilities equipment, and we depend on independent contractors to supply our fabrics and to manufacture our products to our specifications. We do not have long-term contracts with any suppliers or manufacturers, and our business is dependent on continued good relations with our vendors. In addition, none of our suppliers or manufacturers supplies or manufactures our products exclusively. As a result, we compete with other companies for the production capacity of independent manufacturers and international import quota capacity. If our vendors or manufacturers fail to ship our fabrics or products on time or to meet our quality standards or are unable to fill our orders, we might not be able to deliver products to our retail stores and wholesale customers on time or at all.
Moreover, our manufacturers have at times been unable to deliver finished products in a timely fashion. This has led, from time to time, to an increase in our inventory, creating potential markdowns and a resulting decrease in our profitability. As there are a limited number of qualified, offshore manufacturers, it could take significant time to find alternative manufacturers, which could result in our missing retailing seasons or our wholesale customers’ canceling orders, refusing to accept deliveries or requiring that we lower selling prices. Since we cannot return merchandise to our manufacturers, we could also have a significant amount of unsold merchandise. Any of these problems could harm our financial condition and results of operations.
Our wholesale business is highly concentrated. The decision by any of our large customers to decrease their purchases of our products or stop carrying our products could have a material adverse effect on our results of operations and financial condition.
In 2006, 5.5% of our consolidated net revenue came from Bloomingdale’s, Macy’s and other affiliated stores owned by Federated Department Stores, Inc. No other single customer or group of related customers accounted for more than 5% of our net revenue in 2006. Continued consolidation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our and our licensees’ products. Also, as we expand the number of our retail stores, we run the risk that our wholesale customers will perceive that we are increasingly competing directly with them, which may lead them to reduce or terminate purchases of our products. In addition, in recent years there has been a significant increase in the number of designer brands seeking placement in department stores, which makes any one brand potentially less attractive to department stores. If any one of our major customers decides to decrease purchases from us, to stop carrying GUESS? products or to carry our products only on terms less favorable to us, our sales and profitability could significantly decrease. This could have a material adverse effect on our results of operations and financial condition.
Since we do not control our licensees’ actions and we depend on our licensees for a substantial portion of our earnings from operations, their conduct could harm our business.
We license to others the rights to produce and market products that are sold with our trademarks. If the quality, focus, image or distribution of our licensed products diminish, consumer acceptance of and demand for the GUESS? brand and products could decline. This could materially and adversely affect our business and results of operations. In 2006, approximately 71% of our net royalties were derived from our top five licensed product lines. A decrease in customer demand for any of these product lines could have a material adverse effect on our results of operations and financial condition.
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We depend on our intellectual property, and our methods of protecting it may not be adequate.
Our success and competitive position depend significantly upon our trademarks and other proprietary rights. We take steps to establish and protect our trademarks worldwide. Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive and time consuming, and we may be unable to adequately protect our intellectual property or to determine the extent of any unauthorized use, particularly in those foreign countries where the laws do not protect proprietary rights as fully as in the United States. We also place significant value on our trade dress and the overall appearance and image of our products. However, we cannot assure you that we can prevent imitation of our products by others or prevent others from seeking to block sales of GUESS? products for violating their trademarks and proprietary rights. We also cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of GUESS?, that our proprietary rights would be upheld if challenged or that we would, in that event, not be prevented from using our trademarks, any of which could have a material adverse effect on our financial condition and results of operations. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others. Even if we are successful in such actions, the costs we incur could have a material adverse effect on us.
If we fail to successfully execute our growth initiatives, including through acquisitions, our business and results of operations could be harmed.
As part of our business growth initiatives, we regularly open new stores in the United States and Canada. We also regularly evaluate strategic acquisitions and alliances and pursue those that we believe will support and contribute to our overall growth initiatives. For instance, we completed the acquisition of our former European jeanswear licensee during 2005 and the acquisition of 75% of the outstanding shares of our former European licensee of the GUESS by MARCIANO contemporary line of apparel for women and men in December 2006. We have also continued our international expansion by opening new stores outside the U.S., primarily in the form of stores owned by our international licensees and distributors. We plan to continue opening new stores in the U.S. and internationally. This expansion effort places increased demands on our managerial, operational and administrative resources that could prevent or delay the successful opening of new stores, adversely impact the performance of our existing stores and adversely impact our overall results of operations. In addition, acquired businesses may not provide us with increased business opportunities, or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming and expensive process. Failing to acquire and successfully integrate complementary businesses, or failing to achieve the business synergies or other anticipated benefits of acquisitions, could materially adversely affect our business and results of operations.
We may be unsuccessful in implementing our planned North America retail expansion, which could harm our business and negatively affect our results of operations.
To open and operate new stores successfully, we must:
·                    identify desirable locations, the availability of which is out of our control;
·                    negotiate acceptable lease terms, including desired tenant improvement allowances;
·                    build and equip the new stores;
·                    source sufficient levels of inventory to meet the needs of the new stores;
·                    hire, train and retain competent store personnel;
·                    successfully integrate the new stores into our existing operations; and
·                    satisfy the fashion preferences of customers in the new geographic areas.
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Any of these challenges could delay our store openings, prevent us from completing our store opening plans or hinder the operations of stores we do open. We cannot be sure that we can successfully complete our planned expansion or that our new stores will be profitable. Such things as unfavorable economic and business conditions and changing consumer preferences could also interfere with our plans to expand.
Failure to successfully develop and manage our new store concepts could adversely affect our results of operations.
In addition to our core Guess retail stores, we continue to develop the MARCIANO and Guess Accessories store concepts and in 2007 we plan to introduce our new G by GUESS and footwear store concepts. The introduction and growth of several new store concepts as part of our overall growth strategy could strain our financial and management resources. If we are unable to successfully develop and manage these multiple store concepts, or if consumers are not receptive to the products or store concepts, our results of operations and financial results could be adversely affected.
Much of our business is international and can be disrupted by factors beyond our control.
We have been reducing our reliance on domestic contractors and expanding our use of direct sourced offshore manufacturers as a cost-effective means to produce our products. During 2006, we sourced a significant amount of our finished products through third-party suppliers located outside the United States and we continued to purchase fabrics outside the United States. As we focus strategically on progressively more direct sourcing, we are expanding our Hong Kong office infrastructure to allow us to develop, engineer and source directly from overseas factories.
In addition, we have been increasing our international sales of product outside of the United States primarily through the significant expansion of our international stores through our licensees and distributors and through our 2005 acquisition of our former European jeanswear licensee and our 2006 acquisition of 75% of the outstanding shares of our former European licensee of the GUESS by MARCIANO contemporary line of apparel. In 2006, approximately 37.2% of our consolidated net revenue was generated by sales from outside of the United States. We anticipate that these international revenues will continue to grow as a percentage of our total business.
As a result of our increasing international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control. Such factors that could harm our results of operations and financial condition include, among other things:
·                    political instability or acts of terrorism, which disrupt trade with the countries in which our contractors, suppliers or customers are located;
·                    difficulties in managing our foreign operations;
·                    local business practices that do not conform to legal or ethical guidelines;
·                    adoption of additional or revised quotas, restrictions or regulations relating to imports or exports;
·                    additional or increased customs duties, tariffs, taxes and other charges on imports;
·                    delays in receipts due to our distribution centers as a result of increasing security requirements at U.S. ports;
·                    significant fluctuations in the value of the dollar against foreign currencies;
·                    increased difficulty in protecting our intellectual property rights in foreign jurisdictions;
·                    social, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in these international markets;
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·                    restrictions on the transfer of funds between the United States and foreign jurisdictions; and
·                    the ability of our international licensees and distributors to locate and continue to open desirable new retail locations.
Our imports are limited by textile agreements between the United States and some foreign jurisdictions, most notably including China. These agreements impose quotas on the amounts and types of merchandise that may be imported into the United States from these countries. These agreements also allow the United States to limit the importation of categories of merchandise that are not now subject to specified limits. The United States and the countries in which our products are produced or sold may also, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust prevailing quota, duty or tariff levels. If we are unable to obtain our raw materials and finished apparel from the countries where we wish to purchase them, either because of capacity constraints or visa availability under the required quota category or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our results of operations and financial condition.
Domestic and foreign currency fluctuations could adversely impact our financial condition and results of operations.
We generally purchase our products in U.S. dollars. However, we source most of our products overseas. As a result, the cost of these products may be affected by changes in the value of the applicable currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Furthermore, our international sales and licensing revenue generally is derived from sales in foreign currencies, including the Canadian Dollar and the Euro. This revenue could be materially affected by currency fluctuations. Although we hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, we cannot assure you that foreign currency fluctuations will not have a material adverse impact on our financial condition and results of operations.
Our two most senior executive officers own a significant percentage of our common stock. Their interests may differ from the interests of our other stockholders.
Maurice and Paul Marciano, our Chairman of the Board and Chief Executive Officer, respectively, collectively beneficially own over 42% of our outstanding shares of common stock. These individuals may have different interests than our other stockholders and, accordingly, they may direct the operations of our business in a manner contrary to the interests of our other stockholders. As long as these individuals own a significant percentage of our common stock, they may effectively be able to:
·                    elect our directors;
·                    amend or prevent amendment of our Restated Certificate of Incorporation or Bylaws;
·                    effect or prevent a merger, sale of assets or other corporate transaction; and
·                    control the outcome of any other matter submitted to our stockholders for vote.
Their stock ownership, together with the anti-takeover effects of certain provisions of applicable Delaware law and our Restated Certificate of Incorporation or Bylaws, may allow them to delay or prevent a change in control that may be favored by our other stockholders, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our common stock price.
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Our failure to attract and retain our existing senior management team and other key personnel could adversely affect our business.
Our business requires disciplined execution at all levels of our organization in order to ensure the timely delivery of desirable merchandise in appropriate quantities to our stores and our wholesalers’ stores. This execution requires experienced and talented management in design, production, merchandising and advertising. Our success depends upon the personal efforts and abilities of our senior management, particularly Maurice Marciano and Paul Marciano, and other key personnel. Although we believe we have a strong management team with relevant industry expertise, the extended loss of the services of one or both of the Marcianos or other key personnel could materially harm our business. Although we are the beneficiary of a $10 million “key man” insurance policy on the life of Paul Marciano, we do not have any other “key man” insurance with respect to either of the Marcianos or other key employees, and any of them may leave us at any time, which could severely disrupt our business and future operating results.
Fluctuations in our quarterly results of operations, comparable store sales, sales per square foot, wholesale operations or royalty net revenue or other factors could have a material adverse effect on our results of operations and financial condition.
Our quarterly results of operations for our individual stores, our wholesale operations and our royalty net revenue have fluctuated in the past and can be expected to fluctuate in the future. Further, if our retail store expansion plans, both domestically and internationally, fail to meet our expected results, our overhead and other related expansion costs would increase without an offsetting increase in sales and net revenue. This could have a material adverse effect on our results of operations and financial condition.
Our net revenue and operating results have historically been lower in the first half of our fiscal year due to general seasonal trends in the apparel and retail industries. The Company recently changed its fiscal year to the end of January but expects the historical trend described above to continue. Our comparable store sales and quarterly results of operations are affected by a variety of factors, including:
·                    shifts in consumer tastes and fashion trends;
·                    the timing of new store openings and the relative proportion of new stores to mature stores;
·                    calendar shifts of holiday or seasonal periods;
·                    changes in our merchandise mix;
·                    changes in our mix of revenues by segment;
·                    the timing of promotional events;
·                    actions by competitors;
·                    weather conditions;
·                    changes in style;
·                    changes in the business environment;
·                    population trends;
·                    changes in patterns of commerce such as the expansion of electronic commerce; and
·                    the level of pre-operating expenses associated with new stores.
An unfavorable change in any of the above factors could have a material adverse effect on our results of operations and financial condition.
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Violation of labor laws and practices by our licensees or suppliers could harm our business.
We require our licensing partners and suppliers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices, we do not control our licensees or suppliers or their labor practices. The violation of labor or other laws by any of our licensees or suppliers, or divergence of a licensee’s or supplier’s labor practices from those generally accepted as ethical in the United States, could interrupt or otherwise disrupt the shipment of our products, harm the value of our trademarks or damage our reputation.
We rely on third parties and our own personnel for upgrading and maintaining our management information and accounting systems. If these parties do not perform these functions appropriately, our business could be disrupted.
The efficient operation of our business is very dependent on our information and accounting systems. In particular, we rely heavily on the merchandise management systems used to track sales and inventory. We depend on our vendors to maintain and periodically upgrade these systems to support our business as we expand. The software programs supporting the processing of our inventory management information are licensed to us by independent software developers. The inability of these developers to continue to maintain and upgrade our software programs could result in incorrect information being supplied to management, inefficient ordering and replenishment of products and disruption of our operations if we are unable to convert to alternate systems in an efficient and timely manner.
ITEM 1B.       Unresolved Staff Comments.
None.
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ITEM 2.   Properties.
Certain information concerning our principal facilities, all of which are leased at December 31, 2006, is set forth below:
Location	 	 	 	Use	 	Approximate
Area in
Square Feet	 	
1444 South Alameda Street
Los Angeles, California	 	Principal executive and administrative offices, design facilities, sales offices, distribution and warehouse facilities, production control, and sourcing used by our Wholesale and Retail segments, and our Corporate groups	 	 	355,000	 	 	
144 S. Beverly Drive
Beverly Hills, California	 	Administrative offices	 	 	1,200	 	 	
1610 Freeport Drive
Louisville, Kentucky	 	Distribution and warehousing facility used by our Wholesale and Retail segments	 	 	506,000	 	 	
1385 Broadway
New York, New York	 	Administrative offices, public relations, and showrooms used by our Wholesale and Retail segments	 	 	30,000	 	 	
Montreal/Toronto, Canada	 	Administrative offices, showrooms and warehouse facilities used by our Wholesale and Retail segments	 	 	110,000	 	 	
Kowloon, Hong Kong	 	Administrative offices, showrooms, sourcing, distribution and licensing coordination facilities	 	 	24,000	 	 	
Seoul, Korea	 	Administrative offices and showrooms used by our Wholesale segment	 	 	6,400	 	 	
Shanghai, China	 	Administrative offices	 	 	1,400	 	 	
Florence/Milan/
Crevalcore, Italy	 	Administrative offices and showrooms used by our European segment	 	 	174,000	 	 	
 
Our corporate, wholesale and retail headquarters and certain warehousing facilities are located in Los Angeles, California and in Beverly Hills, California, consisting of five buildings totaling approximately 356,200 square feet. All of these properties are leased by us, primarily from limited partnerships in which the sole partners are trusts controlled by and for the benefit of Maurice Marciano and Paul Marciano (the “Principal Stockholders”), Armand Marciano, their brother and former executive of the Company, and their families pursuant to leases that expire in February 2008 and July 2008. The total lease payments to these limited partnerships are approximately $0.2 million per month with aggregate minimum lease commitments to these partnerships at December 31, 2006, totaling approximately $4.9 million.
During the first quarter of 2005, the Company, through a wholly-owned Canadian subsidiary, began leasing warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with Maurice Marciano and Paul Marciano. The lease expires in December 2014. The monthly lease payment is $44,000 Canadian (US $39,000) with aggregate minimum lease commitments through the term of the lease totaling approximately $4.2 million Canadian (US $3.7 million) at December 31, 2006.
See Note 11 to the Consolidated Financial Statements for further information regarding related party transactions.
Through early 2000, distribution of our products in the U.S. was centralized in our Los Angeles, California facility. In 2000, we leased an automated distribution center in Louisville, Kentucky, to replace the distribution center in Los Angeles as our primary distribution center. Our Canadian business operates
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a distribution facility located in Montreal, Canada. Our European business utilizes an independent distributor with two separate locations in Italy. Additionally, we utilize a contract warehouse in Hong Kong that services the Pacific Rim.
We lease our showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under non-cancelable operating lease agreements expiring on various dates through January 2018. These facilities are located principally in the U.S., with aggregate minimum lease commitments, at December 31, 2006, totaling approximately $456.4 million excluding related party commitments. In addition, in 2005 we started leasing a new headquarters building in Florence, Italy for our Europe operations under a capital lease agreement. We opened the Florence facility in June 2006. The capital lease obligation, including build-outs, amounted to $19.5 million as of December 31, 2006.
The current terms of our store leases, excluding renewal options, expire as follows:
 	 	Number of Stores	 	
Years Lease Terms Expire	 	 	 	North
America	 	Europe	 	Mexico	 	
2007-2009	 	 	80	 	 	 	7	 	 	 	2	 	 	
2010-2012	 	 	109	 	 	 	7	 	 	 	1	 	 	
2013-2015	 	 	94	 	 	 	6	 	 	 	—	 	 	
2016-2017	 	 	52	 	 	 	4	 	 	 	—	 	 	
Thereafter	 	 	1	 	 	 	—	 	 	 	—	 	 	
 	 	 	336	 	 	 	24	 	 	 	3	 	 	

We believe our existing facilities are well maintained, in good operating condition and are adequate to  support our present level of operations. See Notes 11 and 12 to the Consolidated Financial Statements for further information regarding current lease obligations.
ITEM 3.   Legal Proceedings.
On February 1, 2005, a complaint was filed by Michele Evets against the Company in the Superior Court of the State of California for the County of San Francisco. The complaint purports to be a class action filed on behalf of current and former Guess store managers in California. Plaintiffs seek overtime wages and a preliminary and permanent injunction. The Company answered the complaint on April 28, 2005. The parties participated in a voluntary mediation on August 16, 2006 and are in the process of finalizing a settlement agreement. The Company has accrued $1.0 million related to net charges in connection with the proposed settlement arrangement.
In 2006, the Officers of the Florence Customs Authorities (“Customs Authorities”) began an import customs audit with respect to the Company’s Italian Maco subsidiary in Florence, Italy, acquired in January 2005. 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 and 2005 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 Company has recently concluded that the amount of any possible loss would not be material to our consolidated financial statements and that the likelihood of incurring a loss is less than probable. Accordingly, no liability related to this matter has been accrued.
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The Company is also involved in various other employment-related 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. With the exception of the class action accrual discussed above, no material amounts were accrued as of December 31, 2006 or December 31, 2005, related to any of the Company’s other legal proceedings.
ITEM 4.   Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our shareholders during the fourth quarter of fiscal year 2006.
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PART II
ITEM 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Since August 8, 1996, the Company’s common stock has been listed on the New York Stock Exchange under the symbol ‘GES.’ The following table sets forth, for the periods indicated, the high and low sales prices of the Company’s Common Stock, as reported on the New York Stock Exchange Composite Tape, as adjusted to reflect the two-for-one stock split announced February 14, 2007 and expected to be effective March 13, 2007:
 	 	High	 	Low	 	
Year ended December 31, 2005	 	 	 	 	 	
First Quarter 2005	 	$	7.89	 	$	5.99	 	
Second Quarter 2005	 	8.78	 	6.50	 	
Third Quarter 2005	 	12.50	 	8.59	 	
Fourth Quarter 2005	 	18.45	 	10.38	 	
Year ended December 31, 2006	 	 	 	 	 	
First Quarter 2006	 	$	23.10	 	$	17.18	 	
Second Quarter 2006	 	23.35	 	19.56	 	
Third Quarter 2006	 	24.92	 	20.18	 	
Fourth Quarter 2006	 	32.55	 	24.15	 	
 
On February 20, 2007, the closing sales price per share of the Company’s common stock, as reported on the New York Stock Exchange Composite Tape, was $42.93. On February 20, 2007, there were 303 holders of record of the Company’s common stock.
Performance Graph
The Stock Price Performance Graph below compares the most recent five-year cumulative shareholder return of the Company with the S&P 500 Index (a broad equity market index) and the S&P 1500 Apparel Retail Index (a published industry index). The return on investment is calculated based on an investment of $100 on December 31, 2001, with dividends, if any, reinvested.

 	 	December 31,	 	
 	 	2001	 	2002	 	2003	 	2004	 	2005	 	2006	 	
Guess?, Inc..	 	100.00	 	55.87	 	160.93	 	167.33	 	474.67	 	845.73	 	
S&P 1500 Apparel Retail Index	 	100.00	 	99.41	 	136.25	 	160.32	 	174.90	 	191.64	 	
S&P 500 Index	 	100.00	 	77.90	 	100.25	 	111.15	 	116.61	 	135.03	 	
 
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Stock Split
On February 12, 2007, our Board of Directors approved a two-for-one stock split of the Company’s common stock to be effected in the form of a 100% stock dividend. Each shareholder of record at the close of business on February 26, 2007 will be issued one additional share of common stock for every share of common stock owned as of that time. The additional shares will be distributed on or about March 12, 2007 and the Company’s common stock is expected to begin trading on the New York Stock Exchange on a post-split basis on March 13, 2007. All share and per share amounts in this Annual Report on Form 10-K have been adjusted to reflect the 2007 stock split.
Dividend Policy
On February 12, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share on the Company’s common stock and approved a two-for-one stock split of the Company’s common stock, each to be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. Because the record date for the initial cash dividend preceded the March 12, 2007 stock split distribution date, the cash dividend will be paid on only pre-split shares. Assuming the Board of Directors maintains the current level of cash dividends, future quarterly dividends per share will be half the current level but will apply to shares on a post-split basis. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service requirements, cash paid for income taxes, earnings and liquidity. Prior to the initiation of a quarterly dividend on February 12, 2007, we had not declared any dividends on our common stock since our initial public offering in 1996. The agreement governing our Credit Facility limits our ability to pay dividends unless immediately after giving effect thereto the aggregate amount of unrestricted cash and cash equivalents held by Guess?, Inc. and its Canadian subsidiary is at least $50 million. At December 31, 2006, Guess?, Inc. and its Canadian subsidiary had approximately $193 million in unrestricted cash and cash equivalents.
Sale of Unregistered Securities
Effective December 31, 2006, Guess?, Inc., through its wholly-owned subsidiary, Guess? Europe, B.V., completed the acquisition of 75% of the outstanding shares of Focus Europe S.r.l. from Focus Pull S.p.A. (“Seller”). The total purchase price, which is expected to be €18.4 million ($24.2 million) subject to certain purchase price adjustments, also included 86,624 shares on a post-split basis of unregistered common stock of Guess?, Inc valued at approximately €2.0 million ($2.6 million) based on the Company’s stock price at the time of closing.
The offer and sale of the common stock in the Focus acquisition complied with Section 4(2) of the Securities Act and Rules 501, 502 and 506 promulgated thereunder. The Seller represented as of the date of the purchase of the common stock that (a) it acquired the shares for its own account and not with a view to or for sale in connection with any distribution thereof in any transaction that would violate the securities laws of the United States or any state thereof, (b) it had no present plan or intention to effect any distribution thereof and (c) it was an “accredited investor” within the meaning of Rule 501 promulgated under the Securities Act.
ITEM 6.   Selected Financial Data.
The selected financial data set forth below have been derived from the audited consolidated financial statements of the Company and the related notes thereto. All share and per share amounts included in the following consolidated financial data have been adjusted to reflect the two-for-one stock split announced February 14, 2007. The following selected financial data should be read in conjunction with the Company’s
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Consolidated Financial Statements and the related Notes contained herein and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information regarding accounting changes, acquisitions and other items affecting comparability.
 	 	Year Ended December 31,	 	
 	 	2006	 	2005	 	2004	 	2003	 	2002	 	
 	 	(in thousands, except per share data)	 	
Statement of operations data:	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	1,185,184	 	$	936,092	 	$	729,262	 	$	636,585	 	$	583,139	 	
Earnings (loss) from operations	 	193,023	 	101,810	 	55,482	 	20,600	 	(8,526	)	
Income taxes (benefit)	 	72,715	 	38,882	 	21,147	 	5,500	 	(5,550	)	
Net earnings (loss)	 	123,168	 	58,813	 	29,566	 	7,286	 	(11,282	)	
Earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	1.36	 	$	0.66	 	$	0.34	 	$	0.08	 	$	(0.13	)	
Diluted	 	$	1.34	 	$	0.65	 	$	0.33	 	$	0.08	 	$	(0.13	)	
Weighted number of shares outstanding—basic	 	90,618	 	88,774	 	88,020	 	86,558	 	86,784	 	
Weighted number of shares outstanding—diluted	 	92,074	 	90,118	 	89,088	 	87,116	 	86,784	 	
 
 	 	December 31,	 	
 	 	2006	 	2005	 	2004	 	2003	 	2002	 	
Balance sheet data:	 	 	 	 	 	 	 	 	 	 	 	
Working capital(1)	 	$	274,996	 	$	190,792	 	$	134,564	 	$	95,260	 	$	21,426	 	
Total assets	 	836,925	 	633,374	 	424,304	 	362,765	 	349,532	 	
Notes payable, long-term debt and capital lease, excluding current installments	 	18,018	 	53,199	 	41,396	 	54,161	 	1,480	 	
Stockholders’ equity	 	431,060	 	288,293	 	220,577	 	182,782	 	166,280	 	

(1)          Working capital at December 31, 2002, reflects the $79.6 million of 91¤2% Senior Subordinated Notes due 2003 as current debt and therefore a reduction in working capital.
ITEM 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Summary
We derive our net revenue from the sale of GUESS? men’s and women’s apparel, MARCIANO women’s apparel and our licensees’ products through our network of retail and factory outlet stores primarily in the United States and Canada, from the sale of GUESS? men’s and women’s apparel worldwide to wholesale customers and distributors, from net royalties from worldwide licensing activities, from the sale of GUESS? apparel and certain of our licensees’ products through the wholesale channels of our 100% owned Canadian subsidiary, GUESS? Canada Corporation (“GUESS Canada”), our 100% owned Italian subsidiary, GUESS? Italia, S.r.l. (effective June 1, 2006, merged with Maco Apparel, S.p.A., the 100% owned entity acquired in 2005), and from the sale of GUESS? and MARCIANO apparel and our licensee products through our on-line stores at www.guess.com, www.guessfactory.com,  www.marciano.com and www.guess.ca.
The business segments of the Company are retail, wholesale, European and licensing. Information relating to these segments is summarized in Note 15 to the 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 internationally,
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excluding Europe. The European segment includes both wholesale and retail operations in Europe. The licensing segment includes the worldwide licensing operations of the Company. The business segments 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, accounting and finance, executive compensation, facilities and legal.
The Company reports comparable store sales for its 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 or relocation results in a square footage change of more than 15%, the store is removed from the comparable store base until it has been opened at its new size or in its new location for 13 full months. Effective January 2007, the company discontinued its practice of reporting comparable store sales on a monthly basis.
All share and per share amounts in this Annual Report on Form 10-K have been adjusted to reflect the two-for-one stock split announced February 14, 2007.
Executive Summary
The Company
The Company continued to see improvement in all of its business segments, resulting in a record financial performance in the 2006 fiscal year regarding revenues and earnings. The Company reported record net earnings of $123.2 million, or diluted earnings of $1.34 per share, in the year ended December 31, 2006, more than double the net earnings of $58.8 million, or diluted earnings of $0.65 per share, reported in the year ended December 31, 2005. These results reflect the impact of the significant growth in our European operations bolstered by the success of our licensee acquisition in 2005; comparable store sales growth and retail store expansion in the U.S. and Canada; the worldwide growth of our accessories business; and stronger product performance driving our wholesale business.
Overall, the Company achieved an operating margin of 16.3% in 2006, up 540 basis points from 10.9% in 2005. This improvement was driven by the combination of increased revenues, improved gross margin and better SG&A leverage. Revenues grew 26.6% to $1,185.2 million in 2006 from $936.1 million in 2005 with all segments contributing to this improvement. Gross margin improved 310 basis points to 43.8% in 2006 from 40.7% in 2005. This improvement was driven by a higher mix of the European and licensing businesses, which generated higher gross margins than the retail and wholesale segments, increased European gross margin, improved gross margin in our retail business due to more full-priced selling and occupancy cost leverage and improved wholesale gross margin due to stronger sell through performance resulting in lower markdown allowances relative to sales. As a percentage of revenues, SG&A expense was down 230 basis points to 27.5% compared to the prior year, driven by better leveraging of fixed costs in all segments. These factors, plus the reduction in the effective tax rate to 37.1% for the full year compared to 39.8% in the prior year and the sales of certain non-operating assets all contributed positively to the improvement in diluted earnings per share.
The Company ended 2006 with $220.3 million in cash and cash equivalents compared to $171.5 million at the end of 2005. Total debt including capital lease obligations at the end of 2006 was $52.4 million, down $35.9 million from $88.3 million at the end of 2005. Receivables increased by $51.6 million or 63.2% to $133.4 million at December 31, 2006 compared to $81.8 million at December 31, 2005. The increase was driven by significant revenue growth in our European operations in the second half of 2006. Inventory increased by $43.2 million or 35.4% to $165.2 million at December 31, 2006 compared to $122.0 million at December 31, 2005. The increase was due to the acquisition of our European GUESS by MARCIANO licensee, Focus Europe S.r.l. (“Focus”), effective December 31, 2006 and higher European and retail segment inventories to support anticipated sales growth in 2007.
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Retail
Our retail segment, including full-priced retail, factory outlet, Canada, and E-commerce, generated net sales of $721.3 million in the year ended December 31, 2006, an increase of 17.7%, from $612.9 million in the prior year. This growth was driven by sales for stores open more than one year which grew 12.8% and a larger store base, which represented a 5.3% increase in average square footage compared to the 2005 year. The increase in net revenue was due to growth in our women’s, accessories and men’s lines of business. Retail earnings from operations increased by $35.1 million to $100.4 million in 2006 compared to $65.3 million in 2005. This increase was primarily driven by both higher sales volumes and higher average selling prices along with better gross margin performance.
We have continued to develop MARCIANO and Guess Accessories concept stores, and we believe that over time these concepts can grow to become significant chains in North America. The MARCIANO brand, a contemporary line that commands higher price points, is available in approximately half of our full-price GUESS? retail stores in the U.S. and Canada. We have opened stores in key markets in the U.S. and Canada with a focus on superior locations with highly attractive return opportunities. We opened eleven MARCIANO stores and six Guess Accessories stores in 2006. In addition, in 2007 the Company is introducing our new G by GUESS store concept. The Company expects to open approximately 32 G by GUESS stores, including store conversions from other concepts, in 2007.
We ended 2006 with a total of 336 stores in the U.S. and Canada, of which 192 were full-priced retail, 103 were factory outlet stores, 25 were MARCIANO stores and 16 were Guess Accessories stores. This compares to 315 stores at the end of 2005.
Wholesale
Wholesale segment revenues in 2006 increased 20.8% to $146.3 million from $121.1 million in 2005. Our products were sold in the U.S. in approximately 970 and 965 doors at the end of 2006 and 2005, respectively. Earnings from operations for the wholesale segment improved by $16.7 million, or 227.1%, to $24.0 million in 2006 from $7.3 million in 2005, driven by increased sales unit volume and higher gross margin as a result of lower markdown allowances relative to sales and reduced SG&A expenses.
Europe
In Europe, revenues grew by $98.6 million, or 64.1%, to $252.4 million in 2006 compared to $153.8 million in 2005. The majority of the revenue growth was generated by the European wholesale business. This growth was driven primarily by our accessories and apparel wholesale lines and additional sales in our owned retail stores. We ended 2006 with 24 owned stores which included the four stores acquired in the Focus acquisition versus 16 in the prior year. Earnings from operations from our European segment increased by 128.5% to $64.2 million in 2006 from $28.1 million in 2005 due to higher sales volume, better gross margin and improved SG&A expense leverage.
Licensing
Our licensing business generated net revenues of $65.2 million in 2006, up 35.0%, from $48.3 million in 2005. This increase was driven by growth of several product categories, especially handbags, watches and footwear. Licensing segment earnings from operations increased $19.4 million, or 51.3%, to $57.2 million in 2006 from $37.8 million in 2005 due to revenue growth and a reduction in expenses of $2.5 million. Results for 2005 included a special performance-based compensation expense of $4.6 million, which did not reoccur in 2006.
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Outside of North America, we ended 2006 with 413 stores, of which 329 were Guess and GUESS by MARCIANO stores and 84 were Guess Accessories stores. Of the 413 stores, 27 were owned and operated by Guess and 386 were operated by licensees or distributors.
Corporate Overhead
Corporate overhead increased by $16.1 million in 2006, or 43.8%, to $52.8 million from $36.7 million in 2005. This increase was primarily due to increased compensation costs, including $3.8 million related to higher stock compensation expense resulting from the adoption in 2006 of FAS 123R, “Share-Based Payment” (revised 2004) (“SFAS123R”), other performance-based compensation and pension costs.
Initiation of Quarterly Dividend
On February 12, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share on the Company’s common stock and approved a two-for-one stock split of the Company’s common stock, each to be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. Because the record date for the initial cash dividend preceded the March 12, 2007 stock split distribution date, the cash dividend will be paid on only pre-split shares. Assuming the Board of Directors maintains the current level of cash dividends, future quarterly dividends per share will be half the current level but will apply to shares on a post-split basis. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service requirements, cash paid for income taxes, earnings and liquidity.
Application of Critical Accounting Policies
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on its historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management evaluates its estimates and judgments on an ongoing basis including those related to the valuation of inventories, accounts receivable allowances, sales return allowances, the useful life of assets for depreciation, restructuring expense and accruals, evaluation of impairment, recoverability of deferred taxes, workers compensation accruals, litigation accruals, pension obligations and stock-based compensation.
The Company believes that the following significant accounting policies involve a higher degree of judgment and complexity. In addition to the accounting policies mentioned below, see Note 1 to the Consolidated Financial Statements for other significant accounting policies.
Accounts receivable reserves:
In the normal course of business, the Company grants credit directly to certain wholesale customers after a credit analysis based on financial and other criteria is performed. Accounts receivable are recorded net of an allowance for accounts receivable. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments. The Company bases its allowances through analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical collection trends and an evaluation of the impact of current economic conditions.
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Costs associated with customer markdowns are recorded as a reduction to net revenues, and are included in the allowance for accounts receivable. These costs result from seasonal negotiations with the Company’s wholesale customers, as well as historical trends and the evaluation of the impact of current economic conditions.
Sales returns reserves:
The Company accrues for estimated sales returns in the period in which the related revenue is recognized. To recognize the financial impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and reduces sales and cost of sales accordingly based on historical return experience. The Company’s policy allows retail customers a 30 day period to return merchandise following the date of sale. Substantially all of these returns are considered to be resalable at a price that exceeds the cost of the merchandise.
Inventory reserves:
Inventories are valued at the lower of cost (first-in, first-out and weighted average method) or market. The Company continually evaluates its inventories by assessing slow moving product as well as prior seasons’ inventory. Market value of aged inventory is estimated based on historical sales trends for this category of inventory of the Company’s individual product lines, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory. The Company closely monitors its off-price sales to ensure the actual results closely match initial estimates. Estimates are regularly updated based upon this continuing review.
Valuation of goodwill, intangible and other long-lived assets:
The Company assesses the impairment of its long-lived assets (i.e., goodwill, intangible assets and property and equipment), which requires the Company to make assumptions and judgments regarding the carrying value of these assets on an annual basis, or more frequently if events or changes in circumstances indicate that the assets might be impaired. An asset is considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the asset’s ability to continue to generate income from operations and positive cash flow in future periods or if significant changes in the Company’s strategic business objectives and utilization of the assets occurred. If the assets (other than goodwill) are assessed to be recoverable, they are depreciated or amortized over the periods benefited. If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of those assets. Fair value is determined based upon the discounted cash flows derived from the underlying asset. See Note 1 of the Consolidated Financial Statements for further discussion.
Pension benefit plan actuarial assumptions:
The Company’s pension obligations and related costs are calculated using actuarial concepts, within the framework of Statement of Financial Accounting Standards No. 87 “Employer’s Accounting for Pensions.”  The discount rate is an important element of expense and/or liability measurement. We evaluate this critical assumption annually which enables us to state expected future payments for benefits as a present value on the measurement date. Refer to Note 10 for Supplemental Executive Retirement Plan related information.
Litigation reserves:
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in our consolidated balance sheet. The likelihood of a material change in these estimated
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reserves would be dependent on new claims as they may arise and the favorable or unfavorable outcome of the particular litigation. Both the amount and range of loss on any remaining pending litigation is uncertain. As additional information becomes available, the Company will assess the potential liability related to pending litigation and will revise estimates as appropriate. Such revisions in estimates of the potential liability could materially impact the results of operations and financial position.
Stock-based compensation:
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method. Under this method, compensation cost recognized for the year ended December 31, 2006 included: (a) compensation expense for all stock-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” (“FAS123”) and (b) compensation expense for all stock-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for new grants. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock. The expected life is based on the “simplified” method described in the SEC Staff Accounting Bulletin No. 107. The dividend yield for 2006 and prior years was assumed to be zero since the Company had not historically declared and did not have a current plan to declare dividends on an ongoing basis until the Board of Directors authorized and approved the initiation of a quarterly dividend in February, 2007 (see Note 19). The expected forfeiture rate is determined based on historical data. Compensation expense for new stock options and nonvested stock awards is recognized on a straight-line basis over the vesting period. In accordance with the modified prospective transition method, results for prior periods have not been restated.
Results of Operations
The following table sets forth actual operating results for the 2006, 2005 and 2004 fiscal years as a percentage of net revenue:
 	 	Year Ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Product sales	 	94.5	%	94.8	%	93.5	%	
Net royalties	 	5.5	 	5.2	 	6.5	 	
Total net revenue	 	100.0	 	100.0	 	100.0	 	
Cost of product sales	 	56.2	 	59.3	 	62.4	 	
Gross profit	 	43.8	 	40.7	 	37.6	 	
Selling, general and administrative expenses	 	27.5	 	29.8	 	30.0	 	
Earnings from operations	 	16.3	 	10.9	 	7.6	 	
Interest expense	 	0.6	 	0.7	 	0.7	 	
Interest income	 	(0.4	)	(0.2	)	(0.1	)	
Other, net	 	(0.4	)	—	 	—	 	
Earnings before income taxes	 	16.5	 	10.4	 	7.0	 	
Income taxes	 	6.1	 	4.1	 	2.9	 	
Net earnings	 	10.4	%	6.3	%	4.1	%	
 
