Guess What? Guess? Inc. Expects Better Times Ahead

By Markets Fool.com


Image source: Guess?.

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The retail industry has been under pressure for a while, and premium jeans specialist Guess? (NYSE: GES) has suffered to an even greater extent because of its exposure to the high end of the retail space. Yet recently some retailers have managed to bounce back from the worst of their declines, and coming into Wednesday's fiscal second-quarter financial report, Guess? investors were cautiously hopeful that the company would participate in the rebound. It did indeed outpace expectations, but the best news was a greater amount of optimism in its predictions for the full 2017 fiscal year. Let's look more closely at the latest from Guess? and whether investors should start thinking more positively about the retail player going forward.

Guess? holds up well

Expectations for Guess? and its fiscal second-quarter results were fairly low, yet that didn't dampen the optimism among shareholders when the company outpaced those expectations on the bottom line. Revenue eased downward by 0.2% to $545 million, which was actually quite a bit weaker than the $550 million consensus forecast among investors. However, Guess? managed to grow its earnings, with net income of $32.3 million climbing by more than three-quarters. Most of that gain came from the one-time impact of a sale of Guess? minority interest in a privately held boutique apparel company. After accounting for that gain, adjusted earnings of $0.14 per share were down by a third from last year, but double what most of those following the stock had expected to see.

Taking a closer look at the financials, comparable-store sales continued to fall, but at a slower pace than in past quarters. Comps in the U.S. and Canada were down 3.2% when you exclude e-commerce sales, with foreign exchange impacts costing the company just under a percentage point. E-commerce had only a minimal impact on the company, boosting comps by seven-tenths of a percentage point to reduce the overall decline to 2.5%.

As we've seen in past quarters, most of the regions in which Guess? does business performed poorly, although there was one sign of strength that helped keep revenue from declining further. The key Americas retail segment saw sales drop 3% from the year-ago quarter, and currency was responsible for roughly half of that decline. In Europe, however, things were much better, with Guess? seeing a 7% gain in revenue. Declines in Asia amounted to 6%, and the wholesale business in the Americas and the licensing side of the business took the biggest hits of 8% and 13% respectively. As a result, Europe actually had an impressive positive operating margin of nearly 9%, although both the Americas retail and Asia segments continued to post negative margin figures. All of Guess? operating margin figures were down except for the licensing segment.

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CEO Victor Herrero put the results in perspective, repeating his statement characterizing the first half of fiscal 2017 as a "transition period." However, the CEO was still pleased with strong performance in Europe, even though the tourism business in the Americas and disappointing results in China took their toll on the company's overall results.

What's ahead for Guess?

Guess? has much higher hopes for the future. As Herrero pointed out, "The investments we have made so far are expected to start generating revenue growth for the company in the third quarter, accelerating into the fourth quarter."

The jeans maker's outlook for the rest of the fiscal year supported that assessment. For the third quarter, guidance wasn't quite as upbeat as investors had wanted to see, with just 5% to 8% growth in sales equating to earnings of $0.11 to $0.16 per share. However, the full-year forecast was more favorable. Guess? is calling for sales gains of 3% to 5%, in line with current forecasts among investors, and adjusted earnings of $0.62 to $0.75 per share would come in well above the consensus estimate of $0.60 per share. By the end of the year, Guess? expects that retail comps in the Americas will be down by low single-digit percentages, with continued strong comps in Europe helping to offset the decline.

Guess? shareholders reacted favorably to the news, sending the stock up 18% in pre-market trading Thursday morning following Wednesday afternoon's announcement. The company hasn't totally emerged from its malaise, but the news that Guess? gave is the most favorable that investors have received in a long time.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Guess?. 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.