Guess? Inc. Reassures Investors, but the Next Year Could Still Be Ugly

By Markets Fool.com

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Source: Guess?

The apparel industry is full of cutthroat competition, and jeansmaker Guess? has had a particularly tough year in which it has seen revenues shrink and earnings plunge from previous levels. Coming into Wednesday afternoon's fiscal fourth-quarter financial report, though, investors had fairly low expectations for Guess?, and a rock-bottom valuation left plenty of room for the stock to climb if the company produced anything better than a worst-case scenario.

Guess? delivered at least that much, with earnings that exceeded consensus projections, but its guidance for the coming fiscal year leaves plenty of questions unanswered about whether the company can get itself back on a sustainable growth trajectory. Let's look at what Guess? had to say, and whether investors should be celebrating or looking forward with trepidation at the company's future.

Guess? earnings: not as bad as some feared
The quarterly results for Guess? weren't all that healthy by any standards, even if earnings did manage to surpass the even gloomier views that most of those following the stock had. Overall revenue dropped 9%, to $696.7 million, which was even worse than the $704.6 million that investors had expected the company to bring in. But despite a 24% drop in net income, earnings came in at $0.63 per share, which was much higher than the $0.57 projection among investors.

The weakness in Guess?'s results was felt throughout the company. In North America, retail revenue dropped 4%, with comparable-store sales falling 5%. European revenue plunged 16%, and in Asia, sales were 9% lower in U.S. dollar terms. Weak foreign currencies definitely played a big role in the poor results, especially in Europe. But even on a constant-currency basis, segment revenues dropped 3%, to 7%.

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Source: Guess?

CEO Paul Marciano tried to put a positive spin on the results, noting that "comps and traffic improved in the back-end of the quarter" in North America. Marciano also highlighted a rebound in the company's e-commerce business, which enjoyed 37% higher revenue from the year-ago quarter.

What's next for Guess?
Still, Guess? faces plenty of uncertainty ahead. In its guidance for the first quarter, the company expects revenue declines of 7% to 8%, with adverse currency effects entirely wiping out a 1% to 2% growth rate in constant currency terms. The company is likely to lose $0.03 to $0.06 per share for the quarter as a result.

For the full year, the retailer will see even bigger headwinds, with roughly breakeven revenue in constant currency likely to get hit by eight percentage points of currency headwinds. Earnings of $0.75 to $0.95 per share are also below the $1.04 per share consensus for fiscal 2016, representing even further declines, even from this year's disappointing contraction in the bottom line.

What Guess? hopes is that its efforts to turn around its operations will lead to better results in the coming fiscal year. In Marciano's words, "we will remain focused on what we can control, like our North America real estate realignment, providing a unique customer experience within our stores, and tightly managing our costs and inventory levels."

Investors celebrated the news, sending the stock up more than 10% in the first 30 minutes of after-hours trading following the announcement. Yet apart from beating lowered expectations, it's hard to see how Guess? inspired any true bullish sentiment in its report.

For several quarters now, the company has failed to show much strength, and while the strong dollar has clearly made a bad situation much worse, the retailer's failure to achieve positive results even in constant-currency terms makes it clear that the situation involves more than just foreign exchange issues. Guess? will need to take further steps to show its ongoing progress in order to convince beaten-down shareholders that a true turnaround is in the works. Given the company's guidance, investors will have to be patient before they see the results they want.

The article Guess? Inc. Reassures Investors, but the Next Year Could Still Be Ugly originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.