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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005.
Net revenue.   Net revenue increased $249.1 million or 26.6% to $1,185.2 million for the year ended December 31, 2006, from $936.1 million for the year ended December 31, 2005. All segments contributed to this growth, with the largest contributions from our retail and European segments.
Net revenue from retail operations increased $108.4 million, or 17.7%, to $721.3 million for the year ended December 31, 2006, from $612.9 million for the year ended December 31, 2005. The increase was driven by sales for stores that were open for more than one year which grew 12.8% and accounted for $67.9 million of the increase and a $40.5 million increase due to an average of 24 net new stores during 2006 with a 5.3% increase in average square footage compared to last year. While the majority of this $67.9 million increase was generated in our U.S. stores, the most significant store sales rate increases were in our Canadian retail stores. Currency fluctuations accounted for $7.5 million of the increase in net revenue relating to our Canadian retail stores.
Net revenue from wholesale operations increased $25.2 million, or 20.8%, to $146.3 million for the year ended December 31, 2006, from $121.1 million for the year ended December 31, 2005. U.S. wholesale net revenue increased $16.4 million, or 19.4%, to $101.1 million in 2006 from $84.7 million in 2005. The increase in U.S. wholesale revenue was primarily attributable to strong product performance which drove higher sales volume and lower markdown allowances as a percentage of revenue. Our products were sold domestically in approximately 970 and 965 doors at the end of 2006 and 2005, respectively. International wholesale net revenues, excluding Europe, increased $8.8 million, or 24.2%, to $45.2 million in 2006 from $36.4 million in 2005 primarily due to higher revenues in both Canada and Asia. Currency fluctuations accounted for $1.5 million of the increase in net revenue relating to our Canadian wholesale business.
Net revenue from European operations increased $98.6 million, or 64.1%, to $252.4 million for the year ended December 31, 2006, from $153.8 million for the year ended December 31, 2005. The increase was due to growth in our accessories and footwear businesses, higher sales in our apparel wholesale business, and additional sales in our owned retail stores. Currency fluctuations accounted for $1.1 million of the increase in net revenue relating to our European operations.
Net royalties from licensing operations increased by $16.9 million, or 35.0%, to $65.2 million for the year ended December 31, 2006, from $48.3 million for the year ended December 31, 2005. The increase was the result of the strength of the accessories business, particularly handbags, watches, and the impact of incremental sales from our new footwear and fragrance licensees. The number of licensees remained consistent in 2006 as compared to 2005.
Gross profit.   Gross profit increased $138.5 million or 36.4% to $519.4 million for the year ended December 31, 2006, from $380.9 million for the year ended December 31, 2005. The increase in gross profit primarily resulted from increased sales in all segments and improved gross margin in the European, wholesale and retail segments. Gross profit for the retail segment increased $55.5 million, or 26.0%, to $269.4 million primarily due to higher retail sales volumes and higher margins due to increases in average selling price partially offset by the additional occupancy cost of operating an incremental average 24 net new stores. Gross profit for the wholesale segment increased $12.8 million, or 32.4%, to $52.4 million as a result of increased sales volume and lower markdown allowances. Gross profit for our European operations increased $53.2 million to $132.4 million primarily attributable to the increase in sales. Higher licensing revenue increased overall gross profit by $17.0 million.
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Gross margin (gross profit as a percentage of total net revenues) increased 310 basis points to 43.8% for the year ended December 31, 2006, from 40.7% for the year ended December 31, 2005. The improvement in the overall gross margin was attributable to a higher mix of European and licensing segment revenues, both of which generate higher gross margin than our retail and wholesale segments. Gross margin improved in both Europe and retail due to better product margins and improved occupancy leverage. Gross margin improved in our wholesale business, due mainly to lower markdown allowances. Gross margin from product sales increased 310 basis points to 40.6% for the year ended December 31, 2006, from 37.5% for the year ended December 31, 2005.
The Company’s gross margins 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.   Selling, general and administrative (“SG&A”) expenses increased $47.3 million, or 16.9%, to $326.4 million for the year ended December 31, 2006, from $279.1 million, for the year ended December 31, 2005. The increase was primarily attributable to a $17.1 million increase in our European operations driven by selling and distribution costs, an $8.7 million increase representing the cost of operating an average of 24 net new stores in North America, a $2.2 million increase in North American selling expenses for stores open for more than one year, a $5.6 million increase in stock compensation expense, a $4.8 million increase in performance-based compensation, a $3.1 million increase in pension costs, a $1.4 million increase in professional fees, a $1.0 million accrual for the proposed settlement of a class action lawsuit and a $1.7 million increase in advertising costs. As a percentage of net revenue, SG&A expenses decreased 230 basis points to 27.5% in 2006 from 29.8% in 2005 reflecting lower expenses in the wholesale and licensing segments and improved leverage in both our European and retail segments.  The licensing segment included a special performance bonus in 2005 of $4.6 million which did not reoccur in 2006.
Earnings from operations.   Earnings from operations increased $91.2 million, or 89.6%, to $193.0 million for the year ended December 31, 2006 from $101.8 million for the year ended December 31, 2005 as a result of improved profitability in all of our segments. The retail segment generated earnings from operations of $100.4 million in 2006 versus earnings from operations of $65.3 million in 2005. The increase in earnings from operations for the retail segment was due to higher sales, improved gross margin and better expense leverage. Earnings from operations for the wholesale segment were $24.0 million in 2006 compared to $7.3 million in 2005. This increase was principally due to higher U.S. wholesale sales and gross margin, and lower operating expenses. The European segment increased its earnings from operations to $64.2 million in 2006 from $28.1 million in 2005 primarily due to increased sales, improved gross margin and better expense leverage. Earnings from operations for the licensing segment increased to $57.2 million in 2006 from $37.8 million in 2005 due primarily to higher revenues generated by our accessories and footwear licensees and lower SG&A costs. The cost of unallocated corporate overhead increased to $52.8 million in 2006 from $36.7 million in 2005 mainly due to higher compensation related costs including stock-based compensation expense. The combination of higher sales, increased gross margin and lower SG&A expense rate resulted in an increase in operating margin of 540 basis points from 10.9% to 16.3%.
Interest expense and interest income.   Interest expense increased 10.5% to $7.5 million for the year ended December 31, 2006 from $6.7 million for the year ended December 31, 2005. Total debt at December 31, 2006 was $52.4 million which comprised approximately $32.9 million and $19.5 million of bank debt and capital lease obligations in our European operations, respectively, compared to total debt of $88.3 million at December 31, 2005 which included $45.9 million of European borrowings and $40.7 million of the Company’s 6.75% Secured Notes. The Secured Notes were redeemed in December 2006 resulting in a $1.4 million write-off of debt issuance costs and a $0.5 million redemption premium which are included in interest expense. On a comparable basis, the average debt balance for the
34

year ended December 31, 2006 was $86.5 million, with an average effective interest rate of 6.2% (excluding the effect of the write-off of the debt issuance costs and redemption premium), versus an average debt balance of $91.1 million, with an average effective interest rate of 7.3%, for the year ended December 31, 2005. The comparable interest rate is lower primarily due to European debt comprising a larger proportion of the total debt in 2006 (which carries a lower average interest rate.) Interest income increased to $5.9 million in 2006 from $2.6 million in 2005 due to higher average invested cash balances and higher interest rates on this invested cash.
Other income, net.   Other income was $4.5 million for the year ended December 31, 2006 due to a $2.8 million gain on the sale of long-term investments, a $0.8 million gain on the sale of land, a $0.5 million increase in cash surrender value of long-term investments and a $0.4 million unrealized gain from interest rate swap contracts. There was no other income in the year ended December 31, 2005.
Income taxes.   Income tax for the year ended December 31, 2006 was $72.7 million, or a 37.1% effective tax rate, compared to income tax of $38.9 million, or a 39.8% effective tax rate, for the year ended December 31, 2005. The change in the effective tax rate compared to the prior year was due to the lower impact of permanent tax differences as a result of increased earnings, the generation of capital gains which allowed the Company to realize capital loss carryforwards and favorable tax audit settlements.
Net earnings.   Net earnings increased by $64.4 million, or 109.4%, to $123.2 million for the year ended December 31, 2006, from earnings of $58.8 million for the year ended December 31, 2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.
Net revenue.   Net revenue increased $206.8 million or 28.4% to $936.1 million for the year ended December 31, 2005, from $729.3 million for the year ended December 31, 2004. The increase was driven by improvements in all of our segments, but was primarily attributable to sales growth in the retail and European segments which included the impact of the acquisition of our European jeanswear licensee in 2005.
Net revenue from retail operations increased $94.0 million, or 18.1%, to $612.9 million for the year ended December 31, 2005, from $518.9 million for the year ended December 31, 2004. The increase was driven by a  comparable store sales increase of 9.2% which accounted for $39.4 million of the increase and a $54.6 million increase due to an average of 30 net new stores during 2005 with an 8.2% increase in average square footage as compared to 2004. The most significant comparable store sales percentage increases were in our Canadian retail stores. Currency fluctuations had a positive impact on our overall Canadian results, accounting for $7.7 million of the increase in net revenue.
Net revenue from wholesale operations increased $0.7 million to $121.1 million for the year ended December 31, 2005, from $120.4 million for the year ended December 31, 2004. The increase was driven by growth in non-European, international wholesale sales, offset by a decline in U.S. wholesale sales. U.S. wholesale net revenue decreased $4.7 million, or 5.3%, to $84.7 million in 2005 from $89.4 million in 2004, primarily due to reduced off-price sales in 2005, partially offset by increases in regular-priced sales. Our products were sold domestically in approximately 965 doors at the end of 2005 compared with approximately 930 doors at the end of 2004. Non-European, international wholesale net revenues increased $5.4 million, or 17.4%, to $36.4 million in 2005 from $31.0 million in 2004 primarily as a result of improved sales in Asia and Canada.
Net revenue from European operations increased $111.0 million to $153.8 million for the year ended December 31, 2005, from $42.8 million for the year ended December 31, 2004. The increase reflected the impact of the acquired jeanswear licensee and significant growth from the accessories business in Europe. Revenues from our acquired European jeanswear business, including the acquired retail stores, totaled $84.4 million. Currency fluctuations accounted for $1.2 million of the increase in net revenue.
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Net royalties from licensing operations increased by $1.1 million, or 2.3%, to $48.3 million for the year ended December 31, 2005, from $47.2 million for the year ended December 31, 2004. This growth was driven primarily by the strength of our eyewear, handbag and watch lines of business, partially offset by the acquisition of our European jeanswear licensee in January 2005, since the revenues of the acquired business are now classified as revenues for the European segment. Licensing income included in the licensing operations segment from our acquired European jeanswear licensee for the year ended December 31, 2004 totaled $5.9 million. The number of licensees remained consistent in 2005 as compared to 2004.
Gross profit.   Gross profit increased $106.9 million or 39.0% to $380.9 million for the year ended December 31, 2005, from $274.0 million for the year ended December 31, 2004. The increase in gross profit primarily resulted from growth in our European operations driven by the acquisition of the European jeanswear licensee and increased sales and improved margins in our retail segment. Gross profit for our European operations increased $57.3 million to $79.2 million primarily due to higher sales. The European acquisition accounted for approximately $40.6 million of the increase. Gross profit for the retail segment increased $45.1 million, or 26.8%, to $213.8 million primarily due to higher sales. Gross profit for the wholesale segment increased $3.3 million, or 9.2%, to $39.6 million as a result of a lower proportion of off-price product sales in the U.S. and increased sales in Canada and Asia.
Gross margin improved to 40.7% for the year ended December 31, 2005, from 37.6% for the year ended December 31, 2004. Gross margin from product sales increased to 37.5% for the year ended December 31, 2005, from 33.2% for the year ended December 31, 2004. The growth in the overall gross margin was due to the increased volume of sales in the high margin European business for the year ended December 31, 2005, improved leverage of store occupancy and higher product profitability, partially offset by a lower proportion of licensing revenue as a percentage of the overall revenue.
The Company’s gross margins 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 a portion of them related to the wholesale segment’s distribution costs from gross margin, including them instead in selling, general and administrative expenses.
Selling, general and administrative expenses.   Selling, general and administrative expenses increased $60.6 million, or 27.7%, to $279.1 million for the year ended December 31, 2005, from $218.5 million, for the year ended December 31, 2004. SG&A expenses in our European operations increased by $37.0 million for the year ended December 31, 2005 to $51.1 million from $14.1 million for the year ended December 31, 2004, primarily due to our acquisition. The remaining increase of $23.6 million was primarily due to a $10.6 million increase representing the cost of operating an average of 30 net new stores, a $4.1 million increase in store selling expenses resulting from higher sales and an $8.5 million increase in accrued bonus, including $4.6 million of performance-based compensation related to our licensing segment. As a percentage of net revenue, SG&A expenses decreased to 29.8% in 2005 from 30.0% in 2004. This lower rate reflects lower expenses in the wholesale business and lower advertising costs, partially offset by increased costs incurred to develop our infrastructure in Europe and domestically in the retail segment, and a higher performance-based compensation bonus expense in the licensing segment.
Earnings from operations.   Earnings from operations increased $46.3 million to $101.8 million for the year ended December 31, 2005 from $55.5 million for the year ended December 31, 2004. The retail segment generated earnings from operations of $65.3 million in 2005 versus earnings from operations of $47.8 million in 2004 with higher sales and gross profit partially offset by an increase in store selling and other costs. The wholesale segment improved its earnings from operations to $7.3 million in 2005 from a loss of $5.6 million in 2004. The improvement in earnings from operations for the wholesale segment is principally due to lower operating expenses in that segment and improved gross margin performance in our domestic wholesale business based on reduced sales of excess product in the off-price channel. The European segment increased its earnings from operations to $28.1 million in 2005 from $7.7 million in
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2004 primarily due to our recent European acquisition and improved performance of our accessories business in Europe. Earnings from our newly acquired jeanswear business totaled $11.9 million for the year ended December 31, 2005. Earnings from operations for the licensing segment remained flat at $37.8 million in 2005 from $37.7 million in 2004 due to increased royalty income and lower advertising and design costs, offset by both the loss of licensing revenue from our acquired European operations and a $4.6 million performance based compensation expense related to the performance and contributions of the licensing business to the Company’s operations. There was no corresponding performance based expense in the comparable prior year period. The cost of unallocated corporate overhead increased to $36.7 million in 2005 from $32.2 million in 2004 mainly due to higher compensation costs.
Interest expense and interest income.   Interest expense increased 19.2% to $6.7 million for the year ended December 31, 2005 from $5.7 million for the year ended December 31, 2004. Total debt at December 31, 2005 was $88.3 million, which included $40.7 million of the Company’s 6.75% Secured Notes due 2012, approximately $33.6 million of bank debt, primarily from our European operations, and a new capital obligation of $14.0 million relating to our new building in Europe. On a comparable basis, the average debt balance for the year ended December 31, 2005 was $91.1 million, with an average effective interest rate of 7.3%, versus an average debt balance of $63.5 million, with an average effective interest rate of 8.9%, for the year ended December 31, 2004. Interest income increased to $2.6 million in 2005 from $0.6 million in 2004 due to higher average invested cash balances and higher interest rates on this invested cash.
Income taxes.   Income tax for the year ended December 31, 2005 was $38.9 million, or a 39.8% effective tax rate, compared to the income tax of $21.1 million, or a 41.7% effective tax rate, for the year ended December 31, 2004. The change in the effective tax rate was due to the lower impact of permanent tax differences as a result of increased earnings in 2005 and other adjustments compared to the prior year.
Net earnings.   Net earnings increased by $29.2 million to $58.8 million for the year ended December 31, 2005, from earnings of $29.6 million for the year ended December 31, 2004.
Liquidity and Capital Resources
The following table summarizes the Company’s contractual obligations at December 31, 2006 and the effects such obligations are expected to have on liquidity and cash flow in future periods (dollars in thousands):
 	 	Payments due by period	 	
 	 	Total	 	Less than
1 year	 	1-3
years	 	3-5
years	 	More than
5 years	 	
Contractual Obligations:	 	 	 	 	 	 	 	 	 	 	 	
Debt Obligations(1)	 	$	32,870	 	$	32,870	 	$	—	 	$	—	 	$	—	 	
Capital Lease Obligations(1)	 	24,242	 	2,263	 	4,365	 	4,295	 	13,319	 	
Operating Lease Obligations(2)	 	464,969	 	81,046	 	141,734	 	103,862	 	138,327	 	
Purchase Obligations	 	127,218	 	127,218	 	—	 	—	 	—	 	
Aircraft Purchase	 	10,919	 	10,919	 	—	 	—	 	—	 	
Other Long-Term Liabilities	 	4,584	 	1,981	 	2,603	 	—	 	—	 	
Total	 	$	664,802	 	$	256,297	 	$	148,702	 	$	108,157	 	$	151,646	 	
Other Commercial Commitments(3)	 	$	12,442	 	$	12,442	 	$	—	 	$	—	 	$	—	 	

(1)          Includes interest on long-term debt and capital lease obligations.
(2)          Does not include insurance, taxes and common area maintenance charges. In 2006, these variable charges totaled $30.4 million.
(3)          Consists of standby letters of credit for guarantee of foreign subsidiary’s borrowings, workers’ compensation and general liability insurance.
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On February 12, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share on the Company’s common stock and approved a two-for-one stock split of the Company’s common stock, each to be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. Because the record date for the initial cash dividend preceded the March 12, 2007 stock split distribution date, the cash dividend will be paid on only pre-split shares. Assuming the Board of Directors maintains the current level of cash dividends, future quarterly dividends per share will be half the current level but will apply to shares on a post-split basis. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service requirements, cash paid for income taxes, earnings and liquidity.
At the current quarterly cash dividend rate, the Company’s annual cash dividend payments for 2007 are expected to total approximately $22.4 million. While we believe that the amount of our dividends will allow for adequate cash flow for other purposes, a reduction in cash generated by operations and any increase in capital expenditures, acquisition costs or cash paid for incomes taxes would reduce the amount of cash generated in excess of dividends, potentially reducing our operational and financial flexibility.
Our need for liquidity will primarily arise from the funding of expansion and remodeling of our retail stores, shop-in-shop programs, systems, infrastructure, operations, principal payments and payment of dividends. We have historically financed our operations primarily from internally generated funds and borrowings under our Credit Facility (defined below) and the European Revolvers (defined below). Please see “Item 1A. Risk Factors” for a discussion of risk factors which could reasonably be likely to result in a decrease of internally generated funds available to finance capital expenditures and working capital requirements.
On September 19, 2006, the Company and certain of its affiliates 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.
The obligations under the Credit Facility are guaranteed by certain of the Company’s existing and future domestic subsidiaries, and such obligations, including the guaranties, are secured by (a) substantially all present and future property and assets of the Company and each guarantor and (b) the equity interests of certain of the Company’s direct and indirect U.S. subsidiaries and 65% of the equity interests of the Company’s first tier foreign subsidiaries.
Direct borrowings under the Credit Facility will be made, at the Company’s option, as (a) Eurodollar Rate Loans, which shall bear interest at the published LIBOR rate for the respective interest period plus an applicable margin (which was 0.75% at December 31, 2006) based on Guess’ leverage ratio at the time, or (b) Base Rate Loans, which shall bear interest at the higher of (i) for domestic loans, 0.50% in excess of the federal funds rate, and for Canadian loans, 0.50% in excess of the average rate for 30 day Canada dollar bankers’ acceptances, or (ii) the rate of interest as announced by Bank of America as its “prime rate,” in each case as in effect from time to time, plus an applicable margin (which was 0.0% at December 31, 2006) based on the Company’s leverage ratio at the time. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. At December 31, 2006 the Company had $12.4 million in outstanding standby letters of credit, $19.4 million in outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a leverage ratio and a fixed charge coverage ratio. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to: incur liens, incur indebtedness, make investments,
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dispose of assets, make certain restricted payments, merge or consolidate, and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Credit Facility replaces the (a) Amended and Restated Loan and Security Agreement by and among Wachovia Capital Finance Corporation (Western) (formerly known as Congress Financial Corporation (Western)) and Guess, Guess? Retail, Inc. and Guess.com, Inc., dated as of December 20, 2002, as amended, and (b) Canadian Loan and Security Agreement by and among Wachovia Capital Finance Corporation (Canada) (formerly known as Congress Financial Corporation (Canada)) and Guess Canada, dated as of December 20, 2002, as amended (together, the “Prior Credit Facility”).
On December 20, 2006 the Company, through its wholly-owned subsidiary, Guess? Royalty Finance LLC (the “Issuer”), completed the optional redemption of all of its outstanding 6.75% asset-backed notes due June 2012 (“Secured Notes”). The final aggregate cash consideration paid to the holders of the Secured Notes for the redemption totaled $32.8 million, which included a redemption premium of $0.5 million. The Company also wrote-off debt issuance costs of $1.4 million in connection with the redemption. These amounts are included in interest expense in the accompanying consolidated statement of operations. The Secured Notes, originally issued on April 28, 2003, were secured by rights and interests in receivables generated from specific license agreements of specified GUESS? trademarks and all royalty monies payable or becoming payable under such license agreements, and a security interest in specified assets consisting primarily of such GUESS? trademarks and the specified license agreements.
The Company, through its European subsidiaries, maintains short-term borrowing agreements, primarily for working capital purposes, with various banks in Italy, (the “European Revolvers”). Under these agreements, the Company can borrow up to $93.4 million with annual interest rates ranging from 3.8% to 5.0%. However, the Company’s ability to borrow through foreign subsidiaries is limited to $85 million under the terms of our Credit Facility. At December 31, 2006, the Company had $32.5 million of outstanding borrowings with a weighted average annual interest rate of 3.9% and $6.4 million in outstanding documentary letters of credit under these agreements. These agreements are denominated in Euros, have no financial ratio covenants and are secured by accounts receivable, except for one borrowing agreement which is secured by a $5.3 million standby letter of credit issued under the Credit Facility. None of the agreements have stated maturities. In addition, as part of the acquisition of Focus, effective December 31, 2006, the Company acquired $0.3 million of bank debt with an interest rate of Euribor six-month rate plus 1%. The Company intends to pay this debt down in the short-term.
The Company entered into a capital lease of approximately $16.0 million in December 2005 for a new building in Florence, Italy, with subsequent build-outs which were completed in 2006. The building is the new headquarters for the Company’s Italian operation. This transaction resulted in a capital lease obligation of $19.5 million, including build-outs completed in 2006. The Company subsequently entered into separate interest rate swap agreements designated as non-hedging instruments resulting in a fixed rate of 3.55%. These interest rate swap agreements mature through 2016 and convert the nature of the capital lease obligation from Euribor floating rate debt to fixed rate debt. The fair value of the interest rate swap asset as of December 31, 2006 was approximately $0.5 million.
At December 31, 2006, the Company had working capital of $275.0 million compared to $190.8 million at December 31, 2005. The Company’s primary working capital needs are for inventory and accounts receivable. Accounts receivable at December 31, 2006 were $133.4 million, up $51.6 million, compared to $81.8 million at December 31, 2005. Approximately $37.0 million of the increase is attributed to the receivables related to our European business which totaled $76.4 million at December 31, 2006,
39

versus $39.4 million a year ago. Approximately $37.0 million, or 48.4%, of our European segment’s accounts receivable was insured for collection purposes at December 31, 2006. The Company’s inventory levels increased $43.2 million to $165.2 million at December 31, 2006 from $122.0 million at December 31, 2005. The change versus the year ago period was primarily due to the acquisition of Focus which included approximately $18.0 million of inventory at December 31, 2006, an increase of $15.3 million in inventories in our existing business in Europe and $6.4 million of increased inventories to support our North America business growth.
We believe that our operating cash flows, existing cash balances and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, provide for required debt payments, pay dividends to our shareholders in accordance with our dividend policy and support existing short- and long-term operating strategies. However, our operating cash flow and access to, or cash requirements of, credit facilities can be impacted by macroeconomic factors beyond our control that could reduce or delay consumer spending or prevent suppliers and service providers from providing required services or materials to us.
During 2006, the Company relied on trade credit along with available cash and borrowings under the Prior Credit Facility, European Revolvers, real estate leases, and internally generated funds to finance its operations and expansion. Net cash provided by operating activities was $138.3 million for the year ended December 31, 2006, compared to $149.3 million for the year ended December 31, 2005, or a decrease of $11.0 million. The decrease in cash provided by operating activities over the prior year was driven by growth in receivables of $52.1 million in 2006, primarily due to the revenue growth in Europe in the second half of the year combined with the longer customary payment terms experienced in that region. In addition, 2006 did not include approximately $42.7 million related to certain fixed, cash rights payments from renegotiated license agreements received in 2005 which were over-and-above the Company’s ongoing royalty payments. These items were partially offset by growth in net income of $64.4 million and a relative reduction in deferred taxes of $20.3 million.
Gross capital expenditures totaled $50.3 million, before deducting lease incentives of $5.2 million, for the year ended December 31, 2006. This amount excludes $4.6 million in non-cash build-out costs for the new headquarters building in Florence, Italy, that we are leasing. These build-out costs are accounted for as a capital lease and accordingly, are treated as a non-cash item in the consolidated statement of cash flows. This compares to gross capital expenditures of $48.8 million, before deducting lease incentives of $5.7 million, for 2005. The Company’s capital expenditures for 2007 are planned at approximately $93.0 million, before deducting estimated lease incentives of approximately $8.0 million, primarily for retail store expansion of approximately 48 stores, significant store remodeling programs, investments in information systems and enhancements in other infrastructure. In addition, in May 2006, the Company entered into an agreement to acquire a new corporate aircraft with a scheduled delivery date in December 2007 and has made down payments of approximately $8.1 million with additional progress payments totaling $10.9 million to be made through the expected delivery date. The down payments are accounted for within purchases of long-term investments and deposits on property and equipment in cash flows from investing activities. The acquisition will replace a current aircraft fractional ownership arrangement. The Company is currently negotiating with a lender and may fund the full purchase price of the aircraft and is considering entering into a sale and leaseback arrangement on completion of construction of the aircraft.
40

The Company evaluates strategic acquisitions and alliances and pursues those that we believe will support and contribute to our overall growth initiatives. During the first quarter of 2005, the Company purchased for $21.4 million, including cash acquired of $1.0 million, the remaining 90% of the shares of its European jeanswear licensee, Maco Apparel, S.r.l. (“Maco”), which it did not already own as well as certain retail stores in Europe. In 2005, the Company paid $16.9 million of the purchase price and refinanced $44.9 million of the outstanding debt of Maco. The remaining amount of the purchase price is included in liabilities and is payable in $0.5 million installments on each January 30 and June 30 through June 30, 2009.
Effective December 31, 2006, the Company purchased for approximately $22.8 million (net of $1.5 million of cash acquired), subject to certain purchase price adjustments primarily pertaining to inventory valuations and other closing conditions expected to be completed by June 2007, 75% of the outstanding shares of Focus Europe S.r.l. (“Focus”), the Company’s licensee for “GUESS by MARCIANO” contemporary apparel for women and men in Europe, the Middle East and Asia. In 2006, the Company paid $14.3 million of the purchase price ($11.7 million in cash and $2.6 million in Company common stock), net of $1.5 million of cash acquired. The Company expects to pay the seller approximately $8.4 million for acquired inventory after the seller pays its suppliers. The remainder of the purchase price is expected to be paid upon completion of the purchase price adjustments described above.
Cash used in financing activities increased $5.9 million to $19.2 million for the year ended December 31, 2006 compared to $13.3 million for the year ended December 31, 2005. The increase was driven primarily by the redemption of the Company’s 6.75% secured notes that amounted to $40.7 million at December 31, 2005. Net debt repayments were $19.7 million in 2005. Cash proceeds and tax benefits from the issuance of Company common stock upon stock award exercises were $21.1 million in 2006 compared to $6.4 million in 2005.
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances. The initial participants in the SERP are Maurice Marciano, Chairman of the Board, Paul Marciano, Chief Executive Officer, and Carlos Alberini, President and Chief Operating Officer. As a non-qualified pension plan, no funding of the SERP is required. However, the Company expects to make annual payments into an insurance policy held in a rabbi trust to fund the expected obligations arising under the SERP. As of December 31, 2006, two payments had been made and the cash surrender value of the insurance policy was $7.5 million. The amount of future payments may increase, depending on the future years of service and future annual compensation of the participants and investment performance of the trust.
In January 2002, the Company established a qualified employee stock purchase plan (“ESPP”), the terms of which allow for qualified employees to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. On January 23, 2002, the Company filed with the SEC a Registration Statement on Form S-8 registering 4,000,000 shares of common stock for the ESPP. During the year ended December 31, 2006, 54,846 shares of the Company’s common stock were issued out of its treasury shares pursuant to the ESPP at an average price of $16.55 per share for a total of $0.9 million.
In May 2001, the Company’s Board of Directors authorized the Company to repurchase shares of its own stock in an amount of up to $15 million from time to time in open market transactions. No share repurchases were made during the years ended December 31, 2006, 2005 and 2004. Since the inception of the share repurchase program in May 2001, the Company has purchased 2,274,000 shares at an aggregated cost of $7.1 million, or an average of $3.13 per share.
41

