Will Faster Growth Ever Return at Guess?

Turnarounds are always difficult, because no investor wants to wait forever for a recovery. Guess? (NYSE: GES) has dealt with the normal ups and downs of its market as well as some unusual situations affecting its reputation, and that's made some people think twice about counting on the jeans maker's attempts to mount a full turnaround.

Coming into Wednesday's fiscal first-quarter financial report, Guess? investors didn't have much hope that the company would be able to come close to turning a profit, but they still wanted to see good gains in sales. The jeans retailer largely delivered on those expectations, but some shareholders look like they're getting tired of having to endure quarter after quarter of red ink.

How the jeans maker did

Guess?'s fiscal first-quarter results gave optimists further hope about the company's future. Revenue was higher by 15% from year-earlier figures to $521.3 million, which was far better than the 11% growth that most investors were looking for. Guess? still suffered an adjusted net loss of $17.8 million, but that was 8% less than the loss it had in the first quarter of fiscal 2018 a year ago, and the per-share adjusted loss of $0.23 matched the amount of red ink that those following the stock were expecting.

One thing to keep in mind was that Guess? benefited greatly from currency impacts during the quarter. On a constant currency basis, the growth rate that the jeans maker posted was seven percentage points less than its dollar-denominated performance.

The weakest area for Guess? was its Americas retail unit, where revenue was actually down 1.4% from year-ago levels. Comparable sales including e-commerce were up just 2%. Yet elsewhere, Guess? did better. Wholesale revenue in the Americas jumped 13%, and top-line gains in Europe of 24% and Asia of 33% included double-digit comps -- driven largely by the weakness of the U.S. dollar in comparison to the euro and various Asian currencies. Guess? brought in almost 24% more revenue from licensing arrangements during the quarter as well.

Margin figures were mixed. Retail in the Americas segment saw a dramatic narrowing of negative operating margin figures, with fewer markdowns and higher initial pricing practices. Operating margin also jumped in Asia, but substantial reductions in Europe and the wholesale business in the Americas offset gains elsewhere. In general, though, profit levels improved sequentially nearly everywhere, with only the wholesale business in the Americas getting left out.

CEO Victor Herrero highlighted the efforts Guess? has made in the Americas. "I am especially proud of the work that has been accomplished in [Americas] retail," Herrero said, "where we ended the quarter with positive comps while being significantly less promotional." The CEO said that those efforts were instrumental in improving operating margin by more than nine percentage points.

What's next for Guess?

Guess? has a lot of hope for the future. Herrero is convinced of the "global strength and potential of the Guess brand," and he said that "more than ever, we remain focused on executing our strategic initiatives that have been the pillars of our revenue and profit growth."

Guidance upgrades also came as good news for the company. For fiscal 2019, Guess? now expects sales growth of 8.5% to 9.5%, higher by 1.5 percentage points from what it expected three months ago. Adjusted earnings of $0.88 to $0.99 per share were higher by about $0.01 to $0.02 per share. Fiscal second-quarter projections for top-line growth of 14% to 15.5% and earnings of $0.27 to $0.30 per share are ambitious, but the consensus forecast for net income was somewhat more optimistic than what the guidance that Guess? issued seemed to predict.

Guess? shareholders didn't have a huge reaction either way to the report, and the stock eased lower by 0.5% in after-hours trading following the announcement. It'll take continued upward momentum for Guess? to convince somewhat skeptical investors that the jeans maker's recovery is for real and can continue to produce faster growth.

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