Guess? Sees Signs of a Retail Recovery

By Dan Caplinger Markets Fool.com

The retail industry has undergone substantial pressures for a long time, and jeans maker Guess? (NYSE: GES) has proven to be particularly susceptible to the difficult conditions in the sector. During 2016, the stock lost more than a third of its value, and the combination of lower demand for its jeans and rising competition from elsewhere in the industry have weighed on the company's ability to sustain its profitability.

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Coming into Wednesday's fiscal first-quarter financial report, Guess? investors were prepared to see a loss in a seasonally weak period for the company, but they wanted signs of better times ahead. Guess? was able to deliver on that front, narrowing its loss from year-ago levels and doing better than many had feared. Let's take a closer look at Guess? and what its results say about its future.

Image source: Guess?

Guess? makes progress

Guess? did fairly well with its fiscal first-quarter results. Revenue showed modest growth of just over 2% to $458.6 million, which was better than the roughly flat performance on the top line that most investors were expecting to see. GAAP net losses of $21.3 million were 15% less than the year-ago period, and on an adjusted basis, the per-share net loss of $0.24 was quite a bit better than the consensus forecast among those following the stock for a loss of $0.32 per share.

Looking more closely at Guess?'s numbers, the same geographical differences continue to plague the jeans retailer's results. In the home Americas retail division, revenue plunged nearly 15%, and retail comparable sales fell by the same margin. Wholesale revenue in the Americas climbed by 6%, but the wholesale unit brings in far less in sales than its retail counterpart. Licensing revenue once again fell, posting a 9% decline that matched what it did last quarter.

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Elsewhere, Guess? did much better. In Asia, revenue climbed by 17%, and comparable sales figures were up 4% from year-ago levels. Europe performed even more strongly, with a 23% rise in sales even after you take into account substantial headwinds from weaker foreign currencies compared to the U.S. dollar. Comps in Europe were up 5% even in dollar terms, and 11% when you measure sales in local currencies.

Operating margin figures also showed regional differences. In the Americas, lower sales led to weaker margin because of fixed costs. But in Europe and Asia, adjusted operating margin climbed, and Guess? attributed efforts to control expenses and higher initial mark-ups for the improvement.

CEO Victor Herrero was happy with how Guess? did. "We are pleased to report that our first-quarter results finished above the high-end of our expectations," Herrero said. The CEO also pointed to the strength of the international business as a sign of where the company can get the most bang for its buck going forward.

Can Guess? keep improving?

Guess? is looking for ways to build on its recovery efforts. Herrero noted that the weakness in the Americas will require efforts to shrink its footprint there and to focus on boosting profitability. More generally, Guess? sees the need to make shifts in order to conform with the demands of its customers. As Herrero put it:

Authenticity is "in," and being real is more important than being perfect. The millennial and Gen Z consumer is seeking purpose-driven brands whose values align with their own. As always, we are adapting to this changing environment.

Guess? also gave some encouraging guidance. In the fiscal second quarter, sales are expected to climb 2% to 4%, with adjusted earnings of $0.08 to $0.11 per share. But what looked especially good was the upgrade to full-year fiscal 2018 guidance, which included calls for sales to rise 3.5% to 5%, up from the previous 2% to 4% range. Adjusted earnings for the year should be between $0.34 and $0.44 per share, up $0.04 to $0.06 from its previous guidance.

Guess? shareholders celebrated on the news, and the stock soared 13% just after the market opened on Thursday morning following the Wednesday night announcement. If Guess? can sustain the momentum it's building, then the business could finally start to turn things around and get back in touch with its customer base in the future.

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