Seasonality
The Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries. U.S. retail operations are generally stronger from July through December, and U.S. wholesale operations generally experience stronger performance in July, August and September. The European operations are largely wholesale and operate with two primary selling seasons. Spring/Summer primarily ships in January, February and March and Fall/Winter ships in July, August and September. The remaining months of the year are relatively small shipping months. As the timing of the shipment of products may vary from year to year, the results for any particular quarter may not be indicative of results for the full year.
Inflation
The Company does not believe that the relatively moderate rates of inflation experienced in the U.S. over the last three years have had a significant effect on net revenue or profitability. Although higher rates of inflation have been experienced in a number of foreign countries in which the Company’s products are manufactured and sold, management does not believe that foreign rates of inflation have had a material adverse effect on its net revenue or profitability.
Impact of Recent Accounting Pronouncements
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payments,” which requires that companies recognize the grant-date fair value of stock options and other equity-based compensation issued to employees as an expense in the income statement. SFAS 123R generally requires that companies account for those transactions using the fair-value-based method, and eliminates using the intrinsic value method of accounting in APB 25. SFAS 123R is effective for the Company beginning with the first quarter of 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides the staff’s views regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of stock-based payments arrangements for public companies. The Company adopted SFAS 123R during the first quarter of fiscal 2006 using the modified prospective transition method. This method requires that compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 pro-forma disclosures. The impact of SFAS 123R on the Company’s statement of operations in 2006 and beyond will depend upon various factors, including the amount of awards granted and the fair value of those awards at the time of grant. The Company incurred an incremental expense of $5.6 million, or $0.04 per diluted share for fiscal 2006 as a result of the adoption of SFAS 123R. See Note 16 for further information regarding stock-based compensation.
In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 13-1 (“FSP13-1”), “Accounting for Rental Costs Incurred during the Construction Period,” which requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. These rental costs shall be included in income from continuing operations. The effective date of this FSP guidance was the first reporting period beginning after December 15, 2005. The Company’s policy prior to the adoption of FSP 13-1 was to capitalize pre-opening rental costs and amortize them over the remaining lease term. The Company incurred an incremental pre-opening rental expense of approximately $1.3 million during fiscal 2006 for new stores opened during 2006 with a subsequent reduction in amortization expense over the remaining lease term.
In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).”  The EITF reached a consensus that (a) the scope of
42

this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and (b) that the presentation of taxes within the scope on either a gross or a net basis is an accounting policy decision that should be disclosed under APB Opinion 22. Furthermore, for taxes reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented. The consensus is effective, through retrospective application, for periods beginning after December 15, 2006. The FASB ratified the consensus on June 28, 2006. Earlier application is permitted. The Company records taxes collected from customers for revenue producing transactions on a net basis. The Company does not expect to change this policy upon adoption of the EITF, and hence, does not expect the adoption of this consensus to have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 may have on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in its fiscal year ending December 31, 2006. At December 31, 2006, the Company has adopted the provisions of SAB 108 and determined no adjustments to current and prior reported periods are necessary.
In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurement.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its financial statements.
In September 2006, the FASB issued SFAS No. 158 (“SFAS 158”), “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income and as a separate component of stockholders’ equity. Additional footnote disclosures are also required. SFAS No. 158 is effective as of the end of the fiscal year ending after December 15, 2006. As a result of adopting SFAS 158, the Company reduced other assets by $14.7 million, increased deferred tax assets by $10.3 million, recorded an incremental liability of $12.2 million, and recorded incremental charges to accumulated other comprehensive income (loss) of $16.6 million, net of taxes.
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ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk.
Exchange Rate Risk
Approximately 65% of product sales and licensing revenue recorded in the year ended December 31, 2006, were denominated in United States dollars (“USD”). Inventory purchases from offshore contract manufacturers are primarily denominated in USD; however, purchase prices for products may be impacted by fluctuations in the exchange rate between the USD and the local currencies of the contract manufacturers, which may have the effect of increasing the cost of goods in the future. In addition, royalties received from international licensees are subject to foreign currency translation fluctuations as a result of the net sales of the licensee being denominated in local currency and royalties being paid to the Company in USD. During the last three fiscal years, exchange rate fluctuations have not had a material impact on inventory costs. Due to the increase in foreign currency transactions and the fact that not all foreign currencies react in the same manner as the USD, the Company cannot quantify in any meaningful way the effect of currency fluctuations on future income.
The Company’s primary exchange rate risk relates to operations in Canada and Europe. The Company may enter into derivative financial instruments, including forward exchange contracts and currency swaps, to manage exchange risk on foreign currency transactions. These financial instruments can be used to protect the Company from the risk that the eventual net cash inflows from the foreign currency transactions will be adversely affected by changes in exchange rates. Changes in the fair value of derivative financial instruments are either recognized periodically through the income statement or through stockholders’ equity as a component of comprehensive income or loss. The classification depends on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives designated as fair value hedges are matched in the income statement against the respective gain or loss relating to the hedged items. Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income or loss net of deferred taxes. Changes in fair values of derivatives not qualifying as hedges are reported in net earnings. The Company’s foreign currency contracts are not designated as hedges for accounting purposes. Thus, changes in fair value of the derivative instruments are included in net earnings.
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The following table sets forth information about the Company’s outstanding foreign currency contracts as of December 31, 2006:
Currency Exchange
Contracts	 	Contract Type	 	USD
Equivalent	 	Maturity Date	 	Current Value
in USD
at
Dec. 31, 2006	 	
Canadian dollars	 	Forward	 	$	1,000,000	 	January 4 to January 31, 2007	 	$	958,205	 	
Canadian dollars	 	Forward	 	1,000,000	 	February 1 to February 28, 2007	 	957,432	 	
Canadian dollars	 	Forward	 	1,000,000	 	March 1 to March 30, 2007	 	956,660	 	
 	 	 	 	$	3,000,000	 	 	 	$	2,872,297	 	
Euros	 	Domestic Currency Swap	 	1,000,000	 	January 5, 2007	 	1,022,785	 	
Euros	 	Domestic Currency Swap	 	1,000,000	 	February 7, 2007	 	1,021,361	 	
Euros	 	Domestic Currency Swap	 	2,000,000	 	March 7, 2007	 	2,040,425	 	
Euros	 	Domestic Currency Swap	 	1,000,000	 	March 16, 2007	 	1,019,680	 	
Euros	 	Forward	 	2,000,000	 	January 10, 2007	 	2,063,966	 	
Euros	 	Forward	 	1,000,000	 	January 10, 2007	 	1,032,225	 	
Euros	 	Forward	 	1,000,000	 	January 18, 2007	 	1,031,499	 	
Euros	 	Forward	 	1,000,000	 	January 18, 2007	 	1,031,499	 	
Euros	 	Forward	 	1,000,000	 	January 18, 2007	 	1,021,786	 	
Euros	 	Forward	 	2,000,000	 	February 8, 2007	 	2,061,387	 	
Euros	 	Forward	 	2,000,000	 	February 8, 2007	 	2,061,065	 	
Euros	 	Forward	 	1,000,000	 	February 16, 2007	 	1,030,211	 	
Euros	 	Forward	 	1,000,000	 	February 16, 2007	 	1,020,463	 	
Euros	 	Forward	 	1,000,000	 	March 9, 2007	 	1,029,327	 	
Euros	 	Forward	 	1,000,000	 	March 16, 2007	 	1,019,296	 	
Euros	 	Forward	 	1,000,000	 	April 6, 2007	 	1,018,490	 	
Euros	 	Domestic Currency Swap	 	10,000,000	 	November 8, 2006 to 2007	 	10,362,779	 	
Euros	 	Domestic Currency Swap	 	4,800,000	 	November 8, 2006 to 2007	 	4,948,875	 	
Euros	 	Domestic Currency Swap	 	4,900,000	 	November 8, 2006 to 2007	 	5,051,976	 	
Euros	 	Domestic Currency Swap	 	5,100,000	 	November 8, 2006 to 2007	 	5,258,180	 	
Euros	 	Domestic Currency Swap	 	5,200,000	 	November 8, 2006 to 2007	 	5,361,281	 	
 	 	 	 	$	50,000,000	 	 	 	$	51,508,556	 	
 	 	 	 	$	53,000,000	 	 	 	$	54,380,853	 	
 
At December 31, 2005, the Company had Canadian dollar currency exchange contracts to purchase $5.0 million USD and the current value of those contracts at that date was $5.1 million USD.
Interest Rate Risk
At December 31, 2006, approximately 37% of the Company’s indebtedness related to a capital lease obligation which is covered by interest rate swap agreements resulting in a fixed interest rate of 3.55% over the life of the lease obligation. Changes in the related interest rate will result in an unrealized gain or loss on the fair value of the swap and are reported in other income or expenses. The change in the unrealized fair value of the interest swap had an immaterial impact during 2006. Substantially all of the Company’s remaining indebtedness, principally consisting of short-term borrowings under the European Revolvers, is at variable rates of interest. Accordingly, changes in interest rates would impact the Company’s results of operations in future periods. A 100 basis point increase in interest rates would have increased interest expense for the year ended December 31, 2006 by approximately $0.9 million.
The fair value of the Company’s debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company’s borrowing rate. At December 31, 2006,
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the carrying value of all financial instruments was not materially different from fair value, as the interest rate on the Company’s debt approximates rates currently available to the Company.
ITEM 8.   Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference to the Consolidated Financial Statements and Supplementary Data listed in Item 15 of Part IV of this report.
ITEM 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.   Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2006.
Effective December 31, 2006, we completed the acquisition of 75% of Focus Europe S.r.l. Consistent with published guidance of the SEC, our management excluded the acquired company from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006. Total assets from the Focus acquisition represented 4.5% of the related consolidated total assets of GUESS?, Inc. as of December 31, 2006.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Guess?, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Guess?, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Guess?, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Guess?, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Guess? Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) .
On December 31, 2006, Guess?, Inc. acquired 75% of the outstanding shares of Focus Europe S.r.l. (Focus). Consistent with published guidance of the Securities and Exchange Commission, management excluded the acquired company from its assessment of the effectiveness of Guess?, Inc.’s internal control over financial reporting as of December 31, 2006. Total assets from the Focus acquisition represented 4.5% of the related consolidated total assets of Guess?, Inc. as of December 31, 2006. Our audit of internal
47

control over financial reporting of Guess?, Inc. also excluded an evaluation of the internal control over financial reporting of Focus.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Guess?, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2006, and the related financial statement schedule, and our report dated February 28, 2007, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ KPMG LLP
Los Angeles, California
February 28, 2007
 
48

ITEM 9B.             Other Information.
None.
PART III
ITEM 10.               Directors, Executive Officers and Corporate Governance.
The information required by this item can be found under the captions “Directors, Executive Officers,” “Corporate Governance and Board Matters,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement (the “Proxy Statement”) to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year and is incorporated herein by reference.
With respect to Item 406 of Regulation S-K, our Code of Conduct is incorporated herein by reference as Exhibit 14.1.
ITEM 11.               Executive Compensation.
The information in the Proxy Statement set forth under the captions “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference.
ITEM 12.               Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information set forth under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.
ITEM 13.               Certain Relationships and Related Transactions, and Director Independence.
The information set forth under the caption “Certain Relationships and Related Transactions”  and “Board Independence, Structure and Committee Composition” in the Proxy Statement is incorporated herein by reference.
ITEM 14.               Principal Accountant Fees and Services.
The information set forth under the caption “Relationship with Independent Auditors” in the Proxy Statement is incorporated herein by reference.
49

PART IV
ITEM 15.   Exhibits and Financial Statement Schedules.
Documents Filed with Report
(1)         Consolidated Financial Statements
The Report of Independent Registered Public Accounting Firm and financial statements listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule are filed as part of this report.
(2)         Consolidated Financial Statement Schedule
The financial statement schedule listed on the accompanying Index to Consolidated Financial Statements and Financial Statement Schedule is filed as part of this report.
(3)         Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of this report.
50

Guess?, Inc.
Form 10-K
Index to Consolidated Financial Statements and Financial Statement Schedule
1	 	Report of Independent Registered Public Accounting Firm	 	F-2	 	
2	 	Consolidated Financial Statements	 	 	 	
 	 	Consolidated Balance Sheets at December 31, 2006 and 2005	 	F-3	 	
 	 	Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004	 	F-4	 	
 	 	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004	 	F-5	 	
 	 	Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	 	F-6	 	
 	 	Notes to Consolidated Financial Statements	 	F-7	 	
3	 	Consolidated Financial Statement Schedule—Valuation and Qualifying Accounts for the Years Ended December 31, 2006, 2005 and 2004	 	F-38	 	
 
F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Guess?, Inc.:
We have audited the consolidated financial statements of Guess?, Inc. and subsidiaries, as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule, as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guess?, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 and 16 to the consolidated financial statements, Guess?, Inc. adopted Statement  of Financial Accounting Standards No. 123(R), “Share-Based Payment” effective January 1, 2006. As discussed in Note 1 and 10 to the consolidated financial statements, Guess?, Inc. adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment to FASB Statements No. 87, 88, 106 and 132(R),” as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Guess?, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
February 28, 2007
 
F-2

GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
 	 	2006	 	2005	 	
 	 	(in thousands, except
share data)	 	
ASSETS	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	220,344	 	$	171,549	 	
Receivables, net	 	133,406	 	81,762	 	
Inventories	 	165,232	 	122,037	 	
Prepaid expenses and other current assets	 	21,741	 	16,231	 	
Deferred tax assets	 	18,169	 	16,439	 	
Total current assets	 	558,892	 	408,018	 	
Property and equipment, net	 	164,262	 	144,007	 	
Goodwill	 	28,004	 	20,623	 	
Other intangible assets, net	 	18,532	 	11,282	 	
Long-term deferred tax assets	 	43,084	 	37,226	 	
Other assets	 	24,151	 	12,218	 	
 	 	$	836,925	 	$	633,374	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Current installments of notes payable, long-term debt and capital lease obligations	 	$	34,357	 	$	35,051	 	
Accounts payable	 	117,339	 	87,711	 	
Accrued expenses	 	132,200	 	94,464	 	
Total current liabilities	 	283,896	 	217,226	 	
Notes payable, long-term debt and capital lease obligations, excluding current installments	 	18,018	 	53,199	 	
Long-term deferred rent and lease incentives	 	31,236	 	28,688	 	
Long-term deferred royalties	 	35,008	 	43,423	 	
Other long-term liabilities	 	32,955	 	2,545	 	
 	 	401,113	 	345,081	 	
Minority interest.	 	4,752	 	—	 	
Commitments and contingencies (Note 12)	 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	 	
Preferred stock, $0.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding	 	—	 	—	 	
Common stock, $0.01 par value. Authorized 150,000,000 shares; issued 133,896,240 and 131,887,050 shares at 2006 and 2005, outstanding 92,088,880 and 89,938,220 shares at 2006 and 2005, respectively	 	921	 	900	 	
Paid-in capital	 	220,812	 	189,153	 	
Deferred compensation	 	—	 	(1,389	)	
Retained earnings	 	374,729	 	251,561	 	
Accumulated other comprehensive income (loss)	 	(9,483	)	4,515	 	
Treasury stock, 41,807,360 and 41,948,830 shares repurchased at 2006 and 2005, respectively	 	(155,919	)	(156,447	)	
Stockholders’ equity	 	431,060	 	288,293	 	
 	 	$	836,925	 	$	633,374	 	
 
See accompanying notes to consolidated financial statements
F-3

GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2006, 2005 and 2004
 	 	2006	 	2005	 	2004	 	
 	 	(in thousands, except per share data)	 	
Net revenue:	 	 	 	 	 	 	 	
Product sales	 	$	1,119,945	 	$	887,782	 	$	682,020	 	
Net royalties	 	65,239	 	48,310	 	47,242	 	
 	 	1,185,184	 	936,092	 	729,262	 	
Cost of product sales	 	665,805	 	555,223	 	455,278	 	
Gross profit	 	519,379	 	380,869	 	273,984	 	
Selling, general and administrative expenses	 	326,356	 	279,059	 	218,502	 	
Earnings from operations	 	193,023	 	101,810	 	55,482	 	
Other expense (income):	 	 	 	 	 	 	 	
Interest expense	 	7,450	 	6,741	 	5,653	 	
Interest income	 	(5,947	)	(2,626	)	(619	)	
Other, net	 	(4,477	)	—	 	(265	)	
 	 	(2,974	)	4,115	 	4,769	 	
Earnings before income tax expense and minority interest	 	195,997	 	97,695	 	50,713	 	
Income tax expense	 	72,715	 	38,882	 	21,147	 	
Minority interest	 	114	 	—	 	—	 	
Net earnings	 	$	123,168	 	$	58,813	 	$	29,566	 	
Earnings per share (Note 19)	 	 	 	 	 	 	 	
Basic	 	$	1.36	 	$	0.66	 	$	0.34	 	
Diluted	 	$	1.34	 	$	0.65	 	$	0.33	 	
Weighted average shares outstanding (Note 19)	 	 	 	 	 	 	 	
Basic	 	90,618	 	88,774	 	88,020	 	
Diluted	 	92,074	 	90,118	 	89,088	 	
 
See accompanying notes to consolidated financial statements
F-4

GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 2006, 2005 and 2004
 	 	Compre-
hensive
Income	 	Common
Stock	 	Paid-in
Capital	 	Deferred
Compensation	 	Retained
Earnings	 	Accumulated
Other
Comprehensive
Income (Loss)	 	Treasury 
Stock	 	Total	 	
 	 	(in thousands)	 	
Balance at December 31, 2003	 	 	 	 	 	 	$	876	 	 	$	172,917	 	 	$	(509	)	 	 	$	163,182	 	 	 	$	3,300	 	 	$	(156,984	)	$	182,782	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	 	$	29,566	 	 	 	—	 	 	—	 	 	—	 	 	 	29,566	 	 	 	—	 	 	—	 	29,566	 	
Foreign currency translation adjustment	 	 	3,635	 	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	3,635	 	 	—	 	3,635	 	
Unrealized gain on investments, net of tax effect	 	 	141	 	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	141	 	 	—	 	141	 	
Total comprehensive income	 	 	$	33,342	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock under stock compensation plans including tax effect	 	 	 	 	 	 	10	 	 	3,447	 	 	—	 	 	 	—	 	 	 	—	 	 	—	 	3,457	 	
Issuance of stock under Employee Stock Purchase Plan	 	 	 	 	 	 	—	 	 	188	 	 	—	 	 	 	—	 	 	 	—	 	 	264	 	452	 	
Deferred compensation	 	 	 	 	 	 	—	 	 	1,128	 	 	(584	)	 	 	—	 	 	 	—	 	 	—	 	544	 	
Balance at December 31, 2004	 	 	 	 	 	 	$	886	 	 	$	177,680	 	 	$	(1,093	)	 	 	$	192,748	 	 	 	$	7,076	 	 	$	(156,720	)	$	220,577	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	 	$	58,813	 	 	 	—	 	 	—	 	 	—	 	 	 	58,813	 	 	 	—	 	 	—	 	58,813	 	
Foreign currency translation adjustment	 	 	(2,588	)	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	(2,588	)	 	—	 	(2,588	)	
Unrealized gain on investments, net of tax effect	 	 	27	 	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	27	 	 	—	 	27	 	
Total comprehensive income	 	 	$	56,252	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock under stock compensation plans including tax effect	 	 	 	 	 	 	14	 	 	10,187	 	 	—	 	 	 	—	 	 	 	—	 	 	—	 	10,201	 	
Issuance of stock under Employee Stock Purchase Plan	 	 	 	 	 	 	—	 	 	252	 	 	—	 	 	 	—	 	 	 	—	 	 	273	 	525	 	
Deferred compensation	 	 	 	 	 	 	—	 	 	1,034	 	 	(296	)	 	 	—	 	 	 	—	 	 	—	 	738	 	
Balance at December 31, 2005	 	 	 	 	 	 	$	900	 	 	$	189,153	 	 	$	(1,389	)	 	 	$	251,561	 	 	 	$	4,515	 	 	$	(156,447	)	$	288,293	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net earnings	 	 	$	123,168	 	 	 	—	 	 	—	 	 	—	 	 	 	123,168	 	 	 	—	 	 	—	 	123,168	 	
Foreign currency translation adjustment	 	 	2,874	 	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	2,874	 	 	—	 	2,874	 	
Unrealized loss on investments, net of tax effect	 	 	(263	)	 	 	—	 	 	—	 	 	—	 	 	 	—	 	 	 	(263	)	 	—	 	(263	)	
Supplemental Executive Retirement Plan, net of tax effect	 	 	(16,609	)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(16,609	)	 	 	 	(16,609	)	
Total comprehensive income	 	 	$	109,170	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock under stock compensation plans including tax effect	 	 	 	 	 	 	21	 	 	23,290	 	 	—	 	 	 	—	 	 	 	—	 	 	—	 	23,311	 	
Issuance of stock under Employee Stock Purchase Plan	 	 	 	 	 	 	—	 	 	703	 	 	—	 	 	 	—	 	 	 	—	 	 	205	 	908	 	
Stock-based compensation	 	 	 	 	 	 	—	 	 	6,739	 	 	—	 	 	 	—	 	 	 	—	 	 	—	 	6,739	 	
Deferred compensation	 	 	 	 	 	 	—	 	 	(1,389	)	 	1,389	 	 	 	—	 	 	 	—	 	 	—	 	—	 	
Issuance of common stock for Focus acquisition	 	 	 	 	 	 	—	 	 	2,316	 	 	—	 	 	 	—	 	 	 	—	 	 	323	 	2,639	 	
Balance at December 31, 2006	 	 	 	 	 	 	$	921	 	 	$	220,812	 	 	$	—	 	 	 	$	374,729	 	 	 	$	(9,483	)	 	$	(155,919	)	$	431,060	 	
 
See accompanying notes to consolidated financial statements
 
F-5

GUESS?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
 	 	2006	 	2005	 	2004	 	
 	 	(in thousands)	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	
Net earnings	 	$	123,168	 	$	58,813	 	$	29,566	 	
Adjustments to reconcile net earnings to net cash provided by operating activities:	 	 	 	 	 	 	 	
Depreciation and amortization of property and equipment	 	35,309	 	32,364	 	34,975	 	
Amortization of intangible assets	 	2,745	 	2,275	 	467	 	
Stock-based compensation expense	 	6,739	 	1,175	 	968	 	
Deferred income taxes	 	(5,441	)	(25,658	)	(1,244	)	
Net (gain) loss on disposition of long-term assets and property and equipment	 	(970	)	1,195	 	136	 	
Other items, net	 	(369	)	(2,729	)	2,665	 	
Minority interest	 	114	 	 	 	 	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	
Receivables	 	(52,073	)	18,145	 	(21,313	)	
Inventories	 	(25,177	)	(25,009	)	1,201	 	
Prepaid expenses and other assets	 	(4,128	)	3,505	 	(1,871	)	
Accounts payable and accrued expenses	 	53,983	 	40,116	 	23,624	 	
Long-term deferred rent and lease incentives	 	2,548	 	3,406	 	10,335	 	
Long-term deferred royalties	 	(1,418	)	39,174	 	4,250	 	
Other long-term liabilities	 	3,223	 	2,544	 	—	 	
Net cash provided by operating activities	 	138,253	 	149,316	 	83,759	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	
Purchases of property and equipment	 	(50,281	)	(48,794	)	(34,779	)	
Proceeds from dispositions of long-term assets and property and equipment	 	4,946	 	2,553	 	1,020	 	
Acquisition of Maco, net of cash acquired	 	—	 	(20,427	)	—	 	
Acquisition of Focus, net of cash acquired	 	(11,721	)	—	 	—	 	
Purchases of long-term investments and deposits on property and equipment	 	(14,481	)	(3,646	)	(327	)	
Net cash used in investing activities	 	(71,537	)	(70,314	)	(34,086	)	
Cash flows from financing activities:	 	 	 	 	 	 	 	
Proceeds from notes payable and long-term debt	 	118,190	 	119,576	 	214,066	 	
Repayment of notes payable and long-term debt	 	(158,948	)	(139,259	)	(227,332	)	
Minority interest capital contributions	 	490	 	—	 	—	 	
Issuance of common stock	 	11,237	 	6,359	 	2,286	 	
Excess tax benefits from stock-based compensation	 	9,842	 	—	 	—	 	
Net cash used in financing activities	 	(19,189	)	(13,324	)	(10,980	)	
Effect of exchange rates on cash and cash equivalents	 	1,268	 	(132	)	147	 	
Net increase in cash and cash equivalents	 	48,795	 	65,546	 	38,840	 	
Cash and cash equivalents at beginning of year	 	171,549	 	106,003	 	67,163	 	
Cash and cash equivalents at end of year	 	$	220,344	 	$	171,549	 	$	106,003	 	
Supplemental disclosures about non-cash investing and financing activities:	 	 	 	 	 	 	 	
Capital lease obligation incurred	 	$	4,619	 	$	13,964	 	$	—	 	
Shares issued for Focus acquisition	 	2,639	 	—	 	—	 	
Supplemental cash flow data:	 	 	 	 	 	 	 	
Interest paid	 	5,433	 	5,707	 	4,832	 	
Income taxes paid	 	56,280	 	54,131	 	15,089	 	
 
See accompanying notes to consolidated financial statements
F-6

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
Description of the Business
Guess?, Inc. (the “Company” or “GUESS?”) designs, markets, distributes and licenses a leading lifestyle collection of casual apparel and accessories for men and women that reflect the American lifestyle and European fashion sensibilities. The Company’s designs are sold in GUESS owned stores, to a network of wholesale accounts that includes primarily better department stores, selected specialty retailers and upscale boutiques and through the Internet. GUESS branded products, some of which are produced under license, are also sold internationally through a series of licensees and distributors.
Classification of Certain Costs and Expenses
The Company includes inbound freight charges, purchasing costs, retail store occupancy costs and a portion of the Company’s distribution costs related to its retail business in costs of product sales. Distribution costs related to the wholesale business are included in selling, general and administrative expenses and amounted to $15.4 million, $7.8 million and $8.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company includes store selling, selling and merchandising, advertising, wholesale distribution costs, design and other corporate overhead costs as a component of selling, general and administrative expenses.
The Company classifies amounts billed to customers for shipping fees as revenues, and classifies costs related to shipping as cost of product sales in the accompanying consolidated statements of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Guess?, Inc., its wholly-owned direct and indirect subsidiaries and its majority-owned subsidiaries. Accordingly, all references herein to “Guess?, Inc.” include the consolidated results of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated during the consolidation process.
Stock Split
On February 12, 2007, our Board of Directors approved a two-for-one stock split of the Company’s common stock to be effected in the form of a 100% stock dividend. Each shareholder of record at the close of business on February 26, 2007 will be issued one additional share of common stock for every share of common stock owned as of that time. The additional shares will be distributed on or about March 12, 2007. All share and per share amounts in this Annual Report on Form 10-K have been adjusted to reflect the 2007 stock split.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosed in the accompanying notes. Significant areas requiring the use of management estimates relate to the valuation of inventories, accounts receivable allowances, sales return allowances, pension obligations, the useful life of assets for depreciation, evaluation of asset impairment, litigation accruals, recoverability of deferred taxes, workers compensation and medical self-insurance expense and accruals, stock-based compensation, and evaluation
F-7

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
of net recoverable amounts and accruals for the sublet of certain lease obligations. Actual results could differ from those estimates.
Litigation reserves
Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable outcome of the particular litigation. As additional information becomes available, the Company assesses the potential liability related to pending litigation and revises estimates as appropriate. Such revisions in estimates of the potential liability could materially impact the results of operations and financial position.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less.
Investment Securities
The Company accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). SFAS 115 requires investments to be classified into one of three categories based on management’s intent: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at their amortized cost. Available-for-sale securities are recorded at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity. Trading securities are recorded at market value with unrealized gains and losses reported in operations. The Company accounts for its long-term investment securities as available-for-sale.
Earnings per Share
Basic earnings per share represents net earnings divided by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted-average number of shares outstanding, inclusive of the dilutive impact of common stock equivalents such as stock options, calculated using the treasury stock method.
The reconciliation of basic to diluted weighted average shares is as follows (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Weighted average shares used in basic computations	 	90,618	 	88,774	 	88,020	 	
Dilutive equity awards	 	1,456	 	1,344	 	1,068	 	
Weighted average shares used in diluted computations	 	92,074	 	90,118	 	89,088	 	
 
For the fiscal years 2006, 2005 and 2004, the difference between basic and diluted earnings per share was due to the potential dilutive impact of options to purchase common stock. Options for 473,220,
F-8

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
145,094 and 1,964,598, of the Company’s shares, respectively, were outstanding during 2006, 2005 and 2004 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.
Accounts Receivable and Concentration of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of accounts receivable. In addition, the Company maintains cash with various major financial institutions and performs evaluations of the relative credit standing of these financial institutions in order to limit the amount of credit exposure with any institution. The Company extends credit to corporate customers based upon an evaluation of the customer’s financial condition and credit history and generally requires no collateral. The Company maintains allowances for doubtful accounts for estimated losses that result from the inability of its wholesale customers to make their required payments. The Company bases its allowances on analysis of the aging of accounts receivable at the date of the financial statements, assessments of historical collections trends and an evaluation of the impact of current economic conditions. The Company’s corporate customers are principally located throughout North America and in Europe, and their ability to pay amounts due to the Company may be dependent on the prevailing economic conditions of their geographic region. However, such credit risk is considered limited due to the Company’s large customer base. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based on these evaluations. The Company’s credit losses for the periods presented are insignificant and have not significantly exceeded management’s estimates. A few of the Company’s domestic wholesale customers, including some under common ownership, have accounted for significant portions of its total net revenue. Bloomingdale’s, Macy’s and other affiliated stores owned by Federated Department Stores, Inc. together accounted for approximately 5.5%, 5.8%, and 5.1% of the Company’s consolidated net revenue in 2006, 2005 and 2004, respectively. The Company does not have significant credit exposure to any one European customer.
Inventories
Inventories are valued at the lower of cost (first-in, first-out and weighted average method) or market. The Company continually evaluates its inventories by assessing slow moving product as well as prior seasons’ inventory. Market value of aged inventory is estimated based on historical sales trends for this category of inventory of the Company’s individual product lines, the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory.
Revenue Recognition
General
The Company recognizes retail operations revenue at the point of sale and wholesale operations revenue from the sale of merchandise when products are shipped and the customer takes title and assumes risk of loss, collection of relevant receivable is reasonably assured, pervasive evidence of an arrangement exists, and the sales price is fixed or determinable. The Company accrues for estimated sales returns and other allowances in the period in which the related revenue is recognized. To recognize the financial
F-9

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
impact of sales returns, the Company estimates the amount of goods that will be returned based on historical experience and reduces sales and cost of sales accordingly based on historical return experience. The change in sales returns accruals decreased gross profit by $3.3 million and $2.1 million for the years ended December 31, 2006 and 2005, respectively. The sales returns accruals were $6.5 million and $2.7 million at December 31, 2006 and 2005, respectively. The Company recorded retail sales returns accruals which resulted in a reduction of gross profit of $3.2 million in 2006. Management evaluated the effects of not accruing for retail sales returns in prior periods and determined the impact to be immaterial.
Net Royalty Revenue
Royalty revenue is based upon a percentage, as defined in the underlying agreement, of the licensee’s actual net sales or minimum net sales, whichever is greater. The Company may receive special payments in consideration of the grant of license rights. These payments are recognized ratably as revenue over the term of the license agreement. The unrecognized portion of upfront payments is included in deferred royalties and accrued expenses depending on the long or short-term nature of the payments to be recognized. During 2005 we successfully renegotiated license agreements for certain significant product categories comprising watches, handbags and eyewear. The renewal terms call for certain fixed, cash rights payments which are over-and-above our normal, ongoing royalty payments. During 2005 we received $42.7 million in cash for these significant renewals and recorded the same amount as deferred royalties, of which we have recognized $1.5 million as revenues in each of 2006 and 2005, respectively. In 2004, we renegotiated a new footwear license and received $5.0 million in cash and recorded the same amount as deferred royalties. The Company commenced recognizing revenue once the footwear contract became effective in 2005, totaling $1.4 million and $0.7 million for 2006 and 2005, respectively.
Gift Certificates and Store Credits
The Company defers all revenues related to gift certificates and store credits until they are redeemed for merchandise. Based on prior redemption experience, the Company does not recognize unredeemed balances prior to two years from the date of issuance. The breakage income is subsequently recognized ratably into operating income over a four-year period.
Depreciation and Amortization
Depreciation and amortization of property and equipment are provided using the straight-line method over the following useful lives:
Building and building improvements including properties under capital lease	 	10 to 33 years	 	
Land improvements	 	5 years	 	
Machinery and equipment	 	5 years	 	
Corporate aircraft	 	10 years	 	
Corporate vehicles	 	5 years	 	
Shop fixtures	 	5 years	 	
 
F-10

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Construction in progress is not depreciated until the related asset is completed and placed in service.
Foreign Currency
The local currency is the functional currency for all of our significant international operations. In accordance with SFAS No. 52, “Foreign Currency Translation,” assets and liabilities of the Company’s foreign operations are translated from foreign currencies into U.S. dollars at year-end rates, while income and expenses are translated at the weighted-average exchange rates for the year. The related translation adjustments are reflected as a foreign currency translation adjustment in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency, including gains and losses on foreign currency contracts, are included in the results of operations. Net foreign currency transaction losses included in the determination of net earnings were $800,000, $661,000 and $864,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The Company may enter into forward foreign exchange contracts in the ordinary course of business to mitigate the risk associated with foreign exchange rate fluctuations related to Canadian purchases of U.S. dollar denominated inventory and Italian purchases of U.S. dollar denominated inventory. The Company’s foreign currency contracts are not designated as hedges for accounting purposes and changes in fair value of the derivative instruments are included in net earnings. At December 31, 2006, the Company had currency exchange contracts to purchase $53.0 million U.S. dollars for approximately $3.3 million Canadian dollars and approximately 39.0 million Euros. At December 31, 2005, the Company had currency exchange contracts to purchase $5.0 million U.S. dollars for approximately $5.9 million Canadian dollars. Unrealized losses were $1,381,000, $51,000 and $1,086,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Deferred Rent and Lease Incentives
When a lease includes lease incentives (such as a rent holiday or reimbursement of certain lessee construction costs) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
F-11

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Comprehensive Income
Comprehensive income consists of net earnings, unrealized gains or losses on investments, foreign currency translation adjustments and the unfunded portion of the Company’s supplemental executive retirement plan (“SERP”), net of taxes. Comprehensive income is presented in the consolidated statements of stockholders’ equity and comprehensive income.
Business Segment Reporting
The Company reports information about business segments and related disclosures about products and services, geographic areas and major customers. The business segments of the Company are retail, wholesale, European and licensing. Information regarding these segments is summarized in Note 15 to the Consolidated Financial Statements. In the first quarter of 2005, the Company revised its segment reporting to include its aggregate European operations as a separate segment. The change was made as a result of the significant European acquisition made in 2005. The Company believes this segment reporting better 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 internationally, excluding Europe. The European segment includes both wholesale and retail operations in Europe. The licensing segment includes the worldwide licensing operations of the Company. All amounts for 2004 have been revised to conform to the 2005 and 2006 presentation.
Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, which principally include cash, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. Investments are recorded at fair value.
The fair values of the Company’s debt instruments (See Note 8) are based on the amount of future cash flows associated with each instrument discounted using the Company’s borrowing rate. At December 31, 2006 and 2005, the carrying value of all financial instruments was not materially different from fair value, as the interest rates on variable rate debt including the capital lease obligation approximated rates currently available to the Company.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The Company recorded charges related to store
F-12

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
impairment of $2.4 million and $0.6 million, respectively, for the fiscal years ended December 31, 2006 and 2005.
Goodwill and Other Intangible Assets, net
Goodwill and other intangibles not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill and other intangibles over the implied fair value. The implied fair value is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. As of December 31, 2006, we had goodwill of approximately $28.0 million. No goodwill impairments have been recognized for the years ended December 31, 2006, 2005 and 2004. Other intangible assets as of December 31, 2006 primarily consisted of lease and license acquisition costs related to the two recent European acquisitions. See Note 18 for further information regarding intangible assets acquired from the Focus acquisition. Gross intangible assets were $24.8 million and $13.7 million at December 31, 2006 and 2005, respectively. The accumulated amortization of intangible assets with definitive useful lives was $6.3 million and $2.4 million at December 31, 2006 and 2005, respectively.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising expenses charged to operations for the years ended December 31, 2006, 2005 and 2004 were $22.4 million, $19.8 million and $22.7 million, respectively.
Reclassifications
Certain reclassifications have been made to the December 31, 2005 condensed consolidated balance sheet to conform to classifications used in the current year. As of December 31, 2005, we reclassified long-term restricted cash of $2.8 million from prepaid expenses and other current assets to other assets; and reclassified the current portion of capital lease obligations amounting to $0.8 million from accrued expenses to current installments of notes payable, long-term debt and capital lease obligations and reclassified the long-term portion of capital lease obligations amounting to $13.1 million from other long-term liabilities to notes payable, long-term debt and capital lease obligations, excluding current installments.
The Company has made certain other reclassifications to prior years’ consolidated financial statements to conform to classifications used in the current year. These reclassifications, including the above, had no impact on previously reported results of operations.
F-13

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Stock-based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, “Share-Based Payments,” using the modified prospective transition method. Under this method, compensation cost recognized in 2006 included: (a) compensation expense for all stock-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and (b) compensation expense for all stock-based awards granted to employees on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for new grants. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock. The expected life is based on the “simplified” method described in the SEC Staff Accounting Bulletin No. 107. The dividend yield for 2006 and prior years was assumed to be zero since the Company had not historically declared and did not have a plan to declare dividends on an ongoing basis until the Board of Directors authorized and approved the initiation of quarterly dividends in February 2007 (see Note 19). The expected forfeiture rate is determined based on historical data. Compensation expense for new stock options and nonvested stock awards is recognized on a straight-line basis over the vesting period. In accordance with the modified prospective transition method, results for prior periods have not been restated. The Company incurred an incremental expense of $5.6 million, or $0.04 per diluted share, for 2006 as a result of the adoption of SFAS123R.
See Note 16 to the Consolidated Financial Statements for further information regarding stock-based compensation.
Supplemental Executive Retirement Plan
Effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). Under SFAS 158, an asset for a plan’s overfunded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheet, plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year, and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in other comprehensive income and as a separate component of stockholders’ equity.
As a result of adopting SFAS 158, the Company reduced other assets by $14.7 million, increased deferred tax assets by $10.3 million, recorded an incremental liability of $12.2 million, and recorded incremental charges to accumulated other comprehensive income (loss) of $16.6 million, net of taxes.
(2) New Accounting Standards
In October 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 13-1 (“FSP13-1”), “Accounting for Rental Costs Incurred during the Construction Period,” which requires that rental costs associated with ground or building operating leases that are incurred during a construction period be
F-14

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) New Accounting Standards (Continued)
recognized as rental expense. These rental costs shall be included in income from continuing operations. The effective date of this FSP guidance was the first reporting period beginning after December 15, 2005. The Company’s policy prior to the adoption of FSP 13-1 was to capitalize pre-opening rental costs and amortize them over the remaining lease term. The Company incurred an incremental pre-opening rental expense of approximately $1.3 million during fiscal 2006 for new stores opened during 2006 with a subsequent reduction in amortization expense over the remaining lease term.
In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).”  The EITF reached a consensus that (a) the scope of this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and (b) that the presentation of taxes within the scope on either a gross or a net basis is an accounting policy decision that should be disclosed under APB Opinion 22. Furthermore, for taxes reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented. The consensus is effective, through retrospective application, for periods beginning after December 15, 2006. The FASB ratified the consensus on June 28, 2006. Earlier application is permitted. The Company records taxes collected from customers for revenue producing transactions on a net basis. The Company does not expect to change this policy upon adoption of the EITF, and hence, does not expect the adoption of this consensus to have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 may have on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in its fiscal year ending December 31, 2006. At December 31, 2006, the Company has adopted the provisions of SAB 108 and determined no adjustments to current and prior reported periods are necessary.
In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurement.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after
F-15

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) New Accounting Standards (Continued)
November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its financial statements.
(3) Investments
Long-term investments consist of certain marketable equity securities and other investments aggregating $10.5 million and $3.7 million at December 31, 2006 and 2005, respectively, and are included in other assets in the accompanying consolidated balance sheets. Unrealized gains (losses), net of deferred tax liabilities (assets) are included as a component of stockholders’ equity and comprehensive income (loss). Unrealized gains (losses) related to marketable equity securities at December 31, 2006 and 2005 were negligible.
(4)  Receivables, net
Accounts receivable consists of trade receivables primarily relating to its wholesale businesses in Europe and North America. The Company provided for valuation allowances relating to these receivables of $14.8 million and $11.9 million, at December 31, 2006 and 2005, respectively. In addition, accounts receivable includes royalty receivables relating to its licensing operations, for which, the Company recorded an allowance for doubtful accounts of $0.3 million and $0.7 million at December 31, 2006 and 2005, respectively. The accounts receivable valuation allowance includes allowances for wholesale markdowns and sales returns. Retail sales returns allowances are included in accrued expenses.
(5) Inventories
Inventories are summarized as follows (in thousands):
 	 	December 31,	 	
 	 	2006	 	2005	 	
Raw materials	 	$	3,837	 	$	8,046	 	
Work in process	 	2,830	 	4,439	 	
Finished goods—Europe	 	67,582	 	34,168	 	
Finished goods—Retail	 	71,102	 	63,790	 	
Finished goods—Wholesale	 	19,881	 	11,594	 	
 	 	$	165,232	 	$	122,037	 	
 
At December 31, 2006 and 2005, reserves to write-down inventories to the lower of cost or market totaled $14.8 million and $9.1 million, respectively.
F-16

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Property and Equipment
Property and equipment is summarized as follows (in thousands):
 	 	December 31,	 	
 	 	2006	 	2005	 	
Land and land improvements	 	$	3,057	 	$	3,237	 	
Building and building improvements	 	3,822	 	1,837	 	
Leasehold improvements	 	160,584	 	152,006	 	
Machinery and equipment	 	182,488	 	174,213	 	
Corporate aircraft	 	803	 	1,347	 	
Shop fixtures	 	36,646	 	35,379	 	
Construction in progress	 	5,962	 	6,106	 	
Properties under capital lease	 	22,435	 	15,976	 	
 	 	415,797	 	390,101	 	
Less accumulated depreciation and amortization	 	251,535	 	246,094	 	
 	 	$	164,262	 	$	144,007	 	
 
Construction in progress at December 31, 2006 and 2005 represents the costs associated with the construction in progress of buildings and leasehold improvements to be used in the Company’s operations, primarily for new and remodeled stores in retail operations. During the years ended December 31, 2006, 2005 and 2004, interest costs capitalized in construction in progress amounted to $145,000, $172,000 and $109,000, respectively.
See Note 12 to the Consolidated Financial Statements for further information regarding capital lease obligations.
(7) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
 	 	December 31,	 	
 	 	2006	 	2005	 	
Accrued compensation and benefits	 	$	40,555	 	$	29,427	 	
Income taxes	 	23,365	 	16,980	 	
Deferred royalties	 	12,488	 	4,906	 	
Store credits and gift certificates	 	10,705	 	8,460	 	
Sales and use taxes, property taxes, and other taxes	 	10,706	 	9,450	 	
Focus acquisition remaining payment	 	8,421	 	—	 	
Deferred rent and lease incentives	 	5,976	 	5,345	 	
Professional fees	 	3,840	 	2,876	 	
Construction costs	 	3,499	 	3,250	 	
Retail sales returns	 	3,168	 	—	 	
Other	 	9,477	 	13,770	 	
 	 	$	132,200	 	$	94,464	 	
 
F-17

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Notes Payable, Long-Term Debt and Capital Lease Obligations
Notes payable, long-term debt and capital lease obligations are summarized as follows (in thousands):
 	 	December 31,	 	
 	 	2006	 	2005	 	
$85 million revolving Prior Credit Facility	 	$	78	 	$	1,652	 	
6.75% Secured Notes redeemed in December 2006	 	—	 	40,748	 	
Loans with European banks, no stated maturities	 	32,792	 	31,886	 	
European capital lease, maturing quarterly through 2016	 	19,505	 	13,964	 	
 	 	52,375	 	88,250	 	
Less current installments	 	34,357	 	35,051	 	
Notes payable, long-term debt and capital lease obligations, excluding current installments	 	$	18,018	 	$	53,199	 	
 
On September 19, 2006, the Company and certain of its affiliates 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.
The obligations under the Credit Facility are guaranteed by certain of the Company’s existing and future domestic subsidiaries, and such obligations, including the guaranties, are secured by (a) substantially all present and future property and assets of the Company and each guarantor and (b) the equity interests of certain of the Company’s direct and indirect U.S. subsidiaries and 65% of the equity interests of the Company’s first tier foreign subsidiaries.
Direct borrowings under the Credit Facility will be made, at the Company’s option, as (a) Eurodollar Rate Loans, which shall bear interest at the published LIBOR rate for the respective interest period plus an applicable margin (which was 0.75% at December 31, 2006) based on Guess’ leverage ratio at the time, or (b) Base Rate Loans, which shall bear interest at the higher of (i) for domestic loans, 0.50% in excess of the federal funds rate, and for Canadian loans, 0.50% in excess of the average rate for 30 day Canada dollar bankers’ acceptances, or (ii) the rate of interest as announced by Bank of America as its “prime rate,” in each case as in effect from time to time, plus an applicable margin (which was 0.0% at December 31, 2006) based on the Company’s leverage ratio at the time. The Company is also obligated to pay certain commitment, letter of credit and other fees customary for a credit facility of this size and type. At December 31, 2006 the Company had $12.4 million in outstanding standby letters of credit, $19.4 million in outstanding documentary letters of credit and no outstanding borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with a leverage ratio and a fixed charge coverage ratio. In addition, the Credit Facility contains customary covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to: incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate, and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable. The Credit Facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment defaults,
F-18

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Notes Payable, Long-Term Debt and Capital Lease Obligations (Continued)
covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults and material judgment defaults.
The Credit Facility replaces the (a) Amended and Restated Loan and Security Agreement by and among Wachovia Capital Finance Corporation (Western) (formerly known as Congress Financial Corporation (Western)) and Guess, Guess? Retail, Inc. and Guess.com, Inc., dated as of December 20, 2002, as amended, and (b) Canadian Loan and Security Agreement by and among Wachovia Capital Finance Corporation (Canada) (formerly known as Congress Financial Corporation (Canada)) and Guess Canada, dated as of December 20, 2002, as amended (together, the “Prior Credit Facility”).
On December 20, 2006 the Company, through its wholly-owned subsidiary, Guess? Royalty Finance LLC (the “Issuer”), completed the optional redemption of all of its outstanding 6.75% asset-backed notes due June 2012 (“Secured Notes”). The final aggregate cash consideration paid to the holders of the Secured Notes for the redemption totaled $32.8 million, which included a redemption premium of $0.5 million. The Company also wrote-off debt issuance costs of $1.4 million in connection with the redemption. These amounts are included in interest expense in the accompanying consolidated statements of operations. The Secured Notes, originally issued on April 28, 2003, were secured by rights and interests in receivables generated from specific license agreements of specified GUESS? trademarks and all royalty monies payable or becoming payable under such license agreements, and a security interest in specified assets consisting primarily of such GUESS? trademarks and the specified license agreements.
The Company, through its European subsidiaries, maintains short-term borrowing agreements, primarily for working capital purposes, with various banks in Italy. Under these agreements, the Company can borrow up to $93.4 million with annual interest rates ranging from 3.8% to 5.0%. However, the Company’s ability to borrow through foreign subsidiaries is limited to $85 million under the terms of our Credit Facility. At December 31, 2006, the Company had $32.5 million of outstanding borrowings with a weighted average annual interest rate of 3.9% and 6.4 million in outstanding documentary letters of credit under these agreements. These agreements are denominated in Euros, have no financial ratio covenants and are secured by accounts receivable, except for one borrowing agreement which is secured by a $5.3 million standby letter of credit issued under the Credit Facility. None of the agreements have stated maturities. In addition, as part of the acquisition of Focus, effective December 31, 2006, the Company acquired $0.3 million of bank debt with an interest rate of Euribor six-month rate plus 1%. The Company has classified this debt as current as it intends to pay this debt down in the short-term.
The Company entered into a capital lease of approximately $16.0 million in December 2005 for a new building in Florence, Italy, with subsequent build-outs which were completed in 2006. The building is the new headquarters for the Company’s Italian operation. This transaction resulted in a capital lease obligation of $19.5 million, including build-outs completed in 2006. The Company entered into separate interest rate swap agreements designated as non-hedging instruments resulting in a fixed rate of 3.55%. These interest rate swap agreements mature through 2016 and convert the nature of the capital lease obligation from Euribor floating rate debt to fixed rate debt. The fair value of the interest rate swap asset as of December 31, 2006 was approximately $0.5 million.
F-19

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Notes Payable, Long-Term Debt and Capital Lease Obligations (Continued)
Maturities of debt and capital lease obligations at December 31, 2006 are as follows (in thousands):
 	 	Capital Lease	 	Debt	 	Total	 	
2007	 	 	$	1,487	 	 	$	32,870	 	$	34,357	 	
2008	 	 	1,475	 	 	—	 	1,475	 	
2009	 	 	1,519	 	 	—	 	1,519	 	
2010	 	 	1,565	 	 	—	 	1,565	 	
Thereafter	 	 	13,459	 	 	—	 	13,459	 	
 	 	 	$	19,505	 	 	$	32,870	 	$	52,375	 	
 
(9) Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Federal:	 	 	 	 	 	 	 	
Current	 	$44,101	 	$	45,039	 	$	13,775	 	
Deferred	 	(686	)	(20,944	)	(457	)	
State:	 	 	 	 	 	 	 	
Current	 	4,811	 	7,012	 	4,143	 	
Deferred	 	(1,142	)	(3,655	)	(644	)	
Foreign:	 	 	 	 	 	 	 	
Current	 	29,201	 	12,489	 	4,473	 	
Deferred	 	(3,613	)	(1,059	)	(143	)	
Minority Interest	 	43	 	—	 	—	 	
Total	 	$	72,715	 	$	38,882	 	$	21,147	 	

Actual income tax expense differs from expected income tax expense obtained by applying the statutory Federal income tax rate to earnings before income taxes as follows (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Computed “expected” tax expense	 	$	68,599	 	$	34,193	 	$	17,750	 	
State taxes, net of Federal expense	 	2,701	 	2,182	 	2,274	 	
Incremental foreign taxes in excess of Federal statutory rates	 	4,024	 	2,343	 	670	 	
Exempt Interest	 	(1,491	)	(271	)	—	 	
Other	 	(1,161	)	435	 	453	 	
Minority Interest	 	43	 	—	 	—	 	
Total	 	$	72,715	 	$	38,882	 	$	21,147	 	
 
Total income tax expense (benefit) was allocated as follows (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Operations	 	$	72,715	 	$	38,882	 	$	21,147	 	
Stockholders’ equity	 	(23,557	)	(3,914	)	(918	)	
Total income taxes	 	$	49,158	 	$	34,968	 	$	20,229	 	
 
F-20

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) Income Taxes (Continued)
The tax effects of the components of other comprehensive income were allocated as follows (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Foreign currency translation adjustment	 	$	307	 	$	98	 	$	(57	)	
Unrealized loss on investment	 	(163	)	16	 	107	 	
SERP	 	(10,306	)	—	 	—	 	
Total income tax expense	 	$	(10,162	)	$	114	 	$	50	 	
 
Total pretax income was comprised of the following (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Domestic operations	 	$	134,263	 	$	71,733	 	$	40,237	 	
Foreign operations	 	61,578	 	25,962	 	10,476	 	
Minority Interest	 	156	 	—	 	—	 	
Total pretax income	 	$	195,997	 	$	97,695	 	$	50,713	 	
 
The tax effects of temporary differences that give rise to significant portions of current and non-current deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below (in thousands):
 	 	December 31,	 	
 	 	2006	 	2005	 	
Deferred tax assets:	 	 	 	 	 	
Fixed assets basis difference	 	$	12,912	 	$	10,451	 	
Deferred compensation	 	3,399	 	(924	)	
Bad debt reserve	 	3,569	 	4,253	 	
Deferred lease incentives	 	1,526	 	2,952	 	
Uniform capitalization	 	1,743	 	2,042	 	
Rent expense	 	5,908	 	4,637	 	
Net operating loss	 	1,517	 	—	 	
Inventory valuation	 	3,640	 	3,717	 	
Facility closure reserve	 	79	 	236	 	
Unrealized loss on investment	 	922	 	1,525	 	
Deferred income	 	17,944	 	19,594	 	
SERP	 	11,586	 	—	 	
Other	 	5,673	 	7,516	 	
Total deferred assets	 	70,418	 	55,999	 	
Deferred tax liabilities, primarily goodwill amortization	 	(8,236	)	(2,334	)	
Valuation allowance	 	(929	)	—	 	
Net deferred tax assets	 	$	61,253	 	$	53,665	 	
 
F-21

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) Income Taxes (Continued)
Included above at December 31, 2006 and 2005, are $18.2 million and $16.4 million for current net deferred tax assets, respectively, and $43.1 million and $37.2 million in non-current net deferred tax assets at December 31, 2006 and 2005, respectively. At December 31, 2006, the company’s U.S. and European retail operations had net operating loss carryforwards of $1.5 million. Based on the projections of the future income, management believes that it is more likely than not that the earnings from operations will not generate sufficient income to utilize all of the net operating loss. Therefore the Company recorded a valuation allowance of $0.9 million.
Based on the historical earnings of the Company and projections of future taxable income, management believes it is more likely than not that the results of operations will generate sufficient taxable earnings to realize net deferred tax assets.
(10) Supplemental Executive Retirement Plan
On August 23, 2005, the Board of Directors of the Company adopted a Supplemental Executive Retirement Plan (“SERP”) which became effective January 1, 2006. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment, death, disability or a change in control of the Company, in certain prescribed circumstances. The initial participants in the SERP are Maurice Marciano, Chairman of the Board, Paul Marciano, Chief Executive Officer and Vice Chairman of the Board, and Carlos Alberini, President and Chief Operating Officer. As a non-qualified pension plan, no funding of the SERP is required; however, the Company expects to make annual payments into an insurance policy held in a rabbi trust to fund the expected obligations arising under the non-qualified SERP. The Company has made two payments into the policy as of December 31, 2006. The cash surrender value of the insurance policy was $7.5 million as of December 31, 2006 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.
Effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). Under SFAS 158, an asset for a plan’s overfunded status or a liability for a plan’s underfunded status is recognized in the consolidated balance sheet, plan assets and obligations that determine the plan’s funded status are measured as of the end of the Company’s fiscal year, and changes in the funded status of defined benefit postretirement plans are recognized in the year in which they occur. Such changes are reported in comprehensive income and as a separate component of stockholders’ equity.
F-22

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Supplemental Executive Retirement Plan (Continued)
The components of net periodic pension cost and other charges to comprehensive income for the year ended December 31, 2006 are (in thousands):
 	 	Year Ended	 	
 	 	December 31, 2006	 	
Service cost	 	 	$	139	 	 	
Interest cost	 	 	1,181	 	 	
Net amortization of unrecognized prior service cost	 	 	1,743	 	 	
Net periodic defined benefit pension cost	 	 	3,063	 	 	
Unrecognized prior service cost charged to comprehensive income	 	 	17,949	 	 	
Unrecognized net actuarial loss charged to comprehensive income	 	 	8,966	 	 	
Related tax impact	 	 	(10,306	)	 	
Total periodic costs and other charges to comprehensive income	 	 	$	16,609	 	 	
 
The following chart summarizes the SERP’s funded status and amounts recognized in the Company’s consolidated balance sheet as of December 31, 2006, pursuant to SFAS 158 (in thousands):
Projected benefit obligation	 	$	(29,978	)	
Plan assets at fair value	 	—	 	
Net liability (included in other long-term liabilities)	 	$	(29,978	)	
 
The Company assumed a discount rate of 5.75% as part of the actuarial valuation performed to calculate the projected benefit obligation disclosed above. The rate is considered appropriate based on the timing of cash flows expected to be made in the future to the participants. The annual pay rate increase assumed in the calculation of the projected benefit obligation was 3%. At December 31, 2006, amounts included in comprehensive income that are expected to be recognized as components of net periodic defined benefit pension cost in 2007 consist of prior service costs of $1.7 million and net actuarial losses of $0.6 million. No benefits are expected to be paid in any of the next five fiscal years. Aggregate benefits assumed to be paid in the subsequent five fiscal years amount to $4.5 million.
(11) Related Party Transactions
The Company is engaged in various 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”).
License Agreements and Licensee Transactions
On September 28, 1990, the Company entered into a license agreement with Charles David of California (“Charles David”). Charles David is controlled by the father-in-law of Maurice Marciano. The Marciano Trusts and Nathalie Marciano (the spouse of Maurice Marciano) together owned 50% of Charles David and the remaining 50% was owned by the father-in-law of Maurice Marciano. During the second quarter of 2004, the Marciano Trusts and Armand Marciano sold their shares in Charles David and
F-23

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Related Party Transactions (Continued)
no longer own any shares in Charles David. Nathalie Marciano, the wife of Maurice Marciano, continues to own 10% of the shares in Charles David. The license agreement granted Charles David the rights to manufacture worldwide and distribute worldwide (except Japan and certain European countries) for men, women and some children, leather and rubber footwear which bear the GUESS trademark. The license also included related shoe care products and accessories. In 2002, the license agreement was renewed for six years and included athletic footwear. The Charles David license agreement was terminated effective December 31, 2004 for athletic footwear and June 30, 2005 for fashion footwear. There are no other rights or obligations between the Company and Charles David.
Gross royalties earned by the Company under such license agreement for the years ended December 31, 2005 and 2004 were $0.3 million and $2.3 million, respectively. Additionally, the Company purchased $0.4 million and $4.9 million of products from Charles David for resale in the Company’s retail stores during the same periods. At December 31, 2006, the Company had no royalty receivables due from Charles David.
On January 3, 2005, the Company acquired the remaining 90% of Maco Apparel, S.p.a. (“Maco”) that the Company did not already own. Prior to the acquisition, the Company owned a 10% interest in Maco, which at the time, was the Company’s licensee for the manufacture and distribution of certain men’s and women’s jeanswear apparel in certain parts of Europe. The Company recorded $5.9 million in royalty fees from Maco related to product sales in 2004, at which time the Company owned a 10% interest in Maco.
On January 1, 2003, the Company entered into a license agreement with BARN S.r.l. (“BARN”), an Italian corporation, under which the Company granted BARN the right to manufacture and distribute children’s clothing in certain territories of Europe for a term of three years. The license agreement was amended as of June 19, 2006 to, among other things, extend the term until December 31, 2009. The license agreement has terms substantially similar to the Company’s other license agreements. Two key employees of the Company’s wholly-owned subsidiary, Guess Italia, S.r.l., own BARN. During 2006 and 2005, the Company recorded $1.2 million and $0.9 million in revenues, respectively, related to this license. At December 31, 2006 and 2005, the Company had negligible royalty receivables due from BARN.
Leases
The Company leases manufacturing, warehouse and administrative facilities from partnerships affiliated with the Marciano Trusts and certain of their affiliates. There were three of these leases in effect at December 31, 2006, with expiration dates in February 2008, July 2008 and December 2014. The total lease payments to these limited partnerships are currently $0.3 million per month. See lease commitments to related parties in Note 12 to the Consolidated Financial Statements.
Aggregate rent expense under the two U.S. related party leases in effect was $2.9 million, $2.6 million and $3.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company believes the related party leases have not been significantly affected by the fact that the Company and the lessors are related.
During the first quarter of 2005, the Company, through a wholly-owned Canadian subsidiary, began leasing warehouse and administrative facilities in Montreal, Quebec from a partnership affiliated with Maurice Marciano and Paul Marciano. The lease has a term of 10 years with initial lease payments of approximately $0.5 million Canadian (US $0.5 million) per year. The Company and the lessors entered
F-24

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Related Party Transactions (Continued)
into a written lease agreement during the second quarter of 2005. Total rent expense was approximately $0.5 million Canadian (US $0.4 million) in each of the years ended December 31, 2006 and 2005. The Company believes the related party lease has not been significantly affected by the fact that the Company and the lessors are related.
The Company entered into an agreement with MPM Financial, LLC, a California limited liability company (“MPM Financial”) owned by an affiliated trust of Maurice Marciano and Paul Marciano, to periodically charter an aircraft owned by MPM Financial and managed pursuant to an Aircraft Charter and Management Services Agreement dated December 31, 2004 by and between MPM Financial and The Air Group, Inc. (“The Air Group”), an independent third party. Under the charter arrangement, the Company was entitled to receive a ten percent discount from the standard hourly charter rates The Air Group charges for the aircraft to unrelated third parties. Although the Company and MPM Financial have terminated the agreement, the Company may from time to time continue to charter the aircraft on substantially similar terms to those in the prior agreement. The total fees paid under this arrangement for the years ended December 31, 2006 and 2005 were approximately $1.1 million and $0.4 million, respectively.
(12) Commitments and Contingencies
Leases
The Company leases its showrooms and retail store locations under operating lease agreements expiring on various dates through December 2017. Some of these leases require the Company to make periodic payments for property taxes, utilities and common area operating expenses. Certain leases include lease incentives, rent abatements and fixed rent escalations, for which the effects are being 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 2010.
The Company entered into a capital lease of approximately $16.0 million in December 2005 for a new building in Florence, Italy, with subsequent build-outs completed in 2006. The building is the new headquarters for the Company’s Italian operation. This transaction resulted in a capital lease obligation of $19.5 million as of December 31, 2006. The Company entered into interest rate swap agreements designated as non-hedging instruments resulting in a fixed rate of 3.55%. These interest rate swap agreements mature through 2016 and convert the nature of the capital lease obligation from Euribor floating rate debt to fixed rate debt. The fair value of the interest rate swap asset as of December 31, 2006 was approximately $0.5 million.
F-25

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) Commitments and Contingencies (Continued)
Future minimum lease payments under capital lease and non-cancelable operating leases at December 31, 2006 are as follows (in thousands):
 	 	 	 	Operating Leases	 	 	 	
 	 	Capital Lease	 	Non-
Related
Parties	 	Related
Parties	 	Total	 	
2007	 	 	$	2,263	 	 	$	77,515	 	$	3,531	 	$	83,309	 	
2008	 	 	2,191	 	 	72,251	 	2,263	 	76,705	 	
2009	 	 	2,174	 	 	66,752	 	468	 	69,394	 	
2010	 	 	2,157	 	 	56,164	 	468	 	58,789	 	
2011	 	 	2,138	 	 	46,762	 	468	 	49,368	 	
Thereafter	 	 	13,319	 	 	136,923	 	1,404	 	151,646	 	
Total minimum lease payments	 	 	$	24,242	 	 	$	456,367	 	$	8,602	 	$	489,211	 	
Less interest	 	 	(4,737	)	 	 	 	 	 	 	 	
Capital lease obligations	 	 	$	19,505	 	 	 	 	 	 	 	 	
Less current portion	 	 	(1,487	)	 	 	 	 	 	 	 	
Long-term capital lease obligations	 	 	$	18,018	 	 	 	 	 	 	 	 	
 
Rental expense for all operating leases during the years ended December 31, 2006, 2005, and 2004 aggregated $84.6 million, $73.1 million, and $63.4 million, respectively.
Incentive Bonuses
Certain officers and key employees of the Company are entitled to incentive bonuses, primarily based on net earnings of the Company or particular operations thereof. In addition, on September 27, 2005 the Compensation Committee (the “Committee”) of the Board of Directors of the Company approved performance criteria for the payment of special bonuses to Paul Marciano, Chief Executive Officer of the Company, under the Company’s 2004 Equity Incentive Plan (the “Incentive Plan”) if the performance targets with respect to future earnings from operations for the Company’s licensing segment are met. The Company recorded bonus related expense of $4.6 million, including payroll taxes, in 2005 related to these special licensing bonuses. Assuming the pre-established licensing performance targets are achieved in 2007 and 2008 and the Company receives a fixed cash rights payment of $35.0 million due in 2012 from one of its licensees, the Company will record a further $5.0 million in special bonus expense, excluding payroll taxes, to Paul Marciano through January 2012.
Litigation
On February 1, 2005, a complaint was filed by Michele Evets against the Company in the Superior Court of the State of California for the County of San Francisco. The complaint purports to be a class action filed on behalf of current and former Guess store managers in California. Plaintiffs seek overtime wages and a preliminary and permanent injunction. The Company answered the complaint on April 28, 2005. The parties participated in a voluntary mediation on August 16, 2006 and are in the process of finalizing a settlement agreement. As a result, in 2006 the Company accrued $1.0 million related to net charges in connection with the proposed settlement arrangement.
F-26

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) Commitments and Contingencies (Continued)
In 2006, the Officers of the Florence Customs Authorities (“Customs Authorities”) began an import customs audit with respect to the Company’s Italian Maco subsidiary in Florence, Italy, acquired in January 2005. 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 and 2005 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 Company has recently concluded that the amount of any possible loss would not be material to our consolidated financial statements and that the likelihood of incurring a loss is less than probable. Accordingly, no liability related to this matter has been accrued.
The Company is also involved in various other employment-related 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. With the exception of the class action accrual discussed above, no material amounts were accrued as of December 31, 2006 or December 31, 2005, related to any of the Company’s other legal proceedings.
Corporate Aircraft
In May 2006, the Company entered into an agreement to acquire a new corporate aircraft with a scheduled delivery date in December 2007 and has made down payments of approximately $8.1 million, with additional progress payments totaling $10.9 million to be made through the expected delivery date. The acquisition will replace a current aircraft fractional ownership arrangement. The Company is currently negotiating with a lender and may finance the full purchase price of the aircraft and is considering entering into a sale and leaseback arrangement on completion of construction of the aircraft.
(13) Savings Plan
The Company established the Guess?, Inc. Savings Plan (the “Savings Plan”) under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, employees (“associates”) may contribute up to 15% of their compensation per year subject to the elective limits as defined by IRS guidelines and the Company may make matching contributions in amounts not to exceed 1.5% of the associates’ annual compensation. Investment selections consist of cash and mutual funds and do not include any Company common stock. The Company’s contributions to the Savings Plan for the years ended December 31, 2006, 2005 and 2004 amounted to $0.4 million, $0.3 million and $0.3 million, respectively.
In January 2002, the Company established a qualified employee stock purchase plan (“ESPP”), the terms of which allow for qualified employees (as defined) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. See Note 16 for further details.
Effective January 1, 2006, the Company adopted a Non-qualified Deferred Compensation Plan (the “DCP”). Under the DCP, select employees who satisfy certain eligibility requirements and members of the Board of Directors may make annual irrevocable elections to defer a portion of their base compensation and/or bonuses. The deferred amounts and earnings thereon are payable to participants at specified future
F-27

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Savings Plan (Continued)
distribution dates, upon termination of employment, retirement, disability, death or change in control of the Company, in a lump sum or installments, pursuant to elections under the rules of the DCP.  The DCP is not funded by the Company, and participants have an unsecured contractual commitment by the Company to pay the amounts due under the DCP. The Company has purchased corporate-owned life insurance to offset this liability which is held in a rabbi trust. The assets held in the rabbi trust are not available for general corporate purposes except in the event of bankruptcy of the Company. All earnings and expenses of the rabbi trust are reported in the Company’s consolidated statement of income. The deferred compensation liability was $2.3 million and related long-term asset was $2.4 million as of December 31, 2006.
(14) Quarterly Information (Unaudited)
The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2006 and 2005 (in thousands, except per share data):
Year ended December 31, 2006	 	 	 	First
Quarter	 	Second
Quarter	 	Third
Quarter	 	Fourth
Quarter	 	
Net revenue	 	$	258,978	 	$	231,037	 	$	348,748	 	$	346,421	 	
Gross profit	 	103,632	 	92,453	 	163,831	 	159,463	 	
Net earnings	 	15,396	 	13,734	 	48,355	 	45,683	 	
Earnings per share:	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.17	 	$	0.15	 	$	0.53	 	$	0.50	 	
Diluted	 	$	0.17	 	$	0.15	 	$	0.52	 	$	0.49	 	
 
Year ended December 31, 2005	 	 	 	First
Quarter	 	Second
Quarter	 	Third
Quarter	 	Fourth
Quarter	 	
Net revenue	 	$	215,608	 	$	178,235	 	$	265,600	 	$	276,649	 	
Gross profit	 	82,223	 	66,478	 	114,438	 	117,730	 	
Net earnings	 	8,163	 	4,164	 	20,684	 	25,802	 	
Earnings per share:	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.09	 	$	0.05	 	$	0.23	 	$	0.29	 	
Diluted	 	$	0.09	 	$	0.05	 	$	0.23	 	$	0.28	 	
 
(15) Segment Information
In accordance with the requirements of SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s reportable business segments and respective accounting policies of the segments are the same as those described in Note 1. Management evaluates segment performance based primarily on revenue and earnings from operations. Corporate overhead, interest income and interest expense are evaluated on a consolidated basis and not allocated to the Company’s business segments.
F-28

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) Segment Information (Continued)
Segment information is summarized as follows for the years ended December 31, 2006, 2005 and 2004 (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Net revenue:	 	 	 	 	 	 	 	
Retail operations	 	$	721,262	 	$	612,862	 	$	518,855	 	
Wholesale operations	 	146,320	 	121,103	 	120,392	 	
European operations	 	252,363	 	153,817	 	42,773	 	
Licensing operations	 	65,239	 	48,310	 	47,242	 	
 	 	$	1,185,184	 	$	936,092	 	$	729,262	 	
Earnings (loss) from operations:	 	 	 	 	 	 	 	
Retail operations	 	$	100,436	 	$	65,274	 	$	47,788	 	
Wholesale operations	 	23,963	 	7,325	 	(5,565	)	
European operations	 	64,211	 	28,103	 	7,748	 	
Licensing operations	 	57,189	 	37,804	 	37,722	 	
Corporate overhead	 	(52,776	)	(36,696	)	(32,211	)	
 	 	$	193,023	 	$	101,810	 	$	55,482	 	
Capital expenditures:	 	 	 	 	 	 	 	
Retail operations	 	$	35,733	 	$	37,569	 	$	27,577	 	
Wholesale operations	 	1,253	 	3,194	 	1,934	 	
European operations	 	8,436	 	5,565	 	945	 	
Licensing operations	 	—	 	67	 	—	 	
Corporate overhead	 	4,859	 	2,399	 	4,323	 	
 	 	$	50,281	 	$	48,794	 	$	34,779	 	
 
 	 	December 31,	 	 	 	
 	 	2006	 	2005	 	 	 	
Total assets:	 	 	 	 	 	 	 	
Retail operations	 	$	217,785	 	$	194,083	 	 	 	
Wholesale operations	 	107,031	 	73,363	 	 	 	
European operations	 	245,036	 	133,004	 	 	 	
Licensing operations	 	13,829	 	13,503	 	 	 	
Corporate overhead	 	253,244	 	219,421	 	 	 	
 	 	$	836,925	 	$	633,374	 	 	 	
 
The European operations segment includes net revenue and earnings from the Maco licensee acquisition commencing from the acquisition date of January 3, 2005. Prior to the Maco acquisition, licensing royalty income of $5.9 million received from Maco was included in the licensing operations segment for 2004. The recent Focus acquisition was effective December 31, 2006. The licensing royalty income received from Focus prior to the acquisition of the Focus business was included in the licensing operations segment for the years ended December 31, 2006 and 2005 and amounted to $4.0 million and $2.7 million, respectively. See Note 18 for details on the Focus acquisition.
F-29

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) Segment Information (Continued)
The table below presents information related to geographic areas in which the Company operated during 2006, 2005 and 2004. Net revenue is primarily classified based on the country where the Company’s applicable sales organization or the licensee is based (in thousands):
 	 	Year ended December 31,	 	
 	 	2006	 	2005	 	2004	 	
Net revenue:	 	 	 	 	 	 	 	
U.S.	 	$	744,336	 	$	640,630	 	$	570,610	 	
Italy	 	249,973	 	153,779	 	51,301	 	
Canada	 	154,466	 	112,337	 	86,212	 	
Asia	 	20,085	 	18,816	 	15,506	 	
Other European Countries	 	8,193	 	4,385	 	2	 	
South America	 	2,629	 	2,827	 	1,499	 	
Mexico	 	2,388	 	170	 	271	 	
Middle East	 	1,252	 	1,979	 	2,822	 	
South Africa	 	1,239	 	1,131	 	764	 	
Other	 	623	 	38	 	275	 	
 	 	$	1,185,184	 	$	936,092	 	$	729,262	 	
 
 	 	December 31,	 	 	 	
 	 	2006	 	2005	 	 	 	
Long-lived assets:	 	 	 	 	 	 	 	
U.S.	 	$	115,135	 	$	105,049	 	 	 	
Italy	 	50,833	 	29,567	 	 	 	
Canada	 	22,923	 	21,255	 	 	 	
Other European Countries	 	4,977	 	4,760	 	 	 	
Asia	 	2,067	 	431	 	 	 	
Mexico	 	476	 	—	 	 	 	
 	 	$	196,411	 	$	161,062	 	 	 	
 
F-30

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Stock-Based Compensation
The Company has four stock-based compensation plans. The Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”) provides that the Board of Directors may grant stock options to officers, key employees and certain consultants and advisors to the Company or any of its subsidiaries. The Plan authorizes grants of options to purchase up to 20,000,000 authorized but unissued shares of common stock. At December 31, 2006 and 2005, there were 17,765,450 and 18,667,900 shares available for grant under the Plan, respectively. Stock options granted under the Plan have ten-year terms and typically vest and become fully exercisable in increments of one-fourth of the shares granted on each anniversary from the date of grant. The two most recent annual grants had a vesting period of three years and ten months, and three years and nine months, with an initial vesting period of ten months and nine months, respectively, followed by three annual vesting periods. The Guess?, Inc. Employee Stock Purchase Plan (“ESPP”) allows for qualified employees to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (the “Director Plan”) provides for the grant of certain stock and stock options to non-employee directors. The Director Plan authorizes grants of options to purchase up to 2,000,000 authorized but unissued shares of common stock which consists of the 1,000,000 shares that were initially approved for issuance on July 30, 1996 plus an additional 1,000,000 shares that were approved for issuance effective May 9, 2006. At December 31, 2006 and 2005, there were 1,075,716 and 175,032 shares available for grant under this plan, respectively. In addition, the Guess?, Inc. 1996 Equity Incentive Plan, under which equity grants have not been permitted since the approval of the Plan in 2004, continues to govern outstanding awards previously made thereunder.
Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement principles of APB 25, and related interpretations. No stock-based employee compensation cost for stock options was reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, no compensation expense was recognized for common stock purchases under the Employee Stock Purchase Plan. The Company recorded compensation expense related to its nonvested stock awards at the market price of the underlying stock on the date of grant as unearned compensation and amortized this amount to expense over the vesting period.
On June 20, 2005, the Compensation Committee and the Board of Directors approved the immediate acceleration of vesting of options to purchase 750,000 shares of common stock of the Company, of which 375,000 were held by each of Maurice Marciano and Paul Marciano, then Co-Chairmen of the Board and Co-Chief Executive Officers. The accelerated stock options, which were originally granted on February 26, 2004 under the Company’s 1996 Equity Incentive Plan, have an exercise price of $7.80 per share. The closing price of the Company’s common stock on the New York Stock Exchange on the date of acceleration was $8.68 per share. The purpose of the acceleration of vesting was to enable the Company to avoid recognizing compensation expense associated with these options in future periods in its income statement, as is required under FAS 123R. The Company strongly believes that given the substantial share ownership of Maurice Marciano and Paul Marciano in the Company, accelerating the vesting had and will continue to have no impact with respect to their retention.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method. Under this method, compensation cost recognized in
F-31

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Stock-Based Compensation (Continued)
2006 included: (a) compensation expense for all stock-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation expense for all stock-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for new grants. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected volatility is determined based on an average of both historical volatility and implied volatility. Implied volatility is derived from exchange traded options on the Company’s common stock. The expected life is based on the “simplified” method described in the SEC Staff Accounting Bulletin No. 107. The dividend yield for 2006 and prior years was assumed to be zero since the Company had not historically declared and did not have a current plan to declare dividends on an ongoing basis until the Board of Directors authorized and approved the initiation of quarterly dividends in February, 2007 (see Note 19). The expected forfeiture rate is determined based on historical data. Compensation expense for new stock options and nonvested stock awards is recognized on a straight-line basis over the vesting period. In accordance with the modified prospective transition method, results for prior periods have not been restated. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to recognizing forfeitures as an expense reduction as they occur. The adjustment to apply estimated forfeitures to previously recognized stock-based compensation was considered immaterial and as such was not classified as a cumulative effect of a change in accounting principle. On January 1, 2006, the Company also reclassified the balance in unearned compensation to paid-in capital in the consolidated balance sheet in accordance with the provisions of SFAS 123R.
The following table illustrates the pro-forma effect on net earnings and earnings per share for the years ended December 31, 2005 and 2004 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data):
 	 	Year ended
December 31,	 	
 	 	2005	 	2004	 	
Net earnings, as reported	 	$	58,813	 	$	29,566	 	
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects	 	708	 	564	 	
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	 	(4,290	)	(1,960	)	
Pro forma net earnings	 	$	55,231	 	$	28,170	 	
Earnings per share:	 	 	 	 	 	
Basic—as reported	 	$	0.66	 	$	0.34	 	
Basic—pro forma	 	$	0.62	 	$	0.32	 	
Diluted—as reported	 	$	0.65	 	$	0.33	 	
Diluted—pro forma	 	$	0.61	 	$	0.32	 	
 
The fair value of stock options used to compute the pro-forma net earnings and earnings per common share disclosures above for the years ended December 31, 2005 and 2004 is the estimated value at the grant
F-32

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Stock-Based Compensation (Continued)
date using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for the valuation of the grants in 2005 and 2004, respectively: risk-free interest rates of 4.05% and 3.43%; expected volatilities of 57% and 69%; no expected dividend yield; and a weighted-average expected life of 5 years. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The expected volatility is determined based on an average of the historical volatility for the expected term. The dividend yield and expected life are based on historical data. Using the Black-Scholes option-pricing model, the weighted-average fair value of each option granted during 2005 and 2004 was $4.84 and $4.77, respectively.
Stock options
The following table summarizes the stock option activity under all of the Company’s stock plans during the year ended December 31, 2006:
 	 	Number of
Shares	 	Weighted-
Average
Exercise
Price	 	Weighted-
Average
Remaining
Contractual
Term (Years)	 	Aggregate
Intrinsic
Value
($ 000’s)	 	
Options outstanding at December 31, 2005	 	4,234,536	 	 	$	6.67	 	 	 	 	 	 	 	 	 	 	
Granted	 	772,230	 	 	20.39	 	 	 	 	 	 	 	 	 	 	
Exercised	 	(1,764,872	)	 	(6.22	)	 	 	 	 	 	 	 	 	 	
Forfeited	 	(302,350	)	 	(8.71	)	 	 	 	 	 	 	 	 	 	
Expired	 	(7,600	)	 	(8.61	)	 	 	 	 	 	 	 	 	 	
Options outstanding at December 31, 2006	 	2,931,944	 	 	$	10.34	 	 	 	7.83	 	 	 	$	62,719	 	 	
Exercisable at December 31, 2006	 	1,006,816	 	 	$	6.14	 	 	 	6.86	 	 	 	$	25,748	 	 	
Options exercisable and expected to vest at December 31, 2006	 	2,705,702	 	 	$	8.78	 	 	 	7.83	 	 	 	$	58,374	 	 	
 
The fair value of each stock option was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the year ended December 31, 2006: a risk-free interest rate of 4.60%, no expected dividend yield, an expected volatility of 56.4%, an expected forfeiture rate of 17.97%; and an expected life of 6.25 years.
The weighted-average grant-date fair value of options granted was $11.92 during the year ended December 31, 2006.  The total intrinsic value of stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $31.0 million, $12.3 million and $4.0 million, respectively. The intrinsic value of stock options is defined as the difference between the Company’s stock price on the exercise date and the grant-date exercise price. The total cash received from option exercises was $11.0 million,  $6.3 million and $2.4 million during the years ended December 31, 2006, 2005 and 2004, respectively. The excess tax benefit realized for the tax deductions from these option exercises for 2006 was $9.1 million and is included in cash flows from financing activities for the year ended December 31, 2006. The compensation expense recognized was $4.2 million before the recognized income tax benefit of $1.6 million during the year ended December 31, 2006. As of December 31, 2006, there was approximately $9.9 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options. This cost is expected to be recognized over a weighted-average period of 1.3 years.
F-33

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Stock-Based Compensation (Continued)
Nonvested stock awards/units
The following table summarizes the nonvested stock awards/units activity under all of the Company’s stock plans during the year ended December 31, 2006:
 	 	Number of
Shares/Units	 	Weighted-Average
Grant-Date
Fair Value	 	
Nonvested at December 31, 2005	 	 	353,950	 	 	 	$	8.14	 	 	
Granted	 	 	438,086	 	 	 	20.96	 	 	
Vested	 	 	(139,300	)	 	 	(6.99	)	 	
Forfeited or expired	 	 	(72,450	)	 	 	(10.06	)	 	
Nonvested at December 31, 2006	 	 	580,286	 	 	 	$	17.86	 	 	
 
The weighted-average grant-date fair value of nonvested stock awards/units granted during the year ended December 31, 2006 was $20.96. The total fair value at grant date of previously nonvested stock awards/units that were vested during 2006, 2005 and 2004 was $1.0 million, $0.8 million and $0.7 million, respectively. During 2006, 2005 and 2004, the total intrinsic value of nonvested stock awards/units that vested was $2.9 million,  $1.5 million and $1.6 million, respectively. The excess tax benefit realized for the tax deductions from these vested shares for 2006 was $0.7 million and has been included in cash flows from financing activities for the year ended December 31, 2006. The total intrinsic value of nonvested stock awards/units outstanding and unvested at December 31, 2006 was $18.4 million. The compensation expense included in SG&A recognized during 2006 was $2.2 million, before the recognized income tax benefit of $0.8 million. As of December 31, 2006, there was approximately $6.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock awards/units. This cost is expected to be recognized over a weighted-average period of 1.4 years.
ESPP
In January 2002, the Company established an ESPP, the terms of which allow for qualified employees (as defined) to participate in the purchase of designated shares of the Company’s common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each quarterly stock purchase period. The ESPP is a straight purchase plan and is not subject to any holding period, however all Company employees are subject to the terms of the Company’s securities trading policy which generally prohibits the purchase or sale of any Company securities during the two weeks before the end of each fiscal quarter through two days after the public announcement by the Company of its earnings for that period. On January 23, 2002, the Company filed with the SEC a Registration Statement on Form S-8 registering 4,000,000 shares of common stock for the ESPP.
During the years ended December 31, 2006, 2005 and 2004, 54,846, 73,288 and 70,794 shares of the Company’s common stock were issued pursuant to the ESPP at an average price of $16.55, $7.17 and $6.39 per share, respectively.
F-34

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Stock-Based Compensation (Continued)
The fair value of stock compensation expense associated with our ESPP was estimated on the date of grant using the Black-Scholes option-pricing valuation model and the following weighted-average assumptions for grants during 2006, 2005 and 2004.
 	 	Year ended
December 31,	 	
Valuation Assumptions	 	 	 	2006	 	2005	 	2004	 	
Risk-free interest rate	 	4.77	%	3.14	%	1.37	%	
Expected stock price volatility	 	43.0	%	51.0	%	45.0	%	
Expected life of ESPP options (in months)	 	3	 	3	 	3	 	

The weighted-average grant-date fair value of ESPP options granted during 2006, 2005 and 2004 was $7.15, $4.86 and $2.42, respectively.
(17) Share Repurchase Program
In May 2001, the Company’s Board of Directors authorized the Company to repurchase shares of its own stock in an amount of up to $15 million from time to time in open market transactions. In 2002, the Company purchased 1,212,000 shares at an aggregate cost of $3.2 million, or an average of $2.61 per share. No share repurchases were made during 2006, 2005 and 2004. Since the inception of the share repurchase program in May 2001, the Company has purchased 2,274,000 shares at an aggregated cost of $7.1 million, or an average of $3.13 per share.
(18) Acquisition of Focus Europe S.r.l. (“Focus”)
Effective December 31, 2006, Guess?, Inc. (the “Company”), through its wholly-owned subsidiary, Guess? Europe, B.V. (“Purchaser”), completed the acquisition of 75% of the equity interest of Focus Europe S.r.l (“Focus”) from Focus Pull S.p.A. (“Seller”). The Focus agreement also provides for the acquisition of 75% of the equity interest of Focus Spain S.A. (“Focus Spain”), subject to certain closing conditions.
Since 1997, the Company has licensed to Focus the right to manufacture, distribute and retail  “GUESS by MARCIANO” contemporary apparel for women and men in Europe, the Middle East and Asia. The acquisition of the licensee is expected to further accelerate the Company’s expansion in Europe.
The Focus purchase price is expected to be €18.4 million ($24.2 million) subject to certain purchase price adjustments primarily pertaining to inventory valuations and other closing conditions, which are expected to be completed by June 2007. The assets included in the Focus entity acquired at closing comprise inventories not older than one year, certain long term assets used to operate the business including leasehold interests related to four GUESS by MARCIANO stores and approximately  €1.1 million ($1.5 million) in cash which will be retained by Focus to pay for certain obligations. These obligations, that include certain royalties payable to the Company under the pre-existing license agreement and certain amounts due under a loan agreement, are explicitly limited to the €1.1 million ($1.5 million) cash acquired. The Purchaser has not assumed any trade receivables or other payables and debt as part of the acquisition.
F-35

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) Acquisition of Focus Europe S.r.l. (“Focus”) (Continued)
At closing, the Purchaser paid approximately €10.0 million ($13.2 million) in cash and the Company issued €2.0 million ($2.6 million) in Guess?, Inc. common stock based on the stock price at the closing date. The remaining purchase price, presently estimated to be €6.4 million ($8.4 million), related to inventory acquired that will be paid after the seller pays its suppliers, may increase or decrease, based on the finalization of the outstanding purchase price adjustments and other closing conditions. Such amount is expected to be paid upon completion of the purchase price adjustments described above.
The agreement also provides that at specific times during 2008, 2009 and 2010, Seller may require the Purchaser to acquire the remaining 25% of equity interests in Focus for cash based upon a multiple of Focus’ consolidated net income for the immediately preceding fiscal year. The agreement further provides that, at a specific time in 2011, the Purchaser will have the option to purchase the remaining 25% of equity interest in Focus for cash based upon a multiple of Focus’ consolidated net income for the immediately preceding fiscal year.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Focus. These amounts are considered preliminary as the Company is still in the process of finalizing the valuations, and hence, these amounts are subject to change (in thousands):
 	 	Dec. 31,
2006	 	
Current assets	 	$	18,217	 	
Property and equipment, net	 	1,609	 	
Goodwill	 	7,561	 	
Intangible assets	 	8,957	 	
Total assets acquired	 	36,344	 	
Current liabilities	 	(1,680	)	
Deferred Tax Liabilities	 	(7,736	)	
Minority interest	 	(4,148	)	
Net assets acquired, excluding cash of $1.5 million	 	$	22,780	 	
 
The $9.0 million of acquired intangible assets primarily comprise the value of the acquisition of the pre-existing license arrangement and lease acquisition costs, both of which are subject to amortization. The acquired intangible assets have a weighted-average useful life of approximately 4.0 years. The annual amortization expense over the next four years for these acquired intangible assets is estimated to be approximately $2.2 million each year for 2007 through 2010 and will be recorded as an expense in the European operations segment. Goodwill associated with this acquisition will be recorded in the European operations segment and is non-deductible for tax purposes.
(19) Subsequent Events
On January 18, 2007, the Board of Directors of the Company approved a change in the Company’s fiscal year end from December 31 to the Saturday nearest January 31 of each year. The change, which will align the Company’s reporting cycle with the National Retail Federation fiscal calendar and is expected to provide for more consistent quarter-to-quarter comparisons, will be effective with the Company’s 2008 fiscal year. The Company’s 2008 fiscal year began on February 4, 2007 and will end February 2, 2008, resulting in a one-month transition period that began January 1, 2007 and ended February 3, 2007.
F-36

GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) Subsequent Events (Continued)
On February 12, 2007, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share (pre-split basis) on the Company’s common stock and approved a two-for-one stock split of the Company’s common stock, each to be paid on or about March 12, 2007 to shareholders of record as of the close of business on February 26, 2007. Because the record date for the initial cash dividend preceded the March 12, 2007 stock split distribution date, the cash dividend will be paid on only pre-split shares. Assuming the Board of Directors maintains the current level of cash dividends, future quarterly dividends per share will be half the current level but will apply to shares on a post-split basis. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will be based upon a number of business, legal and other considerations, including our cash flow from operations, capital expenditures, debt service requirements, cash paid for income taxes, earnings and liquidity.
F-37

SCHEDULE II
GUESS?, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2006, 2005, and 2004
(in thousands)
 	 	Balance at
beginning
of period	 	Costs charged / credited to expenses	 	Deductions
and
write-offs	 	Balance at
end
of period	 	
Description	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for accounts receivable	 	 	$	9,123	 	 	 	$	25,636	 	 	 	$(23,278               	)	 	 	$	11,481	 	 	
Allowance for royalties receivable	 	 	650	 	 	 	(366	)	 	 	—	 	 	 	284	 	 	
Allowance for sales returns	 	 	2,737	 	 	 	16,080	 	 	 	(12,352	)	 	 	6,465	 	 	
As of December 31, 2005	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for accounts receivable	 	 	$	8,206	 	 	 	$	25,883	 	 	 	$	(24,966	)	 	 	$	9,123	 	 	
Allowance for royalties receivable	 	 	709	 	 	 	(59	)	 	 	—	 	 	 	650	 	 	
Allowance for sales returns	 	 	472	 	 	 	6,208	 	 	 	(3,943	)	 	 	2,737	 	 	
As of December 31, 2004	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for accounts receivable	 	 	$	7,673	 	 	 	$	25,970	 	 	 	$	(25,437	)	 	 	$	8,206	 	 	
Allowance for royalties receivable	 	 	1,705	 	 	 	(996	)	 	 	—	 	 	 	709	 	 	
Allowance for sales returns	 	 	419	 	 	 	2,616	 	 	 	(2,563	)	 	 	472	 	 	
 
F-38

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 	Guess?, Inc.	
 	By:	 	
 	 	/s/ PAUL MARCIANO	
 	 	Paul Marciano	
 	 	Chief Executive Officer and	
 	 	Vice Chairman of the Board	
 	 	 	
 	 	Date: February 28, 2007	
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ PAUL MARCIANO	 	Chief Executive Officer,	 	February 28, 2007	
Paul Marciano	 	Vice Chairman of the Board and Director	 	 	
 	 	(Principal Executive Officer)	 	 	
/s/ MAURICE MARCIANO	 	Chairman of the Board and Director	 	February 28, 2007	
Maurice Marciano	 	 	 	 	
/s/ CARLOS ALBERINI	 	President, Chief Operating Officer and	 	February 28, 2007	
Carlos Alberini	 	Director	 	 	
/s/ DENNIS R. SECOR	 	Senior Vice President and	 	February 28, 2007	
Dennis R. Secor	 	Chief Financial Officer	 	 	
 	 	(Principal Financial Officer and Chief Accounting Officer)	 	 	
/s/ ANTHONY CHIDONI	 	Director	 	February 28, 2007	
Anthony Chidoni	 	 	 	 	
/s/ KAY ISAACSON-LEIBOWITZ	 	Director	 	February 28, 2007	
Kay Isaacson-Leibowitz	 	 	 	 	
/s/ ALICE KANE	 	Director	 	February 28, 2007	
Alice Kane	 	 	 	 	
/s/ KAREN NEUBURGER	 	Director	 	February 28, 2007	
Karen Neuburger	 	 	 	 	
/s/ ALEX YEMENIDJIAN	 	Director	 	February 28, 2007	
Alex Yemenidjian	 	 	 	 	

Exhibit Index
Exhibit
Number	 	Description	 	
3.1.	 	Restated Certificate of Incorporation of the Registrant (incorporated by reference from Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-4419) filed on July 30, 1996).	 	
3.2.	 	Amended and Restated Bylaws of the Registrant (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001).	 	
4.1.	 	Specimen stock certificate (incorporated by reference from Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-4419) filed on July 30, 1996).	 	
*10.1.	 	1996 Equity Incentive Plan (incorporated by reference from Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-4419) filed on July 30, 1996).	 	
*10.2.	 	2004 Equity Incentive Plan (incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement on Form 14A filed April 14, 2004).	 	
*10.3.	 	First Amendment to the Guess?, Inc. 2004 Equity Incentive Plan (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2006).	 	
*10.4.	 	2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement on Form 14A filed April 14, 2006).	 	
*10.5.	 	Amendment to the Guess?, Inc. 2006 Non-Employee Directors’ Stock Grant and Stock Option Plan (incorporated by reference from the Registrant’s Current Report on Form 8-K filed July 11, 2006).	 	
†*10.6.	 	Annual Incentive Bonus Plan (as amended and restated January 18, 2007).	 	
*10.7.	 	2002 Employee Stock Purchase Plan (incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-81274) filed on January 23, 2002).	 	
†*10.8.	 	Executive Employment Agreement dated January 1, 2007 between the Registrant and Maurice Marciano.	 	
†*10.9.	 	Executive Employment Agreement dated January 1, 2007 between the Registrant and Paul Marciano.	 	
*10.10.	 	Employment Agreement between the Registrant and Carlos Alberini (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).	 	
*10.11.	 	First Amendment to Employment Agreement between the Registrant and Carlos Alberini (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003)	 	
*10.12.	 	Employment Agreement dated August 16, 2002 between the Registrant and Nancy Shachtman (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).	 	
*10.13.	 	Employment Agreement between the Registrant and Stephen Pearson, effective as of January 31, 2006 (incorporated by reference from the Registrant’s Current Report on Form 8-K filed February 13, 2006).	 	
*10.14.	 	Employment Letter Agreement dated February 20, 2004 between the Registrant and Michael Relich (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006).	 	
*10.15.	 	Employment Letter Agreement dated June 8, 2006 between the Registrant and Dennis Secor (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006).	 	
*10.16.	 	Written Description of Performance-Based Bonus Criteria for Paul Marciano (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2005).	 	

 
*10.17.	 	Written Description of Performance-Based Bonus Criteria for Named Executive Officers with Respect to the Registrant’s Fiscal Year Ending December 31, 2006 (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).	 	
†*10.18.	 	Restricted Stock Agreement dated as of January 1, 2007 between the Registrant and Paul Marciano.	 	
*10.19.	 	Form of Nonqualified Stock Option Agreement (incorporated by reference from the Registrant’s Current Report on Form 8-K filed May 16, 2005).	 	
*10.20.	 	Form of Restricted Stock Award Agreement (incorporated by reference from the Registrant’s Current Report on Form 8-K filed May 16, 2005).	 	
*10.21.	 	Indemnification Agreements between the Registrant and certain executives and directors (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996).	 	
*10.22.	 	Nonqualified Deferred Compensation Plan (incorporated by reference from the Registrant’s Registration Statement on Form S-8 (Registration No. 333-129349) filed on November 1, 2005).	 	
*10.23.	 	Supplemental Executive Retirement Plan (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2005).	 	
*10.24.	 	Separation Agreement between the Registrant and Frederick G. Silny, dated as of February 9, 2006 (incorporated by reference from the Registrant’s Current Report on Form 8-K filed February 13, 2006).	 	
10.25.	 	Lease Agreement between the Registrant and Robert Pattillo Properties, Inc. (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).	 	
10.26.	 	Lease Agreement between the Registrant and MAP Properties, Ltd. (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).	 	
10.27.	 	Licensing Contribution Agreement dated as of April 28, 2003, by and between Guess? Licensing, Inc. and Guess? IP Holder L.P. (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003).	 	
10.28.	 	Guess? License Agreement dated as of April 28, 2003, by and between Guess? IP Holder L.P. and the Registrant (incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2003).	 	
10.29.	 	Purchase Agreement among the Registrant, Guess Italia S.r.l, Fingen S.p.A. and Fingen Apparel N.V. dated December 31, 2004 (incorporated by reference from the Registrant’s Current Report on Form 8-K filed January 5, 2005).	 	
10.30.	 	Credit Agreement by and among the Registrant and Guess? Canada Corporation, as Borrowers, lenders from time to time party thereto, Bank of America, N.A., as Domestic Administrative Agent and Domestic L/C Issuer, and Bank of America, N.A., acting through its Canada Branch, as Canadian Administrative Agent and Canadian L/C Issuer, dated as of September 19, 2006 (incorporated by reference from the Registrant’s Current Report on Form 8-K filed September 25, 2006).	 	
14.1.	 	Code of Conduct of the Registrant (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).	 	
†21.1.	 	List of Subsidiaries.	 	
†23.1.	 	Consent of Independent Registered Public Accounting Firm.	 	
†31.1.	 	Certification of Chief Executive Officer and Vice Chairman of the Board pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.	 	
†31.2.	 	Certification of President and Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	 	
†31.3.	 	Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	 	

 
†32.1.	 	Certification of Chief Executive Officer and Vice Chairman of the Board pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	 	
†32.2.	 	Certification of President and Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	 	
†32.3.	 	Certification of Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	 	

*                    Management Contract or Compensatory Plan
†                    Filed herewith

Exhibit 10.6
 
GUESS?, INC.
ANNUAL INCENTIVE BONUS PLAN
(AS AMENDED AND RESTATED JANUARY 18, 2007)
Section 1.   Purposes
The purposes of the Guess?, Inc. Annual Incentive Bonus Plan (the “Plan”) are (i) to provide greater motivation for selected key employees of Guess?, Inc., a Delaware corporation (the “Company”), and its Subsidiaries (as defined in Section 3(c) below) to attain and maintain the highest standards of performance, (ii) to attract and retain executives of outstanding competence, and (iii) to direct the energies of executives toward the achievement of specific business goals established for the Company and its Subsidiaries.
The Plan is designed to qualify compensation paid under the Plan to Covered Employees (as defined in Section 3(a) below) as “performance-based compensation” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (“Section 162(m)”).
Section 2.   Administration and Interpretation
(a)   The Plan shall be administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”), which shall consist of not less than two members of the Board who qualify as “outside directors” as defined under Section 162(m). The Committee may designate all or any portion of its power and authority under this Plan to any sub-committee of the Committee or to any executive officer or executive officers of the Company (each an “Authorized Committee Designee”); provided that no such designation shall be permitted or effective with respect to any award to, or any other matter concerning, any Covered Employee. An Authorized Committee Designee, to the extent provided by the Committee, shall have and may exercise all the power and authority of the Committee hereto, subject to the limitations set forth in the immediately preceding sentence.
(b)   The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations for carrying out the Plan as it may deem necessary or advisable. Decisions of the Committee shall be final, conclusive and binding upon all parties, including, without limitation, the Company and the key employees who participate in the Plan.
(c)   The Plan shall be administered to comply with Section 162(m) and, if any provisions of the Plan cause any award to a Covered Employee to not qualify as performance-based compensation under Section 162(m), that provision shall be stricken from this Plan, but the other provisions of the Plan shall remain in effect. Any action striking any portion of the Plan shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under the Plan.

Section 3.   Participation
(a)   Participation in the Plan during any fiscal year shall be limited to (i) any person serving as Chief Executive Officer of the Company and each other executive officer of the Company that the Committee determines, in its discretion, is or may be a “covered employee” of the Company within the meaning of Section 162(m) (“Covered Employees”) and (ii) those key employees of the Company and its Subsidiaries, other than the Covered Employees, who, in the sole opinion of the Committee, are in a position to have a significant impact on the performance of the Company and who are selected by the Committee (“Key Employees” and together with the Covered Employees, “Participants”); provided that participation by an employee of a Subsidiary shall be subject to approval of the Plan by such Subsidiary’s Board of Directors, which approval shall constitute the Subsidiary’s agreement to pay, at the direction of the Committee, awards directly to its employees or to reimburse the Company for the cost of such participation in accordance with rules adopted by the Committee.
(b)   Unless otherwise determined by the Committee in its sole and absolute discretion, or as provided in a Participant’s employment agreement, if a Participant ceases to be employed by the Company and/or its Subsidiaries prior to the end of a fiscal year for any reason other than disability (as determined by the Company), retirement at or after age 55, or death, his or her participation in the Plan for such year will terminate forthwith and he or she will not be entitled to any award for such year. If, prior to the end of a fiscal year, a Participant’s employment ceases because of disability (as determined by the Company), retirement at or after age 55, or death, or if the effective date of participation by a Participant for any year shall be after the first day of such fiscal year, the Participant shall be entitled to receive only that proportion of the amount, if any, that he or she otherwise would have received under the Plan for the full fiscal year which the number of days of his or her participation in the Plan during such fiscal year bears to the total number of days in such fiscal year; provided, however, that if the effective date of participation by a Covered Employee for any fiscal year shall be after the first day of the fiscal year, then the Committee must establish the Performance Goals (as defined in Section 4(d) below) for such Covered Employee while the performance relating to such Performance Goals remain substantially uncertain within the meaning of Section 162(m) and in no event after 25% of the fiscal year has elapsed.
(c)   The term “Subsidiary” shall mean any corporation at least 50% of whose issued and outstanding voting stock is owned, directly or indirectly by the Company.
Section 4.   Determination of Incentive Awards
Within the time period prescribed by Section 162(m) for each fiscal year, the Committee may authorize awards to Participants pursuant to either or both of the following methods in clauses (a) and (b) below:
(a)   For each fiscal year, the Committee shall: (i) determine the Participants who are to be eligible to receive performance-based awards under the Plan during such year, (ii) notify each such Participant in writing concerning his or her selection for participation in the Plan for such year, (iii) select the Performance Criteria applicable to such year for each such Participant and
2

(iv) establish, in terms of an objective formula or standard for each Participant, the Performance Goal and the amount of each award which may be earned for such year if such Performance Goal is achieved.
(b)   The Committee may in its sole and absolute discretion provide for discretionary bonuses for any of the Key Employees.
(c)   The term “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant. The Performance Criteria that will be used to establish Performance Goals are limited to the following: net earnings, operating earnings or income, earnings per share, cash flow, absolute and/or relative return on equity or assets, pre-tax profits, earnings growth, revenue growth, share price growth, shareholder returns, gross or net profit margin, comparison to peer companies, or any combination of the foregoing, any of which may be measured either in absolute terms, or as compared to any incremental increase, or as compared to the results of a peer group.
(d)   The term “Performance Goals” means the goals established in writing by the Committee for the fiscal year based upon the Performance Criteria. The Performance Goal may be expressed in terms of overall Company performance or the performance of an operating unit, business unit, segment, subsidiary or other division or any portion or combination thereof of the Company.
(e)   Actual financial performance shall be measured by reference to the Company’s financial records and the consolidated financial statements of the Company. In determining performance, the Committee in its sole and absolute discretion shall, in the case of awards to Covered Employees, and may, in the case of awards to Key Employees, direct that adjustments to the Performance Goals or actual financial performance as reported be made to reflect extraordinary organizational, operational or other changes that have occurred during such fiscal year, such as (without limitation) acquisitions, dispositions, expansions, contractions, material non-recurring items of income or loss or events that might create unwarranted hardships or windfalls to Participants, in each case, with respect to Covered Employees, only to the extent consistent with the requirements of Section 162(m) to qualify such awards as performance-based compensation. Notwithstanding the foregoing, the Committee may, by express provision with respect to a specific award provide at the time the performance goals are established that one or more of the adjustments in the foregoing sentence will not be made with respect to the award or establish such other events or circumstances, consistent with Section 162(m), with respect to which the Committee will make appropriate adjustment to the award. The Committee is authorized at any time during or after the fiscal year to increase (except with respect to awards payable to Covered Employees), reduce or eliminate the amount of an award payable to any Participant for any reason. The Committee may also provide that the Chief Executive Officer or Chairman of the Board shall have the discretion to increase or decrease the award otherwise payable to any Key Employee based upon their individual performance during the fiscal year.
3

Section 5.   Awards
(a)   No later than 90 days after the last day of each fiscal year, the Committee shall determine awards to Participants for such fiscal year by comparing actual financial performance to the Performance Goals, Performance Criteria and amounts of awards adopted by the Committee for such year and the Committee shall, with respect to Covered Employees, certify, by resolution or other appropriate action in writing, that the amount of the award has been accurately determined in accordance with the terms, conditions and limits of the Plan and that the Performance Goals and any other material terms established by the Committee or set forth in this Plan were in fact satisfied. If the Committee has not adopted specified goals for the fiscal year, the Committee shall meet no later than 90 days after the last day of such fiscal year to determine if discretionary bonuses shall be awarded to Key Employees. Each award under the Plan shall be paid in cash promptly after the amount of the award has been determined and, with respect to awards to Covered Employees, the Committee has certified that the relevant performance goals have been achieved; provided, that in all events, each award shall be paid no later than the 15 th  day of the third month following the Company’s first taxable year in which such award is no longer subject to a substantial risk of forfeiture.
(b)   No award under this Plan shall be considered as compensation in calculating any insurance, profit-sharing, retirement, or other benefit for which the recipient is eligible unless any such insurance, profit-sharing, retirement or other benefit is granted under a plan which expressly provided that incentive compensation shall be considered as compensation under such plan.
(c)   There is no requirement that the maximum amount available for awards in any fiscal year be awarded, nor that an award will be granted to any particular Participant for any fiscal year. Any portion of any amount available for making awards for any fiscal year which shall not have been awarded, shall not carry over or increase the maximum amount of awards payable in any subsequent year.
(d)   Notwithstanding any provision in the Plan to the contrary, the maximum award payable to any Participant under the Plan for any calendar year shall be $3.2 million.
(e)   In the exercise of its discretion, the Committee may allow a Participant to elect to defer the receipt of all or any portion of an award under the Plan. Any such deferral shall be made pursuant to the terms and conditions set forth in any deferred compensation plan or arrangement adopted by the Company. In the case of any deferred payment of an award to a Covered Employee after the attainment of the applicable Performance Goal, any amount in excess of the amount otherwise payable shall be based on either Moody’s Average Corporate Bond Yield (or such other rate of interest that is deemed to constitute a “reasonable rate of interest” for purposes of Section 162(m)) over the deferral period or the return over the deferral period of one or more predetermined actual investments such that the amount payable at the later date will be based upon actual returns, including any decrease or increase in the value of the investment(s).
4

Section 6.   Death of Participant
If a Participant dies before or after termination of employment, any unpaid installments of an award shall be paid to his or her legal representatives, either in the installments as originally provided or otherwise as the Committee may determine in each individual case, or, where the Committee has authorized the designation of beneficiaries, to such beneficiaries as may have been designated by the Participant.
Section 7.   Non-Assignability and Contingent Nature of Rights
No Participant, no person claiming through him or her, nor any other person shall have any right or interest in the Plan or its continuance, or in the payment of any award under the Plan, unless and until all the provisions of the Plan, the rules adopted thereunder, and restrictions and limitations on the award itself have been fully complied with. No rights under the Plan, contingent or otherwise, shall be transferable, assignable or subject to any pledge or encumbrance of any nature.
Section 8.   Source of Payments
The Company shall not have any obligation to establish any separate fund or trust or other segregation of assets to provide for payments under the Plan. To the extent any person acquires any rights to receive payments hereunder from the Company, such rights shall be no greater than those of an unsecured creditor.
Section 9.   Tax Withholding
The Company or a Subsidiary thereof, as appropriate, shall have the right to deduct from all payments made under the Plan to a Participant or to a Participant’s beneficiary or beneficiaries any Federal, state or local taxes required by law to be withheld with respect to such payments.
Section 10.   Duration, Termination and Amendment
Subject to approval by the Company’s stockholders at the 2005 annual meeting of Company stockholders, the Plan shall be effective for the fiscal year of the Company commencing January 1, 2005 and shall continue in effect until the fifth anniversary of the date of such stockholder approval, unless earlier terminated as described below. Upon such approval of the Plan by the Company’s stockholders at the 2005 annual meeting of Company stockholders, all awards approved or granted under the Plan on or after January 1, 2005 shall be fully effective.
The Committee may at any time terminate or from time to time modify or suspend, in whole or in part, and if suspended, may reinstate, any or all of the provisions of the Plan in such respects as the Committee may deem advisable; provided that no such termination or modification shall impair any rights which have accrued under the Plan; and provided further, that the Committee may not without stockholder approval adopt any amendment that would require the vote of stockholders pursuant to Section 162(m).
5

Section 11.   No Restriction on Right to Effect Changes
The Plan shall not affect in any way the right or power of the Company or its stockholders to make or authorize any sale of all or any portion of the assets of the Company or any Subsidiary, any merger or consolidation of the Company or any Subsidiary, a reorganization, dissolution or liquidation of the Company or any Subsidiary, or any other event or series of events, whether of a similar character or otherwise.
Section 12.   Headings
The headings of sections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan.
Section 13.   Governing Law
This Plan shall be governed by and construed in accordance with the laws of the State of California.
Section 14.   No Contract of Employment or Right to Awards
Nothing contained herein shall be construed as a contract of employment between the Company and any Participant, or as giving a right to any person to be granted awards under the Plan or to continue in the employment of the Company or any of its Subsidiaries, or as limiting the right of the Company or any of its Subsidiaries to discharge any Participant at any time, with or without cause.
6

Exhibit 10.8
 
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”), made as of January 1, 2007 (the “Effective Date”), between Guess?, Inc., a Delaware corporation (the “Company”), and Maurice Marciano (the “Executive”).
WITNESSETH:
WHEREAS, the Executive is a co-founder of the Company and is acting as its Co-Chairman and Co-Chief Executive Officer.
WHEREAS, the Executive has heretofore been employed by the Company pursuant to an employment agreement made effective as of August 13, 1996 (the “Prior Agreement”).
WHEREAS, the Company recognizes that the Executive’s talents and abilities are unique and have been integral to the success of the Company.
WHEREAS, the Executive wishes to focus his time and energy on developing the Company’s strategy as its Chairman of the Board, and is willing to commit himself to serve the Company, on the terms and conditions herein provided.
WHEREAS, the Company wishes to retain the services of the Executive and anticipates that the Executive’s contribution to the growth and success of the Company will continue to be substantial.
WHEREAS, the Company and the Executive wish to amend and restate the Prior Agreement as evidenced by this Agreement effective as of the date hereof in order to provide for the modification of certain provisions of the Prior Agreement.
NOW THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1.            POSITION/DUTIES.
(a)           During the Employment Term (as defined in Section 2 below), the Executive shall serve as the Company’s Chairman of the Board of Directors.    In this capacity, the Executive shall be responsible to identify and develop key strategic initiatives with the Company’s Chief Executive Officer and to fulfill such other duties and responsibilities as the Board of Directors of the Company (the “Board”) shall reasonably designate that are consistent with the Executive’s position as Chairman.  The Executive shall report exclusively to the Board.  The Executive shall have authority as is appropriate to carry out his duties and responsibilities as set forth in this Agreement.
(b)           During the Employment Term (as defined below), the Executive shall use the Executive’s best reasonable efforts to perform faithfully and efficiently the duties and responsibilities assigned to the Executive hereunder and shall devote such portion of the Executive’s business time (excluding periods of vacation and other approved leaves of absence)

as is reasonably necessary to such performance of the Executive’s duties with the Company.  Subject to Board approval, Executive may serve on the board of directors or advisory boards of other for profit companies provided that such service does not create a potential business conflict or the appearance thereof.  Nothing in this Agreement shall prevent Executive from managing his family’s personal investments so long as such activities do not materially interfere with the performance of the Executive’s duties hereunder or create a potential business conflict or the appearance thereof.
(c)           During the Employment Term, the Board shall nominate the Executive for re-election as a member of the Board at the expiration of the Executive’s then-current term.
(d)           The Company shall not relocate the Executive’s principal place of business outside of the Los Angeles metropolitan area without the Executive’s written consent.
(e)           The Executive shall be provided with appropriate office and secretarial facilities in each of the Company’s principal executive offices and any other location that the Executive reasonably deems necessary to have an office and support services in order for the Executive to perform his duties to the Company.
2.            EMPLOYMENT TERM.  The Executive’s term of employment under this Agreement (such term of employment, as it may be extended or terminated, is herein referred to as the “Employment Term”) shall be for a term commencing on the Effective Date and, unless terminated earlier as provided in Section 7 hereof, ending on the last day of the fifth whole Fiscal Year of the Company commencing on or after the Effective Date (the “Original Employment Term”), provided that the Employment Term shall be automatically extended, subject to earlier termination as provided in Section 7 hereof, for successive additional one (1) Fiscal Year periods (the “Additional Terms”), unless, on or before 90 days prior to the expiration of the Original Employment Term or of any Additional Term, the Company or the Executive has notified the other in writing that the Employment Term shall terminate at the end of the then-current term.
3.            BASE SALARY.  The Company agrees to pay the Executive a base salary (the “Base Salary”) at an annual rate of not less than One Million Dollars ($1,000,000), payable in accordance with the regular payroll practices of the Company, but not less frequently than monthly.  The Executive’s Base Salary shall be subject to annual review by the Board (or a committee thereof) after 2007 and may be increased, but not decreased, from time to time by the Board; provided, however, that if the Executive notifies the Board that he wishes to reduce substantially his duties hereunder, the Board may adjust his Base Salary and other compensation hereunder accordingly.  No increase to Base Salary shall be used to offset or otherwise reduce any obligations of the Company to the Executive hereunder or otherwise.  The base salary as determined herein from time to time shall constitute “Base Salary” for purposes of this Agreement.
4.            ANNUAL INCENTIVE BONUS AND OTHER BONUSES.  During the Employment Term, the Executive shall be eligible to participate in the Company’s annual bonus and other incentive compensation plans and programs for the Company’s senior executives at a level commensurate with the Executive’s position.  For each whole fiscal year (“Fiscal Year”) that begins on or after January 1, 2007 and ends not later than the expiration of the Employment
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Term, the Executive shall be eligible to earn an annual cash bonus (the “Bonus”) under the Company’s Annual Incentive Bonus Plan, as amended from time to time (the “Bonus Plan”), and, if appropriate, the Company’s 2004 Equity Incentive Plan, as amended from time to time (the “Equity Plan”), based upon the achievement by the Company and its subsidiaries of performance goals under the Bonus Plan and under the Equity Plan for each such Fiscal Year established by the Compensation Committee of the Board of Directors (the “Compensation Committee”).  The Compensation Committee shall establish objective criteria to be used to determine the extent to which such performance goals have been satisfied. The range of the Bonus opportunity for each Fiscal Year will be as determined by the Compensation Committee based upon the extent to which such performance goals are achieved, provided that the annual target Bonus opportunity shall be at least 140% of the Executive’s Base Salary (for each such year, the “Target Bonus”), the threshold Bonus for a Fiscal Year shall be one-half the Target Bonus for such year and the maximum Bonus payable pursuant to this Section 4 for any Fiscal Year shall not exceed the amount that is 225% of the Executive’s Base Salary for such year.  The Bonus, if any, payable to the Executive in respect of any Fiscal Year will be paid at the same time that bonuses are paid to other executives of the Company, but in any event within seventy-five days after the conclusion of such Fiscal Year.  After the expiration of the Bonus Plan and the Equity Plan, Executive’s right to receive future Bonus opportunities under such plan is subject to approval by the stockholders of the Company of a similar successor plan under which such opportunity may be granted.  The Compensation Committee may, in its sole discretion, award additional bonuses to Executive.
5.            EQUITY BASED INCENTIVE AWARDS.
(a)           PERFORMANCE SHARE AWARDS.  The Company shall grant the Executive under the Equity Plan at the completion of each whole Fiscal Year commencing on and after January 1, 2007 and during the Employment Term shares of the Company’s common stock (“Performance Shares”) based upon the achievement by the Company and its subsidiaries of performance goals under the Equity Plan for each such Fiscal Year established by the Compensation Committee.  The Compensation Committee shall establish objective criteria to be used to determine the extent to which such performance goals have been satisfied.  Performance Shares will be granted for each whole Fiscal Year during the Employment Term at “target” and “stretch” levels of 110% (i.e., $1,100,000 for 2007) and 240% (i.e., $2,400,000 for 2007) of the Executive’s Base Salary for such Fiscal Year.  Performance Shares granted in any particular Fiscal Year will be subject to the standard vesting schedule established by the Compensation Committee for Performance Share grants in that year (the current vesting schedule is a 4-year vesting schedule).  After the expiration of the Equity Plan, Executive’s right to receive future grants of Performance Shares is subject to approval by the stockholders of the Company of a similar successor plan under which such awards may be granted.
(b)           STOCK OPTION AWARDS.  The Company shall grant the Executive under the Equity Plan at the completion of each whole Fiscal Year commencing on or after January 1, 2007 and during the Employment Term stock options to purchase the Company’s common stock at an exercise price of not less than the fair market value of such stock on the grant date (“Stock Options”) based upon the achievement by the Company and its subsidiaries of performance goals under the Equity Plan for each such Fiscal Year established by the Compensation Committee.  The Compensation Committee shall establish objective criteria to be
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used to determine the extent to which such performance goals have been satisfied.  Stock Options for each whole Fiscal Year during the Employment Term will be granted at a grant-date Black-Scholes value of 110% of the Executive’s Base Salary for such Fiscal Year (i.e., $1,100,000 for 2007).  Stock Options granted in any particular Fiscal Year will be subject to the standard vesting schedule established by the Compensation Committee for Stock Option grants in that year (the current vesting schedule is a 4-year vesting schedule).  After the expiration of the Equity Plan, Executive’s right to receive future grants of Stock Options is subject to approval by the stockholders of the Company of a similar successor plan under which such awards may be granted.
(c)           DISCRETIONARY GRANTS.  In addition to the Performance Share and Stock Option Awards under Section 5(a) and (b) above, at the sole discretion of the Board or the Committee, the Executive shall be eligible to participate throughout the Employment Term in such long-term incentive plans and programs as may be in effect from time to time in accordance with the Company’s compensation practices and the terms and provisions of any such plans or programs.
6.            EMPLOYEE BENEFITS.
(a)           BENEFIT PLANS.  The Executive shall be entitled to participate in all employee benefit plans of the Company including, but not limited to, equity, pension, thrift, Section 401(k), profit sharing, medical coverage, education, or other retirement (including without limitation supplemental executive retirement plans) or welfare benefits that the Company has adopted or may adopt, maintain or contribute to for the benefit of its senior executives at a level commensurate with the Executive’s position subject to satisfying the applicable eligibility requirements.  The Executive shall at all times during the Employment Term be entitled to participate in the Guess?, Inc. Supplemental Executive Retirement Plan, as in effect on January 1, 2006, and any deferred compensation plan which may be maintained by the Company from time to time.
(b)           VACATION.  The Executive shall be entitled to accrue annual paid vacation in accordance with the Company’s policy applicable to senior executives, but in no event less than twenty business days per calendar year (as prorated for partial years), which vacation may be taken at such times as the Executive elects with due regard to the needs of the Company.  Executive shall not be permitted to accrue more than a total of twenty five (25) vacation days at any time.  Once Executive reaches the maximum accrual, Executive shall not accrue any additional vacation days until a portion of Executive’s accrued vacation time is used.
(c)           AUTOMOBILE.  The Company shall continue to provide the Executive with an automobile during the Employment Term in a manner consistent with its past practice.
(d)           PERQUISITES.  The Company shall provide to the Executive, at the Company’s cost, all perquisites which other senior executives of the Company are generally entitled to receive in accordance with Company policy as set by the Board from time to time.
(e)           LIFETIME RETIREE MEDICAL BENEFIT.  The Company shall provide the Executive and his eligible family members with Post-Retirement Health Benefits at
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its expense commencing upon expiration of the Employment Term for any reason other than a termination for Cause, in which case the Company shall have no obligation to provide Post-Retirement Health Benefits .   The term “Post-Retirement Health Benefits” means the following:
(i)            health benefits (including medical, prescription, dental and vision coverage, if and to the extent applicable) for the remainder of the Executive’s life under the plans provided to the Company’s executive officers and their eligible family members, as in effect from time to time;  provided that  the Post-Retirement Health Benefits may be made secondary to any other benefits to which the Executive may be entitled under another employer-provided plan or a governmental plan such as Medicare; or
(ii)           if the Company is unable, at any point, to provide such coverage under any such plans, the Company will pay the Executive a lump-sum cash payment that will equal the present value of the cost of such coverage based on the actuarial equivalent assumptions set forth in the Guess?, Inc. Supplemental Executive Retirement Plan and a reasonable forecast of increases in the cost of such coverage for that portion of the period following the expiration of the Employment Term for which such coverage could not be provided (in either case, such benefits are referred to as the “Post-Retirement Health Benefits”).
(f)            BUSINESS AND ENTERTAINMENT EXPENSES.  Upon presentation of appropriate documentation, the Executive shall be reimbursed in accordance with the Company’s expense reimbursement policy for all reasonable and necessary business and entertainment expenses incurred in connection with the performance of the Executive’s duties hereunder.
(g)           CHANGE IN CONTROL.  In the event there is a Change in Control, the Company shall establish a “rabbi trust” for the benefit of the Executive and fund it with cash or cash equivalents sufficient to fully pay when due and payable all payments that potentially would be required to be made under Section 8(d) hereof if the Executive were to be terminated without cause.  For this purpose, the term “Change in Control” is used as defined in the Equity Plan except that in no event shall a “Change in Control” be triggered pursuant to clause (A) of such term as so defined unless the Acquiring Person becomes the Beneficial Owner of twenty percent (20%) or more of the then outstanding shares of Common Stock or the Combined Voting Power of the Company (except pursuant to an offer for all outstanding shares of Common Stock at a price and upon such terms and conditions as a majority of the Continuing Directors determine to be in the best interests of the Company and its shareholders (other than an Acquiring Person on whose behalf the offer is being made)) in one or more bona fide transactions and such level of ownership of such Common Stock or Combined Voting Power, as applicable, exceeds the aggregate level of ownership of the Marcianos of such Common Stock or Combined Voting Power, respectively.  For purposes of the preceding sentence, “Marcianos” means Maurice Marciano, Paul Marciano, and any trust established in whole or in part for the benefit of one or more of them or their family members, or any other entity controlled by one or more of them, and any other capitalized term used in such sentence is used as defined in the Equity Plan if not otherwise defined in this Agreement.
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7.            TERMINATION.  The Executive’s employment and the Employment Term shall terminate on the first of the following to occur:
(a)           DISABILITY.  Upon written notice by the Company to the Executive of termination due to Disability, while the Executive remains Disabled.  For purposes of this Agreement, “Disabled” and “Disability” shall (i) have the meaning defined under the Company’s then-current long-term disability insurance plan, policy, program or contract as entitles the Executive to payment of disability benefits thereunder, or (ii) if there shall be no such plan, policy, program or contract, mean permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).
(b)           DEATH.  Automatically on the date of death of the Executive.
(c)           CAUSE.  Immediately upon written notice by the Company to the Executive of a termination for Cause.  “Cause” shall mean (i) Executive’s conviction or plea of nolo contendere to a felony or any crime involving moral turpitude; (ii) a willful act of theft, embezzlement or misappropriation from the Company; or (iii) a determination by the Board that Executive has willfully and continuously failed to perform substantially the Executive’s duties (other than any such failure resulting from the Executive’s Disability or incapacity due to bodily injury or physical or mental illness), after (A) a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties and provides the Executive with the opportunity to correct such failure if, and only if, such failure is capable of cure; and (B) the Executive’s failure to correct such failure which is capable of cure within 30 days of receipt of the demand for performance.  For the avoidance of doubt, the parties expressly agree that only Cause pursuant to Section 7(c)(iii) shall be deemed capable of cure.  Notwithstanding the foregoing, “Cause” shall not include any act or omission that the Executive believes in good faith to have been in or not opposed to the interest of the Company (without intent of Executive to gain therefrom, directly or indirectly, a profit to which he was not legally entitled).  The Company may only terminate the Executive’s employment for Cause if (A) a determination that Cause exists is made and approved by three fourths of the independent directors of the Company’s Board, (B) for a termination for Cause under Section 7(c)(iii), the Executive is given at least five (5) days’ written notice of the Board meeting called to make such determination, and (C) for a termination for Cause under Section 7(c)(iii), the Executive and his legal counsel are given the opportunity to address such meeting.  In the event that the Board has so determined in good faith that Cause exists, the Board shall have no obligation to terminate the Executive’s employment if the Board determines in its sole discretion that such a decision not to terminate the Executive’s employment is in the best interest of the Company.
(d)           WITHOUT CAUSE.  Upon written notice by the Company to the Executive of an involuntary termination without Cause and other than due to death or Disability prior to age sixty-five.
(e)           GOOD REASON.  Upon written notice by the Executive to the Company of termination for Good Reason unless the reasons for any proposed termination for Good Reason are remedied in all material respects by the Company within thirty (30) days following written notification by the Executive to the Company.  “Good Reason” means the occurrence of
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any one or more of the following events prior to age sixty-five unless Executive specifically agrees in writing that such event shall not be Good Reason:
(i)            Any material breach of this Agreement by the Company, including:
(A)          the failure of the Company to pay the compensation and benefits set forth in Sections 3 through 6 of this Agreement;
(B)           any material adverse change in the Executive’s status, position or responsibilities as Chairman of the Board of the Company;
(C)           any failure to nominate or elect Executive as Chairman of the Board or as member of the Board;
(D)          causing or requiring the Executive to report to anyone other than the Board or
(E)           assignment of duties materially inconsistent with his position and duties described in this Agreement,
(ii)           the failure of the Company to assign this Agreement to a successor to all or substantially all of the business or assets of the Company or failure of such a successor to the Company to explicitly assume and agree to be bound by this Agreement,
(iii)          requiring the Executive to be principally based at any office or location outside of the Los Angeles metropolitan area;
(iv)          purported termination of the Executive’s employment for “Cause” in a bad faith violation of the substantive and procedural requirements of Section 7(c), or
(v)           a termination of employment by the Executive for any reason or no reason during the 30-day period commencing 6 months after a Change of Control.
(f)            RETIREMENT.  Upon thirty (30) days’ prior written notice by the Executive to the Company of the Executive’s termination of employment without Good Reason (which the Company may, in its sole discretion, make effective earlier than any notice date).
8.            CONSEQUENCES OF TERMINATION.  Any termination payments made and benefits provided under this Agreement to the Executive shall be in lieu of any termination or severance payments or benefits for which the Executive may be eligible under any of the plans, policies or programs of the Company or its affiliates.  Except to the extent otherwise provided in this Agreement, all benefits and awards under the Company’s compensation and benefit programs shall be subject to the terms and conditions of the plan or arrangement under which such benefits accrue, are granted or are awarded.  The following amounts and benefits shall be due to the Executive:
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(a)           DISABILITY.  Upon such termination, the Company shall pay or provide the Executive (i) any unpaid Base Salary through the date of termination and any accrued vacation in accordance with Company policy; (ii) any unpaid Bonus earned with respect to any Fiscal Year ending on or preceding the date of termination; (iii) reimbursement for any unreimbursed business expenses incurred through the date of termination; and (iv) all other payments, benefits or perquisites to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit, equity or perquisite plan or program or grant or this Agreement (including any related gross-up) (collectively, “Accrued Amounts”).  The Executive will also be paid a pro-rata portion of the Executive’s Annual Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(b)           DEATH.  In the event the Employment Term ends on account of the Executive’s death, the Executive’s estate (or to the extent a beneficiary has been designated in accordance with a program, the beneficiary under such program) shall be entitled to any Accrued Amounts.  The Executive’s estate (or beneficiary) will also be paid a pro-rata portion of the Executive’s Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(c)           TERMINATION FOR CAUSE.  If the Executive’s employment should be terminated by the Company for Cause or by the Executive without Good Reason, the Company shall pay to the Executive any Accrued Amounts.
(d)           TERMINATION WITHOUT CAUSE OR FOR GOOD REASON.  If the Executive’s employment by the Company is terminated by the Company other than for Cause (other than a termination due to Disability or death) or by the Executive for Good Reason, the Company shall pay or provide the Executive with
(i)            the Accrued Amounts;
(ii)           a pro-rata portion of the Executive’s Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives, determined by multiplying the amount the Executive would have received based upon actual performance had employment continued through the end of the performance year (but in no event less than the amount for target performance), by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365;
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(iii)          an amount equal to the product of (A) the sum of (1) the Executive’s Base Salary and (2) the then Target Bonus multiplied by (B) three, payable in a single lump-sum, with such payment being made on the earliest payroll date that does not result in adverse tax consequences to the Executive under Section 409A of the Code; and
(iv)          two years of additional service credit and age for benefit accrual, early retirement reduction and vesting purposes under the Guess?, Inc. Supplemental Executive Retirement Plan.
In addition, the Company, at its election, shall have the option in its full and absolute discretion to enter into a two-year consulting agreement with the Executive providing for continuation of 50% of Base Pay annually in substantially the same form as set forth in Appendix A below.  Notwithstanding anything to the contrary contained herein, the Company shall have no obligation to provide any of the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts) unless and until Executive executes an effective general release of all claims in favor of the Company in a form acceptable to the Company (the “Release”).  For the avoidance of doubt, Executive’s execution of the Release is a condition precedent to any obligation of the Company to provide the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts).
(e)           NON-RENEWAL.  A notice of non-renewal of this Agreement by the Company that would result in expiration of the Employment Term prior to the Executive’s sixty-fifth birthday shall be treated as a termination of the Executive’s employment by the Company without “Cause” for the purposes of this Agreement.
(f)            RETIREMENT.  If the Executive retires under Section 7(f) of this Agreement, the Company shall pay to the Executive:
(i)            any Accrued Amounts;
(ii)           a pro-rata portion of the Executive’s Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365); and
(iii)          the Executive shall be considered to have “retired” for purposes of any plans, programs, agreements or arrangements with the Company or its affiliates.
In addition, the Company shall enter into a two-year consulting agreement with the Executive providing for continuation of 50% of Base Pay annually in substantially the same form as set forth in Appendix A below.
9.            SECTION 4999 EXCISE TAX.  If any payments, rights or benefits (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement of
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Executive with the Company or any person affiliated with the Company) (the “Payments”) received or to be received by Executive will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), then the Company shall pay to Executive an amount in addition to the Payments (the “Gross-Up Payment”) as calculated below.  The Gross Up Payment shall be in an amount such that, after deduction of any Excise Tax on the Payments and any federal, state and local income and employment tax and Excise Tax on the Gross Up Payment, but before deduction for any federal, state or local income and employment tax on the Payments, the net amount retained by the Executive shall be equal to the Payments.  The process for calculating the Excise Tax, determining the amount of any Gross-Up Payment and other procedures relating to this Section are set forth in Appendix B attached hereto.  For purposes of making the determinations and calculations required herein, the Accounting Firm (as defined in Appendix B) may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code, provided that the Accounting Firm shall make such determinations and calculations on the basis of “substantial authority” (within the meaning of Section 6662 of the Code) and shall provide opinions to that effect to both the Company and Executive.
10.          CONFIDENTIALITY.  The Executive agrees that the Executive shall not, directly or indirectly, use, make available, sell, disclose or otherwise communicate to any person, other than in the course of the Executive’s employment and for the benefit of the Company, either during the period of the Executive’s employment or at any time thereafter, any nonpublic, proprietary or confidential information, knowledge or data relating to the Company, any of its subsidiaries, affiliated companies or businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company.  The foregoing shall not apply to information that (i) was known to the public prior to its disclosure to the Executive; (ii) becomes known to the public subsequent to disclosure to the Executive through no wrongful act of the Executive or any representative of the Executive; or (iii) the Executive is required to disclose by applicable law, regulation or legal process (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company at its expense in seeking a protective order or other appropriate protection of such information).  Notwithstanding clauses (i) and (ii) of the preceding sentence, the Executive’s obligation to maintain such disclosed information in confidence shall not terminate where only portions of the information are in the public domain.
11.          ATTORNEY’S FEES.  To the extent permitted by law, all reasonable costs and expenses incurred by the Executive in evaluating and negotiating the terms and conditions of this Agreement shall be promptly paid on behalf of, or reimbursed, to the Executive by the Company.  If the Executive incurs legal or other fees and expense in a good faith non-frivolous effort to secure or preserve or establish entitlement to compensation and benefits under this Agreement, the Company shall, to the extent permitted by law and regardless of the outcome of such effort, reimburse Executive monthly for such fees and expenses.
12.          NO ASSIGNMENT.
(a)           This Agreement is personal to each of the parties hereto.  Except as provided in Section 12(b) below, no party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto.
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(b)           The Company may assign this Agreement to any successor to all or substantially all of the business and/or assets of the Company provided the Company shall require such successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place and shall deliver a copy of such assignment to the Executive.
13.          NOTICE.  For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered by hand, (b) on the date of transmission, if delivered by confirmed facsimile, (c) on the first business day following the date of deposit if delivered by guaranteed overnight delivery service, or (d) on the fourth business day following the date delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
At the address (or to the facsimile number) shown
on the records of the Company
If to the Company:
Guess?, Inc.
1444 South Alameda Street
Los Angeles, California 90021
Attention:  General Counsel
Facsimile No.:  (213) 765-0911
or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
14.          SECTION HEADINGS; INCONSISTENCY.  The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.  In the event of any inconsistency between this Agreement and any other agreement (including but not limited to any option, stock, long-term incentive or other equity award agreement), plan, program, policy or practice (collectively, “Other Provision”) of the Company the terms of this Agreement shall control over such Other Provision to the extent that the terms of this Agreement are more beneficial to the Executive.
15.          SEVERABILITY.  The provisions of this Agreement shall be deemed severable and the invalidity of unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
16.          COUNTERPARTS.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instruments.  One or more counterparts of this Agreement may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof.
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17.          DISPUTE RESOLUTION.  In the event of any controversy, dispute or claim between the parties under, arising out of or related to this Agreement (including but not limited to, claims relating to breach, termination of this Agreement, or the performance of a party under this Agreement) whether based on contract, tort, statute or other legal theory (collectively referred to hereinafter as “Disputes”), the parties shall follow the dispute resolution procedures set forth below.  Any Dispute shall be settled exclusively by arbitration, conducted before a single arbitrator in Los Angeles, California, administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect.  The parties agree to (i) appoint an arbitrator who is knowledgeable in employment and human resource matters and, to the extent possible, the industry in which the Company operates, and instruct the arbitrator to follow substantive rules of law; (ii) require the testimony to be transcribed; and (iii) require the award to be accompanied by findings of act and a statement of reasons for the decision.  The arbitrator shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrator, upon request of a party.  The arbitrator shall have no power or authority to add to or detract from the written agreement of the parties.  If the parties cannot agree upon an arbitrator within ten (10) days after demand by either of them, either or both parties may request the American Arbitration Association name a panel of five (5) arbitrators.  The Company shall strike the names of two (2) off this list, the Executive shall also strike two (2) names, and the remaining name shall be the arbitrator.  The parties shall stipulate that arbitration shall be completed within ninety (90) days.  The decision of the arbitrator will be final and binding upon the parties hereto.  Judgment may be entered on the arbitrator’s award in any court having jurisdiction.  The Company shall bear the costs of the arbitrator and any related forum fee.
18.          INDEMNIFICATION.  The Company hereby agrees to indemnify the Executive and hold the Executive harmless to the fullest extent permitted by applicable law and under the by-laws of the Company against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorneys’ fees), losses, and damages resulting from the Executive’s performance of his duties and obligations with the Company.  This provision is in addition to any other rights of indemnification the Executive may have.
19.           LIABILITY INSURANCE.  The Company shall cover the Executive under directors and officers liability insurance both during and, while potential liability exists, after the term of this Agreement in the same amount and to the same extent as the Company covers its other officers and directors.
20.          MISCELLANEOUS.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer or director as may be designated by the Board.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  This Agreement together with all exhibits hereto sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.  The validity, interpretation, construction and performance of this Agreement shall be governed by the
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laws of the State of California without regard to its conflicts of law principles.  Notwithstanding the foregoing, the Company’s rights pursuant to any confidentiality, proprietary information, assignment of inventions or similar agreement shall survive and continue in effect.
21.          PAYMENT OF COMPENSATION.  Notwithstanding anything in this Agreement or elsewhere to the contrary:
(a)           If payment or provision of any amount or other benefit that is “deferred compensation” subject to Section 409A of the Code at the time otherwise specified in this Agreement or elsewhere would subject such amount or benefit to additional tax pursuant to Section 409A(a)(1)(B) of the Code, and if payment or provision thereof at a later date would avoid any such additional tax, then the payment or provision thereof shall be postponed to the earliest date on which such amount or benefit can be paid or provided without incurring any such additional tax.  In the event that deferred payment is required in order to comply with Section 409A, such payment shall be accumulated and paid in a single lump sum on such earliest date together with interest for the period of delay, compounded annually, equal to the prime rate (as published in The Wall Street Journal), and in effect as of the date the payment should otherwise have been provided.
(b)           If any payment or benefit permitted or required under this Agreement, or otherwise, is reasonably determined by either party to be subject for any reason to a material risk of additional tax pursuant to Section 409A(a)(1)(B) of the Code, including when final regulations and issued thereunder, then the parties shall promptly agree in good faith on appropriate provisions to avoid such risk without materially changing the economic value of this Agreement to either party.
22.          FULL SETTLEMENT.  Except as set forth in this Agreement, the Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except to the extent any amounts are due the Company or its subsidiaries or affiliates pursuant to a judgment against the Executive.  In no event shall the Executive be obliged to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced by any compensation earned by the Executive as a result of employment by another employer, except as set forth in this Agreement.
23.          REPRESENTATIONS.  Except as otherwise disclosed to the Company in writing, the Executive represents and warrants to the Company that the Executive has the legal right to enter into this Agreement and to perform all of the obligations on the Executive’s part to be performed hereunder in accordance with its terms and that the Executive is not a party to any agreement or understanding, written or oral, which could prevent the Executive from entering into this Agreement or performing all of the Executive’s obligations hereunder.
24.          WITHHOLDING.  The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
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25.          NON-EXCLUSIVITY OF RIGHTS.  Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any restricted stock unit or other agreement with the Company or any of its affiliated companies.  Except as otherwise provided herein, amounts and benefits which are vested benefits or which the Executive is otherwise entitled to receive under any plan, program, agreement or arrangement of the Company at or subsequent to the date of termination shall be payable in accordance with such plan or program.
26.          SURVIVAL.  The respective obligations of, and benefits afforded to, the Company and Executive that by their express terms or clear intent survive termination of Executive’s employment with the Company, including, without limitation, the provisions of Sections 8, 9, 10, 11, 12, 17, 18, 19, 21, 22 and 24 of this Agreement, will survive termination of Executive’s employment with the Company, and will remain in full force and effect according to their terms.
27.          AGREEMENT OF THE PARTIES.  The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto.  Neither Executive nor the Company shall be entitled to any presumption in connection with any determination made hereunder in connection with any arbitration, judicial or administrative proceeding relating to or arising under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
 	GUESS?, INC.	
 	 	
 	By:	/s/ Carlos Alberini	
 	Name:	Carlos Alberini	
 	Its:	President and COO	

 	MAURICE MARCIANO	

 	/s/ Maurice Marciano	

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APPENDIX A
CONSULTING AGREEMENT
CONSULTING AGREEMENT dated this   th day of              20    by and between Guess?, Inc. (the “Company”) and Maurice Marciano (“Marciano”).
WITNESSETH:
WHEREAS, Marciano serves as an executive Chairman of the Company’s Board of Directors (the “Board”);
WHEREAS, Marciano desires to retire from his position as such an executive Chairman (the effective date of such retirement is referred to as the “Retirement Date”) and to provide consulting services to the Company as the Board may reasonably consider appropriate; and
WHEREAS, the parties desire to set forth their respective rights and obligations regarding Marciano’s consulting arrangement.
NOW, THEREFORE, in consideration of the covenants set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:
1.            Consulting Period.  The Company agrees to retain Marciano as a consultant to provide the services described in Section 3 below from the Retirement Date until the second anniversary of the Retirement Date (the “Consulting Period”), as provided in this Consulting Agreement.
2.            Consulting Services.  Marciano shall provide such consulting services to the Company as reasonably requested by the Board from time to time.  These services may include but are not limited to actively participating in major marketing or sales initiatives, performing any transition and integration services related to the Company’s business and cooperating with the Company regarding any litigation initiated involving matters of which Marciano has particular knowledge.  Marciano agrees to be available up to seven days per month during the Consulting Period to perform the Consulting Services.  The Consulting Services will be performed at such times as are reasonably requested by the Company after reasonable consultation with Marciano.  Marciano shall provide these services in Los Angeles, California, provided that Marciano shall be required to travel for business and client meetings as reasonably requested by the Company.
3.            Fees.  As compensation for the Consulting Services, the Company shall pay Marciano fifty percent of Marciano’s Base Salary as of the Retirement Date per annum during the Consulting Period.  Fees shall be paid monthly in arrears by the 15th day of the following month.  Should Marciano die or become disabled during the Consulting Period, the Company shall make a lump sum cash payment to Marciano (or, in the event of his death, to his estate) of an amount equal to the remaining payments owed through the end of the Consulting Period.
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Marciano shall not be entitled to participate, and shall not participate in any employee benefit plan providing benefits to Company employees, whether presently in force or adopted subsequent to this Consulting Agreement, with respect to his Consulting Services.  Notwithstanding the foregoing, Marciano shall retain all compensation and benefits that continue past his Retirement Date pursuant to the terms of his Employment Agreement with the Company dated January 1, 2007 or otherwise.  All reasonable and necessary business expenses incurred by Marciano in the performance of the Consulting Services shall be promptly reimbursed by the Company in accordance with the Company’s standard expense reimbursement policies applicable to independent contractors.
4.            Status.  Marciano acknowledges and agrees that his status at all times during the Consulting Period shall be that of an independent contractor.  Marciano hereby waives any rights to be treated as an employee or deemed employee of the Company or any of its affiliates for any purpose following his termination of employment at the Retirement Date except as provided under his Employment Agreement.  The parties hereby acknowledge and agree that the compensation provided for in Section 4 shall represent fees for Consulting Services provided by Marciano as an independent contractor, and shall be paid without any deductions or withholdings for taxes.
5.            Retained Property.  During the Consulting Period, Marciano shall retain all property of the Company in his possession, including, but not limited to, credit cards, security key cards, telephone cards, car service cards, computer software or hardware, Company identification cards, Company records and copies of records, correspondence and copies of correspondence and other books or manuals issued by the Company.
6.            Assignability.  Marciano may not assign or transfer this Consulting Agreement or any of Marciano’s rights, duties or obligations hereunder.  The Company may assign this Consulting Agreement to any person or entity acquiring all or substantially all of the assets (by merger or otherwise) of the Company so long as such person, entity or affiliate assumes the Company’s obligations hereunder.
7.            Entire Agreement.  This Consulting Agreement constitutes the full and complete understanding and agreement of the parties hereto with respect to engaging Marciano as a consultant to the Company.  This Consulting Agreement may not be changed or amended orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.
8.            Divisibility.  If any one or more of the provisions of this Consulting Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions and other application thereof shall not in any way be affected or impaired.
9.            Applicable Law.  This Consulting Agreement shall be governed by, and the rights and obligations of the parties determined in accordance with, the laws of the State of California as in effect for contracts made and to be performed in the State of California.
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10.          Survival.  All of the Company’s obligations hereunder shall survive the termination of this Consulting Agreement.
11.          Counterparts.  This Consulting Agreement may be executed in counterparts, each of which shall be deemed an original, all of which shall together constitute one and the same Consulting Agreement.
IN WITNESS WHEREOF, the undersigned have duly executed this Consulting Agreement as of the day and year first above written.
 	 	
 	MAURICE MARCIANO	

 	 	 	

 	COMPANY	

 	By:	 	 	
 	 	 	 	
 	Its:	 	 	
 
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APPENDIX B
TAX GROSS-UP PAYMENT RULES AND PROCEDURES
1.            Subject to Paragraph 3 below, all determinations required to be made under Section 9 of this Agreement, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by an accounting firm (the “Accounting Firm”) selected in accordance with Paragraph 2 below.  The Accounting Firm shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the event that results in the potential for an excise tax liability for the Executive, which could include but is not limited to a Change in Control and the subsequent vesting of any cash payments or awards, or the Executive’s termination of employment, or such earlier time as is required by the Company.  The initial Gross-Up Payment, if any, as determined pursuant to this Paragraph 1, shall be paid on the Executive’s behalf to the applicable taxing authorities within five (5) days of the receipt of the Accounting Firm’s determination.  If the Accounting Firm determines that no Excise Tax is payable to the Executive, it shall furnish the Executive with a written report indicating that he has substantial authority not to report any Excise Tax on his federal income tax return.  Any determination by the Accounting Firm shall be binding upon the Company and Executive.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder.  In the event that the Company exhausts its remedies pursuant to Paragraph 3 below and Executive thereafter is required to make a payment or additional payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment, increased by all applicable interest and penalties associated with the Underpayment, shall be promptly paid by the Company to or for the benefit of Executive.  For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes on earned income at the highest marginal rate of taxation in the state and locality of Executive’s residence on the Effective Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
2.            The Accounting Firm shall be a public accounting firm proposed by the Company and agreed upon by the Executive.  If Executive and the Company cannot agree on the firm to serve as the Accounting Firm within ten (10) days after the date on which the Company proposed to Executive a public accounting firm to serve as Auditor, then Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Accounting Firm within ten (10) days after being requested by the Company and Executive to make such selection.  The Company shall pay the Auditor’s fee.
3.            Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment.  Such notification shall be given as soon as practicable but no later than fifteen (15) business days after Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.  Executive shall not pay
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such claim prior to the expiration of the period ending on the date that any payment of taxes with respect to such claim is due or the thirty day period following the date on which Executive gives such notice to the Company, whichever period is shorter.  If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv)  permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including attorneys fees and any additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses.  Without limitation of the foregoing provisions of this Paragraph 3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect to such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax and income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other authority.
4.            If, after the receipt by Executive of an amount advanced by the Company pursuant to Paragraph 3 above, Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Paragraph 3), promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).
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Exhibit 10.9
 
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the “Agreement”), made as of January 1, 2007 (the “Effective Date”), between Guess?, Inc., a Delaware corporation (the “Company”), and Paul Marciano (the “Executive”).
WITNESSETH:
WHEREAS, the Executive is a co-founder of the Company and is acting as its Co-Chairman and Co-Chief Executive Officer.
WHEREAS, the Executive has heretofore been employed by the Company pursuant to an employment agreement made effective as of August 13, 1996 (the “Prior Agreement”).
WHEREAS, the Company recognizes that the Executive’s talents and abilities are unique and have been integral to the success of the Company.
WHEREAS, the Executive has agreed to focus his time and energy primarily as the Company’s sole Chief Executive Officer, and is willing to commit himself to serve the Company, on the terms and conditions herein provided.
WHEREAS, the Company wishes to retain the services of the Executive and anticipates that the Executive’s contribution to the growth and success of the Company will continue to be substantial.
WHEREAS, the Company and the Executive wish to amend and restate the Prior Agreement as evidenced by this Agreement effective as of the date hereof in order to provide for the modification of certain provisions of the Prior Agreement.
NOW THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1.            POSITION/DUTIES.
(a)           During the Employment Term (as defined in Section 2 below), the Executive shall serve as the Company’s Chief Executive Officer and as Vice Chairman of the Board of Directors.    In this capacity the Executive shall have such duties, authorities and responsibilities commensurate with the duties, authorities and responsibilities of persons in similar capacities in similarly sized companies and such other duties and responsibilities as the Board of Directors of the Company (the “Board”) shall designate that are consistent with the Executive’s position as Chief Executive Officer.  The Executive shall report exclusively to the Board.  The Executive shall have authority as is appropriate to carry out his duties and responsibilities as set forth in this Agreement.
(b)           During the Employment Term (as defined below), the Executive shall use the Executive’s best reasonable efforts to perform faithfully and efficiently the duties and responsibilities assigned to the Executive hereunder and shall devote substantially all of the

Executive’s business time (excluding periods of vacation and other approved leaves of absence) as is reasonably necessary to such performance of the Executive’s duties with the Company.  Subject to Board approval, Executive may serve on the board of directors or advisory boards of other for profit companies provided that such service does not create a potential business conflict or the appearance thereof.  Nothing in this Agreement shall prevent Executive from managing his family’s personal investments so long as such activities do not materially interfere with the performance of the Executive’s duties hereunder or create a potential business conflict or the appearance thereof.
(c)           During the Employment Term, the Board shall nominate the Executive for re-election as a member of the Board at the expiration of the Executive’s then-current term.
(d)           The Company shall not relocate the Executive’s principal place of business outside of the Los Angeles metropolitan area without the Executive’s written consent.
(e)           The Executive shall be provided with appropriate office and secretarial facilities in each of the Company’s principal executive offices and any other location that the Executive reasonably deems necessary to have an office and support services in order for the Executive to perform his duties to the Company.
2.            EMPLOYMENT TERM.  The Executive’s term of employment under this Agreement (such term of employment, as it may be extended or terminated, is herein referred to as the “Employment Term”) shall be for a term commencing on the Effective Date and, unless terminated earlier as provided in Section 7 hereof, ending on the last day of the fifth whole Fiscal Year of the Company commencing on or after the Effective Date (the “Original Employment Term”), provided that the Employment Term shall be automatically extended, subject to earlier termination as provided in Section 7 hereof, for successive additional one (1) Fiscal Year periods (the “Additional Terms”), unless, on or before 90 days prior to the expiration of the Original Employment Term or of any Additional Term, the Company or the Executive has notified the other in writing that the Employment Term shall terminate at the end of the then-current term.
3.            BASE SALARY.  The Company agrees to pay the Executive a base salary (the “Base Salary”) at an annual rate of not less than One Million Dollars ($1,000,000), payable in accordance with the regular payroll practices of the Company, but not less frequently than monthly.  The Executive’s Base Salary shall be subject to annual review by the Board (or a committee thereof) after 2007 and may be increased, but not decreased, from time to time by the Board.  No increase to Base Salary shall be used to offset or otherwise reduce any obligations of the Company to the Executive hereunder or otherwise.  The base salary as determined herein from time to time shall constitute “Base Salary” for purposes of this Agreement.
4.            ANNUAL INCENTIVE BONUS AND OTHER BONUSES.  During the Employment Term, the Executive shall be eligible to participate in the Company’s annual bonus and other incentive compensation plans and programs for the Company’s senior executives at a level commensurate with the Executive’s position.  For each whole fiscal year (“Fiscal Year”) that begins on or after January 1, 2007 and ends not later than the expiration of the Employment Term, the Executive shall be eligible to earn an annual cash bonus (the “Bonus”) under the Company’s Annual Incentive Bonus Plan, as amended from time to time (the “Bonus Plan”),
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and, if appropriate, the Company’s 2004 Equity Incentive Plan, as amended from time to time (the “Equity Plan”), based upon the achievement by the Company and its subsidiaries of performance goals under the Bonus Plan and under the Equity Plan for each such Fiscal Year established by the Compensation Committee of the Board of Directors (the “Compensation Committee”).  The Compensation Committee shall establish objective criteria to be used to determine the extent to which such performance goals have been satisfied.  The range of the Bonus opportunity for each Fiscal Year will be as determined by the Compensation Committee based upon the extent to which such performance goals are achieved, provided that the annual target Bonus opportunity shall be at least 200% of the Executive’s Base Salary (for each such year, the “Target Bonus”), the threshold Bonus for a Fiscal Year shall be one-half the Target Bonus for such year and the maximum Bonus payable pursuant to this Section 4 for any Fiscal Year shall not exceed the amount that is 300% of the Executive’s Base Salary for such year.  The Bonus, if any, payable to the Executive in respect of any Fiscal Year will be paid at the same time that bonuses are paid to other executives of the Company, but in any event within seventy-five days after the conclusion of such Fiscal Year.  After the expiration of the Bonus Plan and the Equity Plan, Executive’s right to receive future Bonus opportunities under such plan is subject to approval by the stockholders of the Company of a similar successor plan under which such opportunity may be granted.  In addition to the Bonus, the Executive shall retain the special bonus opportunity (the “Licensing Bonus”) awarded by the Compensation Committee to the Executive on September 27, 2005, as modified by an action by written consent of the Compensation Committee dated as of November 1, 2005, with respect to the performance of the Company’s licensing segment.  The Compensation Committee may, in its sole discretion, award additional bonuses to Executive.
5.            EQUITY BASED INCENTIVE AWARDS.
(a)           EMPLOYMENT INDUCEMENT AWARD.  The Company shall grant the Executive under the Equity Plan as of January 1, 2007 a Restricted Stock Award (“Restricted Stock”) equal to 500,000 shares of the Company’s common stock subject to the following terms and conditions:
(i)            If in any whole Fiscal Year commencing on or after January 1, 2007 and during the Employment Term, the Company shall record earnings per share (“Earnings per Share”) growth of greater than the Applicable Annual Target as compared to the immediately preceding Fiscal Year, then 20% of the Restricted Stock shall become vested as of the first business day following the issuance of the Company’s financial statement for such year, provided the Executive is then employed by the Company.  If the Earnings per Share growth requirement is not met for any such year, all of the shares of the Restricted Stock eligible for vesting for that year shall vest on the first business day following the issuance of the Company’s financial statement for any subsequent Fiscal Year during the Original Employment Term if the cumulative compound average Earnings per Share growth after the 2006 Fiscal Year through such subsequent Fiscal Year is more than the Applicable Cumulative Target for such subsequent Fiscal Year.  The “Applicable Annual Target” for each of the first, second and third whole Fiscal Years that commences on or after January 1, 2007 is a growth in Earnings per Share of 15% or more as compared to the immediately preceding Fiscal Year.  The “Applicable Cumulative Target” for each of the first, second and third whole Fiscal Years that
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commences on or after January 1, 2007 is a 15% rate of cumulative compound average Earnings per Share growth.  The “Applicable Annual Target” and the “Applicable Cumulative Target” for each of the fourth and fifth whole Fiscal Years that commences on or after January 1, 2007 will be a rate of Earnings per Share growth and cumulative compound average Earnings per Share growth, respectively, determined by the Compensation Committee of the Board in its sole discretion not later than the end of the first quarter of such Fiscal Year.
(ii)           For purposes of this Agreement, Earnings per Share shall be equal to the basic earnings per share calculated in accordance with accounting principles generally accepted in the United States and as reported in the Company’s financial statements as filed with the Securities and Exchange Commission, except that certain adjustments may be made for certain non-recurring or unusual non-cash items recognized in accordance with accounting principles generally accepted in the United States including, but not limited to, any write-offs of unamortized deferred financing costs and any asset impairment write-downs, which the Committee determines in its sole discretion to exclude for purposes of this Agreement.
(iii)          The Executive shall have the right to vote the shares of the Restricted Stock, and shall have dividend rights as to such shares, before any forfeiture of the shares of the Restricted Stock and while such shares are restricted.  The number of shares credited to the Executive shall be subject to adjustment in accordance with the provisions of the Equity Plan (for example, in connection with the payment of a stock dividend by the Company).
(iv)          The shares of the Restricted Stock not yet vested or forfeited shall become 100% vested in the event that the Executive dies or becomes Disabled (within the meaning of Section 7(a)) or there is a Change in Control, in each case while employed by the Company or an affiliate during the Employment Term.  For this purpose, the term “Change in Control” is used as defined in the Equity Plan except that in no event shall a “Change in Control” be triggered pursuant to clause (A) of such term as so defined unless the Acquiring Person becomes the Beneficial Owner of twenty percent (20%) or more of the then outstanding shares of Common Stock or the Combined Voting Power of the Company (except pursuant to an offer for all outstanding shares of Common Stock at a price and upon such terms and conditions as a majority of the Continuing Directors determine to be in the best interests of the Company and its shareholders (other than an Acquiring Person on whose behalf the offer is being made)) in one or more bona fide transactions and such level of ownership of such Common Stock or Combined Voting Power, as applicable, exceeds the aggregate level of ownership of the Marcianos of such Common Stock or Combined Voting Power, respectively.  For purposes of the preceding sentence, “Marcianos” means Maurice Marciano, Paul Marciano, and any trust established in whole or in part for the benefit of one or more of them or their family members, or any other entity controlled by one or more of them, and any other capitalized term used in such sentence is used as defined in the Equity Plan if not otherwise defined in this Agreement.  If the Executive terminates his employment with the Company for “Good Reason” (as defined in Section 7(e) of this Agreement), or is terminated by the Company without “Cause” (as defined in Section 7(c) of this
4

Agreement) or for Disability, the shares of the Restricted Stock not yet vested or forfeited shall become 100% vested.
(v)           In all events other than those previously addressed in Section 5(a)(iv), if the Executive ceases to be an employee of the Company or an affiliate, the Executive shall be vested only as to that percentage of shares of the Restricted Stock which are vested at the time of the termination of his employment and the Executive shall forfeit the right to the shares of the Restricted Stock which are not yet vested on the termination date.  Further, any Restricted Stock which is unvested at the conclusion of the Original Employment Term shall be forfeited and terminate.  Unvested shares of the Restricted Stock that are forfeited shall be immediately transferred to the Company without any payment by the Company, and the Company shall have the full right to cancel any evidence of the Executive’s ownership of such forfeited shares.
(vi)          The Restricted Stock Award shall be granted pursuant to and, to the extent not contrary to the terms of this Agreement, shall be subject to all of the terms and conditions imposed upon such awards granted under the Equity Plan.
(b)           PERFORMANCE SHARE AWARDS.  The Company shall grant the Executive under the Equity Plan at the completion of each whole Fiscal Year commencing on and after January 1, 2007 and during the Employment Term shares of the Company’s common stock (“Performance Shares”) based upon the achievement by the Company and its subsidiaries of performance goals under the Equity Plan for each such Fiscal Year established by the Compensation Committee.  The Compensation Committee shall establish objective criteria to be used to determine the extent to which such performance goals have been satisfied.  Performance Shares will be granted for each whole Fiscal Year during the Employment Term at “target” and “stretch” levels of 55% (i.e., $550,000 for 2007) and 82.5% (i.e., $825,000 for 2007) of the Executive’s Base Salary for such Fiscal Year.  Performance Shares granted in any particular Fiscal Year will be subject to the standard vesting schedule established by the Compensation Committee for Performance Share grants in that year (the current vesting schedule is a 4-year vesting schedule).  After the expiration of the Equity Plan, Executive’s right to receive future grants of Performance Shares is subject to approval by the stockholders of the Company of a similar successor plan under which such awards may be granted.
(c)           STOCK OPTION AWARDS.  The Company shall grant the Executive under the Equity Plan at the completion of each whole Fiscal Year commencing on or after January 1, 2007 and during the Employment Term stock options to purchase the Company’s common stock at an exercise price of not less than the fair market value of such stock on the grant date (“Stock Options”) based upon the achievement by the Company and its subsidiaries of performance goals under the Equity Plan for each such Fiscal Year established by the Compensation Committee.  The Compensation Committee shall establish objective criteria to be used to determine the extent to which such performance goals have been satisfied.  Stock Options for each whole Fiscal Year during the Employment Term will be granted at a grant-date Black-Scholes value of 55% of the Executive’s Base Salary for such Fiscal Year (i.e., $550,000 for 2007).  Stock Options granted in any particular Fiscal Year will be subject to the standard vesting schedule established by the Compensation Committee for Stock Option grants in that year (the current vesting schedule is a 4-year vesting schedule).  After the expiration of the
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Equity Plan, Executive’s right to receive future grants of Stock Options is subject to approval by the stockholders of the Company of a similar successor plan under which such awards may be granted.
(d)           DISCRETIONARY GRANTS.  In addition to the Employment Inducement, Performance Share and Stock Option Awards under Section 5(a), (b) and (c) above, at the sole discretion of the Board or the Committee, the Executive shall be eligible to participate throughout the Employment Term in such long-term incentive plans and programs as may be in effect from time to time in accordance with the Company’s compensation practices and the terms and provisions of any such plans or programs.
6.            EMPLOYEE BENEFITS.
(a)           BENEFIT PLANS.  The Executive shall be entitled to participate in all employee benefit plans of the Company including, but not limited to, equity, pension, thrift, Section 401(k), profit sharing, medical coverage, education, or other retirement (including without limitation supplemental executive retirement plans) or welfare benefits that the Company has adopted or may adopt, maintain or contribute to for the benefit of its senior executives at a level commensurate with the Executive’s positions subject to satisfying the applicable eligibility requirements.  The Executive shall at all times during the Employment Term be entitled to participate in the Guess?, Inc. Supplemental Executive Retirement Plan, as in effect on January 1, 2006, and any deferred compensation plan which may be maintained by the Company from time to time.
(b)           VACATION.  The Executive shall be entitled to accrue annual paid vacation in accordance with the Company’s policy applicable to senior executives, but in no event less than twenty business days per calendar year (as prorated for partial years), which vacation may be taken at such times as the Executive elects with due regard to the needs of the Company.  Executive shall not be permitted to accrue more than a total of twenty five (25) vacation days at any time.  Once Executive reaches the maximum accrual, Executive shall not accrue any additional vacation days until a portion of Executive’s accrued vacation time is used.
(c)           AUTOMOBILE.  The Company shall continue to provide the Executive with an automobile during the Employment Term in a manner consistent with its past practice.
(d)           PERQUISITES.  The Company shall provide to the Executive, at the Company’s cost, all perquisites which other senior executives of the Company are generally entitled to receive in accordance with Company policy as set by the Board from time to time.
(e)           LIFETIME RETIREE MEDICAL BENEFIT.  The Company shall provide the Executive and his eligible family members with Post-Retirement Health Benefits at its expense commencing upon expiration of the Employment Term for any reason other than a termination for Cause, in which case the Company shall have no obligation to provide Post-Retirement Health Benefits.  The term “Post-Retirement Health Benefits” means the following:
(i)            health benefits (including medical, prescription, dental and vision coverage, if and to the extent applicable) for the remainder of the Executive’s life under the plans provided to the Company’s executive officers and their eligible family
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members, as in effect from time to time; provided that the Post-Retirement Health Benefits may be made secondary to any other benefits to which the Executive may be entitled under another employer-provided plan or a governmental plan such as Medicare; or
(ii)           if the Company is unable, at any point, to provide such coverage under any such plans, the Company will pay the Executive a lump-sum cash payment that will equal the present value of the cost of such coverage based on the actuarial equivalent assumptions set forth in the Guess?, Inc. Supplemental Executive Retirement Plan and a reasonable forecast of increases in the cost of such coverage for that portion of the period following the expiration of the Employment Term for which such coverage could not be provided (in either case, such benefits are referred to as the “Post-Retirement Health Benefits”).
(f)            LIFE INSURANCE BENEFIT.  The Company will purchase, and will pay the premiums for, life insurance coverage on the Executive’s life with the Executive (or his assignee) as the owner of the policy and with the right to designate the beneficiary of the death benefit.  The premiums paid on the policy shall be imputed as income to the Executive.  Such insurance coverage shall be structured to comply with the requirements of the Sarbanes-Oxley Act and similar legal requirements.  The Executive’s rights pursuant to this Section 6(f) shall be fully vested and non-forfeitable at all times.  The Company shall be obligated in all events to pay all scheduled premium payments unless the Executive dies prior to the end of the last scheduled premium payment.  The Executive’s rights to the policy and any premium payments by the Company shall not be subject to attachment, garnishment, alienation or other similar action by any person to the maximum extent permitted by law.  The Compensation Committee and the Executive will negotiate the other terms and conditions of such insurance coverage in good faith.
(g)           BUSINESS AND ENTERTAINMENT EXPENSES.  Upon presentation of appropriate documentation, the Executive shall be reimbursed in accordance with the Company’s expense reimbursement policy for all reasonable and necessary business and entertainment expenses incurred in connection with the performance of the Executive’s duties hereunder.
(h)           CHANGE IN CONTROL.  In the event there is a “Change in Control” (as such term is defined for purposes of Section 5(a)(iv)), the Company shall establish a “rabbi trust” for the benefit of the Executive and fund it with cash or cash equivalents sufficient to fully pay when due and payable all payments that potentially would be required to be made under Section 8(d) hereof if the Executive were to be terminated without cause.
7.            TERMINATION.  The Executive’s employment and the Employment Term shall terminate on the first of the following to occur:
(a)           DISABILITY.  Upon written notice by the Company to the Executive of termination due to Disability, while the Executive remains Disabled.  For purposes of this Agreement, “Disabled” and “Disability” shall (i) have the meaning defined under the Company’s then-current long-term disability insurance plan, policy, program or contract as entitles the Executive to payment of disability benefits thereunder, or (ii) if there shall be no such plan,
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policy, program or contract, mean permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).
(b)           DEATH.  Automatically on the date of death of the Executive.
(c)           CAUSE.  Immediately upon written notice by the Company to the Executive of a termination for Cause.  “Cause” shall mean (i) Executive’s conviction or plea of nolo contendere to a felony or any crime involving moral turpitude; (ii) a willful act of theft, embezzlement or misappropriation from the Company; or (iii) a determination by the Board that Executive has willfully and continuously failed to perform substantially the Executive’s duties (other than any such failure resulting from the Executive’s Disability or incapacity due to bodily injury or physical or mental illness), after (A) a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties and provides the Executive with the opportunity to correct such failure if, and only if, such failure is capable of cure; and (B) the Executive’s failure to correct such failure which is capable of cure within 30 days of receipt of the demand for performance.  For the avoidance of doubt, the parties expressly agree that only Cause pursuant to Section 7(c)(iii) shall be deemed capable of cure.  Notwithstanding the foregoing, “Cause” shall not include any act or omission that the Executive believes in good faith to have been in or not opposed to the interest of the Company (without intent of Executive to gain therefrom, directly or indirectly, a profit to which he was not legally entitled). The Company may only terminate the Executive’s employment for Cause if (A) a determination that Cause exists is made and approved by three fourths of the independent directors of the Company’s Board, (B) for a termination for Cause under Section 7(c)(iii), the Executive is given at least five (5) days’ written notice of the Board meeting called to make such determination, and (C) for a termination for Cause under Section 7(c)(iii), the Executive and his legal counsel are given the opportunity to address such meeting.  In the event that the Board has so determined in good faith that Cause exists, the Board shall have no obligation to terminate the Executive’s employment if the Board determines in its sole discretion that such a decision not to terminate the Executive’s employment is in the best interest of the Company.
(d)           WITHOUT CAUSE.  Upon written notice by the Company to the Executive of an involuntary termination without Cause and other than due to death or Disability prior to age sixty-five.
(e)           GOOD REASON.  Upon written notice by the Executive to the Company of termination for Good Reason unless the reasons for any proposed termination for Good Reason are remedied in all material respects by the Company within thirty (30) days following written notification by the Executive to the Company.  “Good Reason” means the occurrence of any one or more of the following events prior to age sixty-five unless Executive specifically agrees in writing that such event shall not be Good Reason:
(i)            Any material breach of this Agreement by the Company, including:
(A)          the failure of the Company to pay the compensation and benefits set forth in Sections 3 through 6 of this Agreement;
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(B)           any material adverse change in the Executive’s status, position or responsibilities as Chief Executive Officer of the Company;
(C)           any failure to nominate or elect Executive as Chief Executive Officer of the Company or as member of the Board;
(D)          causing or requiring the Executive to report to anyone other than the Board or
(E)           assignment of duties materially inconsistent with his position and duties described in this Agreement,
(ii)           the failure of the Company to assign this Agreement to a successor to all or substantially all of the business or assets of the Company or failure of such a successor to the Company to explicitly assume and agree to be bound by this Agreement,
(iii)          requiring the Executive to be principally based at any office or location outside of the Los Angeles metropolitan area;
(iv)          purported termination of the Executive’s employment for “Cause” in a bad faith violation of the substantive and procedural requirements of Section 7(c), or
(v)           a termination of employment by the Executive for any reason or no reason during the 30-day period commencing 6 months after a Change of Control.
(f)            RETIREMENT.  Upon thirty (30) days’ prior written notice by the Executive to the Company of the Executive’s termination of employment without Good Reason (which the Company may, in its sole discretion, make effective earlier than any notice date).
8.            CONSEQUENCES OF TERMINATION.  Any termination payments made and benefits provided under this Agreement to the Executive shall be in lieu of any termination or severance payments or benefits for which the Executive may be eligible under any of the plans, policies or programs of the Company or its affiliates.  Except to the extent otherwise provided in this Agreement, all benefits and awards under the Company’s compensation and benefit programs shall be subject to the terms and conditions of the plan or arrangement under which such benefits accrue, are granted or are awarded.  The following amounts and benefits shall be due to the Executive:
(a)           DISABILITY.  Upon such termination, the Company shall pay or provide the Executive (i) any unpaid Base Salary through the date of termination and any accrued vacation in accordance with Company policy; (ii) any unpaid Bonus earned with respect to any Fiscal Year ending on or preceding the date of termination; (iii) reimbursement for any unreimbursed business expenses incurred through the date of termination; and (iv) all other payments, benefits or perquisites to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit, equity or perquisite plan or program or grant or this Agreement (including any related gross-up) (collectively, “Accrued Amounts”).  The Executive will also be paid a pro-rata portion of the Executive’s Bonus and Licensing Bonus for the performance year in which the Executive’s termination occurs, payable at the time that
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annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(b)           DEATH.  In the event the Employment Term ends on account of the Executive’s death, the Executive’s estate (or to the extent a beneficiary has been designated in accordance with a program, the beneficiary under such program) shall be entitled to any Accrued Amounts.  The Executive’s estate (or beneficiary) will also be paid a pro-rata portion of the Executive’s Bonus and Licensing Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365).
(c)           TERMINATION FOR CAUSE.  If the Executive’s employment should be terminated by the Company for Cause or by the Executive without Good Reason, the Company shall pay to the Executive any Accrued Amounts.
(d)           TERMINATION WITHOUT CAUSE OR FOR GOOD REASON.  If the Executive’s employment by the Company is terminated by the Company other than for Cause (other than a termination due to Disability or death) or by the Executive for Good Reason, the Company shall pay or provide the Executive with
(i)            the Accrued Amounts;
(ii)           a pro-rata portion of the Executive’s Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives, determined by multiplying the amount the Executive would have received based upon actual performance had employment continued through the end of the performance year (but in no event less than the amount for target performance), by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365;
(iii)          $5 million if the last day of the Executive’s employment by the Company occurs in 2007 or $3.5 million if the last day of the Executive’s employment by the Company occurs on or after January 1, 2008 but before December 31, 2012 (for purposes of clarity, the Company shall have no obligation to the Executive pursuant to this clause (iii) if the last day of the Executive’s employment by the Company occurs on or after December 31, 2012);
(iv)          an amount equal to the product of (A) the sum of (1) the Executive’s Base Salary and (2) the then Target Bonus multiplied by (B) three, payable in a single lump-sum, with such payment being made on the earliest payroll date that
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does not result in adverse tax consequences to the Executive under Section 409A of the Code; and
(v)           two years of additional service credit and age for benefit accrual, early retirement reduction and vesting purposes under the Guess?, Inc. Supplemental Executive Retirement Plan.
In addition, the Company, at its election, shall have the option in its full and absolute discretion to enter into a two-year consulting agreement with the Executive providing for continuation of 50% of Base Pay annually in substantially the same form as set forth in Appendix A below.  Notwithstanding anything to the contrary contained herein, the Company shall have no obligation to provide any of the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts) unless and until Executive executes an effective general release of all claims in favor of the Company in a form acceptable to the Company (the “Release”).  For the avoidance of doubt, Executive’s execution of the Release is a condition precedent to any obligation of the Company to provide the monetary payments and/or benefits provided for in this Section 8(d) (other than Accrued Amounts).
(e)           NON-RENEWAL.  A notice of non-renewal of this Agreement by the Company that would result in expiration of the Employment Term prior to the Executive’s sixty-fifth birthday shall be treated as a termination of the Executive’s employment by the Company without “Cause” for the purposes of this Agreement.
(f)            RETIREMENT.  If the Executive retires under Section 7(f) of this Agreement, the Company shall pay to the Executive:
(i)            any Accrued Amounts;
(ii)           a pro-rata portion of the Executive’s Bonus for the performance year in which the Executive’s termination occurs, payable at the time that annual Bonuses are paid to other senior executives (determined by multiplying the amount the Executive would have received based upon target performance had employment continued through the end of the performance year by a fraction, the numerator of which is the number of days during the performance year of termination that the Executive is employed by the Company and the denominator of which is 365); and
(iii)          the Executive shall be considered to have “retired” for purposes of any plans, programs, agreements or arrangements with the Company or its affiliates.
In addition, the Company shall enter into a two-year consulting agreement with the Executive providing for continuation of 50% of Base Pay annually in substantially the same form as set forth in Appendix A below.
9.            SECTION 4999 EXCISE TAX.  If any payments, rights or benefits (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement of Executive with the Company or any person affiliated with the Company) (the “Payments”) received or to be received by Executive will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), then the Company
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shall pay to Executive an amount in addition to the Payments (the “Gross-Up Payment”) as calculated below.  The Gross Up Payment shall be in an amount such that, after deduction of any Excise Tax on the Payments and any federal, state and local income and employment tax and Excise Tax on the Gross Up Payment, but before deduction for any federal, state or local income and employment tax on the Payments, the net amount retained by the Executive shall be equal to the Payments.  The process for calculating the Excise Tax, determining the amount of any Gross-Up Payment and other procedures relating to this Section are set forth in Appendix B attached hereto.  For purposes of making the determinations and calculations required herein, the Accounting Firm (as defined in Appendix B) may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code, provided that the Accounting Firm shall make such determinations and calculations on the basis of “substantial authority” (within the meaning of Section 6662 of the Code) and shall provide opinions to that effect to both the Company and Executive.
10.          CONFIDENTIALITY.  The Executive agrees that the Executive shall not, directly or indirectly, use, make available, sell, disclose or otherwise communicate to any person, other than in the course of the Executive’s employment and for the benefit of the Company, either during the period of the Executive’s employment or at any time thereafter, any nonpublic, proprietary or confidential information, knowledge or data relating to the Company, any of its subsidiaries, affiliated companies or businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company.  The foregoing shall not apply to information that (i) was known to the public prior to its disclosure to the Executive; (ii) becomes known to the public subsequent to disclosure to the Executive through no wrongful act of the Executive or any representative of the Executive; or (iii) the Executive is required to disclose by applicable law, regulation or legal process (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company at its expense in seeking a protective order or other appropriate protection of such information).  Notwithstanding clauses (i) and (ii) of the preceding sentence, the Executive’s obligation to maintain such disclosed information in confidence shall not terminate where only portions of the information are in the public domain.
11.          ATTORNEY’S FEES.  To the extent permitted by law, all reasonable costs and expenses incurred by the Executive in evaluating and negotiating the terms and conditions of this Agreement shall be promptly paid on behalf of, or reimbursed, to the Executive by the Company.  If the Executive incurs legal or other fees and expense in a good faith non-frivolous effort to secure or preserve or establish entitlement to compensation and benefits under this Agreement, the Company shall, to the extent permitted by law and regardless of the outcome of such effort, reimburse Executive monthly for such fees and expenses.
12.          NO ASSIGNMENT.
(a)           This Agreement is personal to each of the parties hereto.  Except as provided in Section 12(b) below, no party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto.
(b)           The Company may assign this Agreement to any successor to all or substantially all of the business and/or assets of the Company provided the Company shall
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require such successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place and shall deliver a copy of such assignment to the Executive.
13.          NOTICE.  For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of delivery if delivered by hand, (b) on the date of transmission, if delivered by confirmed facsimile, (c) on the first business day following the date of deposit if delivered by guaranteed overnight delivery service, or (d) on the fourth business day following the date delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
At the address (or to the facsimile number) shown
on the records of the Company
If to the Company:
Guess?, Inc.
1444 South Alameda Street
Los Angeles, California 90021
Attention:  General Counsel
Facsimile No.:   (213) 765-0911
or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
14.          SECTION HEADINGS; INCONSISTENCY.  The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.  In the event of any inconsistency between this Agreement and any other agreement (including but not limited to any option, stock, long-term incentive or other equity award agreement), plan, program, policy or practice (collectively, “Other Provision”) of the Company the terms of this Agreement shall control over such Other Provision to the extent that the terms of this Agreement are more beneficial to the Executive.
15.          SEVERABILITY.  The provisions of this Agreement shall be deemed severable and the invalidity of unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
16.          COUNTERPARTS.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instruments.  One or more counterparts of this Agreement may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof.
17.          DISPUTE RESOLUTION.  In the event of any controversy, dispute or claim between the parties under, arising out of or related to this Agreement (including but not limited
13

to, claims relating to breach, termination of this Agreement, or the performance of a party under this Agreement) whether based on contract, tort, statute or other legal theory (collectively referred to hereinafter as “Disputes”), the parties shall follow the dispute resolution procedures set forth below. Any Dispute shall be settled exclusively by arbitration, conducted before a single arbitrator in Los Angeles, California, administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect.  The parties agree to (i) appoint an arbitrator who is knowledgeable in employment and human resource matters and, to the extent possible, the industry in which the Company operates, and instruct the arbitrator to follow substantive rules of law; (ii) require the testimony to be transcribed; and (iii) require the award to be accompanied by findings of act and a statement of reasons for the decision.  The arbitrator shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrator, upon request of a party.  The arbitrator shall have no power or authority to add to or detract from the written agreement of the parties.  If the parties cannot agree upon an arbitrator within ten (10) days after demand by either of them, either or both parties may request the American Arbitration Association name a panel of five (5) arbitrators.  The Company shall strike the names of two (2) off this list, the Executive shall also strike two (2) names, and the remaining name shall be the arbitrator.  The parties shall stipulate that arbitration shall be completed within ninety (90) days.  The decision of the arbitrator will be final and binding upon the parties hereto.  Judgment may be entered on the arbitrator’s award in any court having jurisdiction.  The Company shall bear the costs of the arbitrator and any related forum fee.
18.          INDEMNIFICATION.  The Company hereby agrees to indemnify the Executive and hold the Executive harmless to the fullest extent permitted by applicable law and under the by-laws of the Company against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorneys’ fees), losses, and damages resulting from the Executive’s performance of his duties and obligations with the Company.  This provision is in addition to any other rights of indemnification the Executive may have.
19.          LIABILITY INSURANCE.  The Company shall cover the Executive under directors and officers liability insurance both during and, while potential liability exists, after the term of this Agreement in the same amount and to the same extent as the Company covers its other officers and directors.
20.          MISCELLANEOUS.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer or director as may be designated by the Board.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  This Agreement together with all exhibits hereto sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles.  Notwithstanding
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the foregoing, the Company’s rights pursuant to any confidentiality, proprietary information, assignment of inventions or similar agreement shall survive and continue in effect.
21.           PAYMENT OF COMPENSATION.  Notwithstanding anything in this Agreement or elsewhere to the contrary:
(a)           If payment or provision of any amount or other benefit that is “deferred compensation” subject to Section 409A of the Code at the time otherwise specified in this Agreement or elsewhere would subject such amount or benefit to additional tax pursuant to Section 409A(a)(1)(B) of the Code, and if payment or provision thereof at a later date would avoid any such additional tax, then the payment or provision thereof shall be postponed to the earliest date on which such amount or benefit can be paid or provided without incurring any such additional tax.  In the event that deferred payment is required in order to comply with Section 409A, such payment shall be accumulated and paid in a single lump sum on such earliest date together with interest for the period of delay, compounded annually, equal to the prime rate (as published in The Wall Street Journal), and in effect as of the date the payment should otherwise have been provided.
(b)           If any payment or benefit permitted or required under this Agreement, or otherwise, is reasonably determined by either party to be subject for any reason to a material risk of additional tax pursuant to Section 409A(a)(1)(B) of the Code, including when final regulations and issued thereunder, then the parties shall promptly agree in good faith on appropriate provisions to avoid such risk without materially changing the economic value of this Agreement to either party.
22.          FULL SETTLEMENT.  Except as set forth in this Agreement, the Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, except to the extent any amounts are due the Company or its subsidiaries or affiliates pursuant to a judgment against the Executive.  In no event shall the Executive be obliged to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced by any compensation earned by the Executive as a result of employment by another employer, except as set forth in this Agreement.
23.          REPRESENTATIONS.  Except as otherwise disclosed to the Company in writing, the Executive represents and warrants to the Company that the Executive has the legal right to enter into this Agreement and to perform all of the obligations on the Executive’s part to be performed hereunder in accordance with its terms and that the Executive is not a party to any agreement or understanding, written or oral, which could prevent the Executive from entering into this Agreement or performing all of the Executive’s obligations hereunder.
24.          WITHHOLDING.  The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
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25.          NON-EXCLUSIVITY OF RIGHTS.  Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any restricted stock unit or other agreement with the Company or any of its affiliated companies.  Except as otherwise provided herein, amounts and benefits which are vested benefits or which the Executive is otherwise entitled to receive under any plan, program, agreement or arrangement of the Company at or subsequent to the date of termination shall be payable in accordance with such plan or program.
26.          SURVIVAL.  The respective obligations of, and benefits afforded to, the Company and Executive that by their express terms or clear intent survive termination of Executive’s employment with the Company, including, without limitation, the provisions of Sections 8, 9, 10, 11, 12, 17, 18, 19, 21, 22 and 24 of this Agreement, will survive termination of Executive’s employment with the Company, and will remain in full force and effect according to their terms.
27.          AGREEMENT OF THE PARTIES.  The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto.  Neither Executive nor the Company shall be entitled to any presumption in connection with any determination made hereunder in connection with any arbitration, judicial or administrative proceeding relating to or arising under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
 	GUESS?, INC.	
 	 	
 	By:	/s/ Carlos Alberini	
 	Name:	Carlos Alberini	
 	Its:	President and COO	

 	PAUL MARCIANO	

 	/s/ Paul Marciano	

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APPENDIX A
CONSULTING AGREEMENT
CONSULTING AGREEMENT dated this   th day of              20    by and between Guess?, Inc. (the “Company”) and Paul Marciano (“Marciano”).
WITNESSETH:
WHEREAS, Marciano serves as the Company’s Chief Executive Officer and as a member of the Company’s Board of Directors (the “Board”);
WHEREAS, Marciano desires to retire from his position as Chief Executive Officer (the effective date of such retirement is referred to as the “Retirement Date”) and to provide consulting services to the Company as the Board may reasonably consider appropriate; and
WHEREAS, the parties desire to set forth their respective rights and obligations regarding Marciano’s consulting arrangement.
NOW, THEREFORE, in consideration of the covenants set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:
1.             Consulting Period.  The Company agrees to retain Marciano as a consultant to provide the services described in Section 3 below from the Retirement Date until the second anniversary of the Retirement Date (the “Consulting Period”), as provided in this Consulting Agreement.
2.             Consulting Services.  Marciano shall provide such consulting services to the Company as reasonably requested by the Board from time to time.  These services may include but are not limited to actively participating in major marketing or sales initiatives, performing any transition and integration services related to the Company’s business and cooperating with the Company regarding any litigation initiated involving matters of which Marciano has particular knowledge.  Marciano agrees to be available up to seven days per month during the Consulting Period to perform the Consulting Services.  The Consulting Services will be performed at such times as are reasonably requested by the Company after reasonable consultation with Marciano.  Marciano shall provide these services in Los Angeles, California, provided that Marciano shall be required to travel for business and client meetings as reasonably requested by the Company.
3.             Fees.  As compensation for the Consulting Services, the Company shall pay Marciano fifty percent of Marciano’s Base Salary as of the Retirement Date per annum during the Consulting Period.  Fees shall be paid monthly in arrears by the 15th day of the following month.  Should Marciano die or become disabled during the Consulting Period, the Company shall make a lump sum cash payment to Marciano (or, in the event of his death, to his estate) of an amount equal to the remaining payments owed through the end of the Consulting Period.
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Marciano shall not be entitled to participate, and shall not participate in any employee benefit plan providing benefits to Company employees, whether presently in force or adopted subsequent to this Consulting Agreement, with respect to his Consulting Services.  Notwithstanding the foregoing, Marciano shall retain all compensation and benefits that continue past his Retirement Date pursuant to the terms of his Employment Agreement with the Company dated January 1, 2007 or otherwise.  All reasonable and necessary business expenses incurred by Marciano in the performance of the Consulting Services shall be promptly reimbursed by the Company in accordance with the Company’s standard expense reimbursement policies applicable to independent contractors.
4.             Status.  Marciano acknowledges and agrees that his status at all times during the Consulting Period shall be that of an independent contractor.  Marciano hereby waives any rights to be treated as an employee or deemed employee of the Company or any of its affiliates for any purpose following his termination of employment at the Retirement Date except as provided under his Employment Agreement.  The parties hereby acknowledge and agree that the compensation provided for in Section 4 shall represent fees for Consulting Services provided by Marciano as an independent contractor, and shall be paid without any deductions or withholdings for taxes.
5.             Retained Property.  During the Consulting Period, Marciano shall retain all property of the Company in his possession, including, but not limited to, credit cards, security key cards, telephone cards, car service cards, computer software or hardware, Company identification cards, Company records and copies of records, correspondence and copies of correspondence and other books or manuals issued by the Company.
6.             Assignability.  Marciano may not assign or transfer this Consulting Agreement or any of Marciano’s rights, duties or obligations hereunder.  The Company may assign this Consulting Agreement to any person or entity acquiring all or substantially all of the assets (by merger or otherwise) of the Company so long as such person, entity or affiliate assumes the Company’s obligations hereunder.
7.             Entire Agreement.  This Consulting Agreement constitutes the full and complete understanding and agreement of the parties hereto with respect to engaging Marciano as a consultant to the Company.  This Consulting Agreement may not be changed or amended orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.
8.             Divisibility.  If any one or more of the provisions of this Consulting Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions and other application thereof shall not in any way be affected or impaired.
9.             Applicable Law.  This Consulting Agreement shall be governed by, and the rights and obligations of the parties determined in accordance with, the laws of the State of California as in effect for contracts made and to be performed in the State of California.
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10.           Survival.  All of the Company’s obligations hereunder shall survive the termination of this Consulting Agreement.
11.           Counterparts.  This Consulting Agreement may be executed in counterparts, each of which shall be deemed an original, all of which shall together constitute one and the same Consulting Agreement.
IN WITNESS WHEREOF, the undersigned have duly executed this Consulting Agreement as of the day and year first above written.
 	 	
 	PAUL MARCIANO	

 	 	

 	COMPANY	

 	By:	 	
 	 	 	
 	Its:	 	

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APPENDIX B
TAX GROSS-UP PAYMENT RULES AND PROCEDURES
1.             Subject to Paragraph 3 below, all determinations required to be made under Section 9 of this Agreement, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by an accounting firm (the “Accounting Firm”) selected in accordance with Paragraph 2 below.  The Accounting Firm shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the event that results in the potential for an excise tax liability for the Executive, which could include but is not limited to a Change in Control and the subsequent vesting of any cash payments or awards, or the Executive’s termination of employment, or such earlier time as is required by the Company.  The initial Gross-Up Payment, if any, as determined pursuant to this Paragraph 1, shall be paid on the Executive’s behalf to the applicable taxing authorities within five (5) days of the receipt of the Accounting Firm’s determination.  If the Accounting Firm determines that no Excise Tax is payable to the Executive, it shall furnish the Executive with a written report indicating that he has substantial authority not to report any Excise Tax on his federal income tax return.  Any determination by the Accounting Firm shall be binding upon the Company and Executive.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder.  In the event that the Company exhausts its remedies pursuant to Paragraph 3 below and Executive thereafter is required to make a payment or additional payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment, increased by all applicable interest and penalties associated with the Underpayment, shall be promptly paid by the Company to or for the benefit of Executive.  For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes on earned income at the highest marginal rate of taxation in the state and locality of Executive’s residence on the Effective Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
2.             The Accounting Firm shall be a public accounting firm proposed by the Company and agreed upon by the Executive.  If Executive and the Company cannot agree on the firm to serve as the Accounting Firm within ten (10) days after the date on which the Company proposed to Executive a public accounting firm to serve as Auditor, then Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Accounting Firm within ten (10) days after being requested by the Company and Executive to make such selection.  The Company shall pay the Auditor’s fee.
3.             Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment.  Such notification shall be given as soon as practicable but no later than fifteen (15) business days after Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.  Executive shall not pay
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such claim prior to the expiration of the period ending on the date that any payment of taxes with respect to such claim is due or the thirty day period following the date on which Executive gives such notice to the Company, whichever period is shorter.  If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv)  permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including attorneys fees and any additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses.  Without limitation of the foregoing provisions of this Paragraph 3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect to such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax and income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other authority.
4.             If, after the receipt by Executive of an amount advanced by the Company pursuant to Paragraph 3 above, Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Paragraph 3), promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).
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Exhibit 10.18
 
RESTRICTED STOCK AGREEMENT
This RESTRICTED STOCK AGREEMENT (the “Agreement”), dated as of January 1, 2007 (the “ Date of Grant ”), is entered into by and between GUESS?, INC., a Delaware corporation (the “ Company ”), and   Paul Marciano  (the “ Grantee ”).
RECITALS
WHEREAS, the Company maintains the Guess?, Inc. 2004 Equity Incentive Plan (the “Plan”).
WHEREAS, the Compensation Committee of the Company’s Board of Directors (the “Committee”) has determined to grant a restricted stock award (the “ Award ”) to the Grantee under the Plan in order to increase Grantee’s participation in the success of the Company and as an inducement to enter into the Executive Employment Agreement dated as of January 1, 2007 by and between the Company and the Grantee (the “ Employment Agreement ”);
NOW, THEREFORE, the parties hereto agree as follows:
1.                                      Definitions; Incorporation of Plan Terms.  Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.  The Award and all rights of the Grantee under this Agreement are subject to, and the Grantee agrees to be bound by, all of the terms and conditions of the Plan, incorporated herein by this reference.  In the event of any conflict or inconsistency between the Plan and this Award Agreement, the Plan shall govern.
2.                                      Grant of Restricted Stock.  The Grantee shall be entitled to purchase 500,000 restricted shares of the Company’s common stock, par value $0.01 per share (the “ Common Stock ”), pursuant to the terms and conditions of this Agreement (the “ Restricted Stock ”).
3.                                      Purchase Price.  The Grantee shall pay to the Company, in cash, an aggregate purchase price of $5,000 (the “ Purchase Price ”), which amount is equal to the aggregate amount of the par value of the Restricted Stock.  Such payment of the Purchase Price shall be made to the Company within 15 days after the date hereof.
4.                                      Restricted Period.  Subject to Section 7 below, the Award shall vest and restrictions shall lapse as follows (the period from the date hereof through each applicable vesting date, the “ Restricted Period ”):
A.                                   If in any whole fiscal year of the Company (“Fiscal Year”) commencing on or after January 1, 2007 and during the Employment Term (as defined in the Employment Agreement), the Company shall record earnings per share (“ Earnings per Share ”) growth of greater than the Applicable Annual Target (as defined below) as compared to the immediately preceding Fiscal Year, then 20% of the Restricted Stock shall become vested as of the first business day following the issuance of the Company’s financial statement for such year, provided the Grantee is then employed by the Company.  If the Earnings per Share growth requirement is not met for any such year, all of the shares of the Restricted Stock

eligible for vesting for that year shall vest on the first business day following the issuance of the Company’s financial statement for any subsequent Fiscal Year during the Original Employment Term (as defined in Employment Agreement) if the cumulative compound average Earnings per Share growth after the 2006 Fiscal Year through such subsequent Fiscal Year is more than the Applicable Cumulative Target (as defined below) for such subsequent Fiscal Year.  The “ Applicable Annual Target ” for each of the first, second and third whole Fiscal Years that commences on or after January 1, 2007 is a growth in Earnings per Share of 15% or more as compared to the immediately preceding Fiscal Year.  The “ Applicable Cumulative Target ” for each of the first, second and third whole Fiscal Years that commences on or after January 1, 2007 is a 15% rate of cumulative compound average Earnings per Share growth.  The “Applicable Annual Target” and the “Applicable Cumulative Target” for each of the fourth and fifth whole Fiscal Years that commences on or after January 1, 2007 will be a rate of Earnings per Share growth and cumulative compound average Earnings per Share growth, respectively, determined by the Compensation Committee of the Board in its sole discretion not later than the end of the first quarter of such Fiscal Year.
B.                                     For purposes of this Agreement, Earnings per Share shall be equal to the basic earnings per share calculated in accordance with accounting principles generally accepted in the United States and as reported in the Company’s financial statements as filed with the Securities and Exchange Commission, except that certain adjustments may be made for certain non-recurring or unusual non-cash items recognized in accordance with accounting principles generally accepted in the United States including, but not limited to, any write-offs of unamortized deferred financing costs and any asset impairment write-downs, which the Committee determines in its sole discretion to exclude for purposes of this Agreement.
5.                                      Rights of a Stockholder.  From and after the Date of Grant and for so long as the Restricted Stock is held by or for the benefit of the Grantee, the Grantee shall have all the rights of a stockholder of the Company with respect to the Restricted Stock, including but not limited to the right to receive dividends, if applicable, and the right to vote such shares.
6.                                      Adjustments Upon Specified Events.  Upon the occurrence of certain events relating to the Company’s Common Stock contemplated by Section 16(b) of the Plan, the Committee will make adjustments, if appropriate, in the number and kind of securities subject to the Award.  If any adjustment is made under Section 16(b) of the Plan, the restrictions applicable to the shares of Restricted Stock shall continue in effect with respect to any consideration or other securities (the “ Restricted Property ” and, for the purposes of this Award Agreement, “Restricted Stock” shall include “Restricted Property,” unless the context otherwise requires) received in respect of such Restricted Stock.  Such Restricted Property shall vest at such times in such proportion as the shares of Restricted Stock to which the Restricted Property is attributable.  To the extent that the Restricted Property includes any cash (other than regular cash dividends provided for in Section 5 hereof), such cash shall be invested, pursuant to policies established by the
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Committee, in interest bearing, FDIC-insured (subject to applicable insurance limits) deposits of a depository institution selected by the Committee, the earnings on which shall be added to and become a part of the Restricted Property.
7.                                      Effect of Cessation of Employment.
A.                                   The shares of the Restricted Stock not yet vested or forfeited shall become 100% vested in the event that the Grantee dies or becomes Disabled (as defined in Section 7(a) of the Employment Agreement) or there is a Change in Control (as defined below), in each case while employed by the Company or an affiliate during the Employment Term.  For this purpose, the term “ Change in Control ” is used as defined in the Plan except that in no event shall a “Change in Control” be triggered pursuant to clause (A) of such term as so defined unless the Acquiring Person becomes the Beneficial Owner of twenty percent (20%) or more of the then outstanding shares of Common Stock or the Combined Voting Power of the Company (except pursuant to an offer for all outstanding shares of Common Stock at a price and upon such terms and conditions as a majority of the Continuing Directors determine to be in the best interests of the Company and its shareholders (other than an Acquiring Person on whose behalf the offer is being made)) in one or more bona fide transactions and such level of ownership of such Common Stock or Combined Voting Power, as applicable, exceeds the aggregate level of ownership of the Marcianos (as defined below) of such Common Stock or Combined Voting Power, respectively.  For purposes of the preceding sentence, “ Marcianos ” means Maurice Marciano, Paul Marciano, and any trust established in whole or in part for the benefit of one or more of them or their family members, or any other entity controlled by one or more of them, and any other capitalized term used in such sentence is used as defined in the Equity Plan if not otherwise defined in this Agreement.  If the Grantee terminates his employment with the Company for “Good Reason” (as defined in Section 7(e) of the Employment Agreement), or is terminated by the Company without “Cause” (as defined in Section 7(c) of the Employment Agreement) or for Disability, the shares of the Restricted Stock not yet vested or forfeited shall become 100% vested.
B.                                     In all events other than those previously addressed in Section 7(A) herein, if the Grantee ceases to be an employee of the Company or an affiliate, the Grantee shall be vested only as to that percentage of shares of the Restricted Stock which are vested at the time of the termination of his employment and the Grantee shall forfeit the right to the shares of the Restricted Stock which are not yet vested on the termination date.  Further, any Restricted Stock which is unvested at the conclusion of the Original Employment Term shall be forfeited and terminate.
C.                                     Upon the occurrence of any forfeiture of shares of Restricted Stock hereunder, such unvested, forfeited shares and related Restricted Property shall be automatically transferred to the Company, without any other action by the Grantee, or the Grantee’s beneficiary or personal representative, as the case may be, and the Company shall refund the Purchase Price to the Grantee (or the Grantee’s beneficiary or personal representative); no additional consideration shall be paid by the Company with respect to such transfer.  No interest shall be credited with respect to nor shall any other adjustments be made to the Purchase
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Price for fluctuations in the fair market value of the Common Stock either before or after the transfer date.  The Company may exercise its powers under Section 10(D) hereof and take any other action necessary or advisable to evidence such transfer.  The Grantee, or the Grantee’s beneficiary or personal representative, as the case may be, shall deliver any additional documents of transfer that the Company may request to confirm the transfer of such unvested, forfeited shares and related Restricted Property to the Company.
8.                                      Reserved.
9.                                      Restrictions on Transfer.  Prior to the lapse of the Restricted Period, neither the Restricted Stock, nor any interest therein, amount payable in respect thereof or Restricted Property shall be sold, transferred, pledged, hypothecated or otherwise disposed of by the Grantee; provided, however, that such transfer restrictions shall not apply to (i) transfers to the Company or (ii) transfers by will or descent and distribution.  Grantee agrees that the Restricted Stock will not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable federal or state securities laws.
10.                                Stock Certificates.
A.                                   Book Entry Form.  The Company shall, in its discretion, issue the shares of Restricted Stock subject to the Award either: (i) in certificate form as provided in Section 10(B) below; or (ii) in book entry form, registered in the name of the Grantee with notations regarding the applicable restrictions on transfer imposed under this Agreement.
B.                                     Certificates to be Held by Company; Legend.  Any certificates representing shares of Restricted Stock that may be delivered to the Grantee by the Company prior to the lapse of restrictions shall be immediately redelivered by the Grantee to the Company to be held by the Company until the restrictions on such shares shall have lapsed and the shares shall thereby have become vested or the shares represented thereby have been forfeited hereunder.  Such certificates shall bear the following legend:
“The ownership of this certificate and the shares of stock evidenced hereby and any interest therein are subject to substantial restrictions on transfer under an Agreement entered into between the registered owner and Guess?, Inc.  A copy of such Agreement is on file in the office of the Secretary of Guess?, Inc.”
C.                                     Delivery of Certificates Upon Lapse of Restricted Period.  Promptly after the lapse of the Restricted Period as to any shares of Restricted Stock pursuant to Section 4 and the satisfaction of any and all related tax withholding obligations pursuant to Section 11, the Company shall, as applicable, either remove the notations on any shares of Restricted Stock issued in book entry form which have vested or deliver to the Grantee a certificate or certificates evidencing the number of shares of Restricted Stock which have vested (or, in either case, such lesser number of shares as may be permitted pursuant to Section 11).  The Grantee (or the Beneficiary or Personal Representative of the Grantee in the event of the Grantee’s death or incapacity, as the case may be) shall deliver to the Company any representations or other documents or assurances as the Company may deem
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necessary or reasonably desirable to ensure compliance with all applicable legal and regulatory requirements.  The shares so delivered shall no longer be restricted shares hereunder.
D.                                    Stock Power; Power of Attorney.  Concurrent with the execution and delivery of this Agreement, the Grantee shall deliver to the Company an executed stock power in the form attached hereto as Exhibit A, in blank, with respect to the Restricted Stock.  The Grantee, by acceptance of the Award, shall be deemed to appoint, and does so appoint by execution of this Agreement, the Company and each of its authorized representatives as the Grantee’s attorney(s) in fact to effect any transfer of unvested, forfeited shares (or shares otherwise reacquired by the Company hereunder) to the Company as may be required pursuant to the Plan or this Agreement and to execute such documents as the Company or such representatives deem necessary or advisable in connection with any such transfer.
E.                                      Postponement of Issuance.  Notwithstanding any other provisions of this Agreement, the issuance or delivery of any shares of Common Stock (whether subject to restrictions or unrestricted) may be postponed for such period as may be required to comply with applicable requirements of any national securities exchange or any requirements under any law or regulation applicable to the issuance or delivery of such shares.  The Company shall not be obligated to issue or deliver any shares of Stock if the issuance or delivery thereof shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange.
11.                                Withholding of Tax.  The Company shall reasonably determine the amount of any federal, state, local or other income, employment, or other taxes which the Company or any of its affiliates may reasonably be obligated to withhold with respect to the grant, vesting, making of an election under Section 83(b) of the Internal Revenue Code of 1986, as amended (the “ Code ”), or other event with respect to the Restricted Stock.  The Company may, in its sole discretion, withhold and/or reacquire a sufficient number of shares of Restricted Stock in connection with the vesting of such shares at their then Fair Market Value (determined either as of the date of such withholding or as of the immediately preceding trading day, as determined by the Company in its discretion) to satisfy the amount of any such withholding obligations that arise with respect to the vesting of such shares.  The Company may take such action(s) without notice to the Grantee and shall remit to the Grantee the balance of any proceeds from withholding and/or reacquiring such shares in excess of the amount reasonably determined to be necessary to satisfy such withholding obligations.  The Grantee shall have no discretion as to the satisfaction of tax withholding obligations in such manner.  If, however, the Grantee makes an election under Section 83(b) of the Code with respect to the Restricted Stock, if any other withholding event occurs with respect to the Restricted Stock other than the vesting of such stock, or if the Company for any reason does not satisfy the withholding obligations with respect to the vesting of the Restricted Stock as provided above in this Section 11, the Company shall be entitled to require a cash payment by or on behalf of the Grantee and/or to deduct from other compensation payable to the Grantee the amount of any such withholding obligations.
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12.                                Compliance.  Grantee hereby agrees to cooperate with the Company, regardless of Grantee’s employment status with the Company, to the extent necessary for the Company to comply with applicable state and federal laws and regulations relating to the Restricted Stock.
13.                                Notices.  Any notice required or permitted under this Agreement shall be deemed given when personally delivered, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee either at the address on record with the Company or such other address as may be designated by Grantee in writing to the Company; or to the Company, Attention: Angelina Orona, Stock Plan Administrator, 1444 South Alameda Street, Los Angeles, California  90021, or such other address as the Company may designate in writing to the Grantee.
14.                                Failure to Enforce Not a Waiver.  The failure of the Company or the Grantee to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.
15.                                Governing Law.  This Agreement shall be governed by and construed according to the laws of the State of Delaware.
16.                                Amendments.  This Agreement may be amended or modified at any time by an instrument in writing signed by both parties.
17.                                Agreement Not a Contract of Employment.  Neither the grant of the Restricted Stock, this Agreement nor any other action taken in connection herewith shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee is an employee of the Company or any subsidiary of the Company.
18.                                Committee’s Powers.  No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee or, to the extent delegated, in its delegate pursuant to the terms of the Plan or resolutions adopted in furtherance of the Plan, including, without limitation, the right to make certain determinations and elections with respect to the Restricted Stock.
19.                                Section 83(b) Election.  The Grantee hereby acknowledged that, with respect to the grant of the Restricted Stock, an election may be filed by the Grantee with the Internal Revenue Service,  within 30 days , of the Date of Grant, electing pursuant to Section 83(b) of the Code, to be taxed currently on the fair market value of the Restricted Stock on the Date of Grant.
THE GRANTEE HEREBY ACKNOWLEDGES THAT IT IS THE GRANTEE’S SOLE RESPONSIBILITY AND NOT THE RESPONSIBILITY OF THE COMPANY TO TIMELY FILE AN ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF THE GRANTEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON THE GRANTEE’S BEHALF.
20.                                Termination of this Agreement.  Upon termination of this Agreement, all rights of the Grantee hereunder shall cease.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Grantee has hereunto set his or her hand as of the date and year first above written.
 	GUESS?, INC.,	
 	a Delaware corporation	

 	By:	/s/ Deborah Siegel	 	
 	 	
 	Print Name: Deborah Siegel	
 	 	
 	Its: Secretary	
 	 	
 	GRANTEE	
 	 	
 	/s/ Paul Marciano	 	
 	Signature	
 	 	
 	Paul Marciano	 	
 	Print Name	
 	 	
 	05457	 	
 	Employee ID	

Exhibit 21.1
 
Guess?, Inc.
List of Subsidiaries
(as of 12/31/06)
 
Investment In	 	Location	 	Owned By	 	Percentage of Ownership	 	
Guess? Apparel Retail, B.V.	 	Netherlands	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? Asia Limited	 	Hong Kong	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? Bermuda Holdings, LLC	 	United States	 	Guess?, Inc.	 	 	100	   %	
Guess? Bermuda, LP	 	Bermuda	 	Guess? Bermuda Holdings, LLC	 	 	99	   %(1)	
Guess? Canada Corporation	 	Canada	 	Guess?, Inc.	 	 	100	   %	
Guess.com, Inc.	 	United States	 	Guess?, Inc.	 	 	100	   %	
Guess? Europe, B.V.	 	Netherlands	 	Guess?, Inc.	 	 	100	   %	
Guess France SAS	 	France	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? Holdings Korea LimitedLiability Company	 	Korea	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? IP GP LLC	 	United States	 	Guess? Licensing, Inc.	 	 	100	   %	
Guess? IP Holder LP	 	United States	 	Guess? IP LP LLC	 	 	82	.7%(2)	
Guess? IP LP LLC	 	United States	 	Guess?, Inc.	 	 	100	   %	
Guess Italia, Srl	 	Italy	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? Licensing, Inc.	 	United States	 	Guess?, Inc.	 	 	100	   %	
Guess Operations Ireland Limited	 	Ireland	 	Guess? Europe, B.V.	 	 	100	   %(3)	
Guess? Retail, Inc.	 	United States	 	Guess?, Inc.	 	 	100	   %	
Guess Swiss Sagl	 	Switzerland	 	Guess? Europe, B.V.	 	 	99	   %(4)	
Guess Swiss Europe Sagl	 	Switzerland	 	Guess? Europe, B.V.	 	 	99	   %(5)	
Guess UK Limited	 	United Kingdom	 	Guess? Europe, B.V.	 	 	100	   %	
Guess? Value LLC	 	United States	 	Guess? Retail, Inc	 	 	100	   %	
Grupo Guess, S. de R.L. de C.V.	 	Mexico	 	Guess? Europe, B.V.	 	 	51	   %(6)	
Focus Europe, Srl	 	Italy	 	Guess? Europe, B.V.	 	 	75	   %(7)	
F.P. France Sarl	 	France	 	Focus Europe, Srl	 	 	100	   %	

(1)             The remaining 1   % is owned by Guess?, Inc.
(2)             The remaining 17.3   % is owned by Guess? IP GP LLC
(3)             Dormant
(4)             The remaining 1   % is owned by Guess Italia, Srl
(5)             The remaining 1   % is owned by Guess? Apparel Retail, B.V.
(6)             The remaining 49   % is owned by Adivina S.A. de C.V., a Mexican company
(7)             The remaining 25   % is owned by Focus Pull SpA, an Italian company

Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Guess?, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-135079, 333-129349, 333-121552, 333-81274, and 333-10069) on Form S-8 and the registration statement (No. 333-111895) on Form S-3, of Guess?, Inc. of our reports dated February 28, 2007, with respect to the consolidated balance sheets of Guess?, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and the related financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 annual report on Form 10-K of Guess?, Inc.
Our report refers to the adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective January 1, 2006 and the adoption of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment to FASB Statements No. 87, 88, 106 and 132(R),” as of December 31, 2006.
On December 31, 2006, Guess?, Inc. acquired 75% of the outstanding shares of Focus Europe S.r.l. (Focus). Consistent with published guidance of the Securities and Exchange Commission, management excluded the acquired company from its assessment of the effectiveness of Guess?, Inc’s internal control over financial reporting as of December 31, 2006. Total assets from the Focus acquisition represented 4.5% of the related consolidated total assets of Guess?, Inc. as of December 31, 2006. Our audit of internal control over financial reporting of Guess?, Inc. also excluded an evaluation of the internal control over financial reporting of Focus.
/s/ KPMG LLP
Los Angeles, California
February 28, 2007

Exhibit 31.1
I, Paul Marciano, certify that:
1.                I have reviewed this annual report on Form 10-K of Guess?, Inc.;
2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.                The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)                Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)               Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.                The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)                All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2007	By:	/s/ PAUL MARCIANO	
 	 	Paul Marciano	
 	 	Chief Executive Officer and
Vice Chairman of the Board	

Exhibit 31.2
I, Carlos Alberini, certify that:
1.                I have reviewed this annual report on Form 10-K of Guess?, Inc.;
2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.                The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)                Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)               Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.                The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)                All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2007	By:	/s/ CARLOS ALBERINI	
 	 	Carlos Alberini	
 	 	President and Chief Operating Officer	

Exhibit 31.3
I, Dennis R. Secor, certify that:
1.                I have reviewed this annual report on Form 10-K of Guess?, Inc.;
2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.                The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)                Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)               Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.                The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)                All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2007	By:	/s/ DENNIS R. SECOR	
 	 	Dennis R. Secor	
 	 	Senior Vice President and
Chief Financial Officer	

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Marciano, Chief Executive Officer and Vice Chairman of the Board of Guess?, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
·       the Annual Report on Form 10-K of the Company for the period ended December 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
·       the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2007	By:	/s/ PAUL MARCIANO	
 	 	Paul Marciano	
 	 	Chief Executive Officer and
Vice Chairman of the Board	
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Guess?, Inc. and will be retained by Guess?, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2
CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002
I, Carlos Alberini, President and Chief Operating Officer of Guess?, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
·       the Annual Report on Form 10-K of the Company for the period ended December 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
·       the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2007	By:	/s/ CARLOS ALBERINI	
 	 	Carlos Alberini	
 	 	President and Chief Operating Officer	
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Guess?, Inc. and will be retained by Guess?, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.3
CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis R. Secor, Senior Vice President and Chief Financial Officer of Guess?, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
·       the Annual Report on Form 10-K of the Company for the period ended December 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
·       the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2007	By:	/s/ DENNIS R. SECOR	
 	 	Dennis R. Secor	
 	 	Senior Vice President and
Chief Financial Officer	
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Guess?, Inc. and will be retained by Guess?, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.