Guess’ Q3 Revenues Decline But It Raises The Earnings Outlook Marginally

by Trefis Team
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Guess (NYSE:GES) reported weak results for its Q3 fiscal 2013 as its revenues declined by 4.1% (constant currency) and gross margins shrunk by 220 basis points. The company’s earnings declined by 7.2% to $0.40 per share, but it was still better than its earlier expectations of $0.34-$0.38. Following these results, Guess lowered its annual sales growth outlook marginally from $2.56 billion-$2.59 billion to $2.55 billion-$2.57 billion. However, it slightly raised the lower end of its earnings per share outlook due to better expense control.

In North America, the company struggled due to an edgy retail environment and heavy promotional activities. In Europe, prevailing economic weakness continued to impact its result. Additionally, the pull back in Chinese consumer spending weighed on Guess’ Asian business in this quarter as well. Since the retailer’s sales have largely depended on the macro-economic environment in these markets, we do not expect it to see a turnaround in the near future.

Our price estimate for Guess stands at $35, which is slightly ahead of the market price. However, we’re in the process of updating our model in light of the recent earnings release.

See our complete analysis for Guess

A Brief Analysis Of Q3 Results

Guess’ North American retail sales fell by 3.1% and its comparable store sales were down by 5%. In the wholesale channel, the retailer saw a revenue decline of 7%. This marks another dismal quarter for Guess’ domestic business, where the company had been struggling to drive store traffic resulting from a lack of popular fashion trends. Even though the retailer’s offerings found some acceptance among its customers during the quarter, overall store traffic remained lean. This can be attributed to the prevailing weakness in the U.S. retail industry arising from the impact of a sluggish economic growth. Looking at Q4, we do not expect the company to do better as this year’s holiday sales are expected to see their weakest gains since 2009. Guess admitted that its comparable store sales in North America will decline in low single digits in the fourth quarter. [1]

In Europe, Guess’ revenues declined by a staggering 7% (local currency) mainly due to a challenging economic environment. The company has been unable to perform well in the region as its mature markets of Italy and France are still reeling under the impact of the economic crises. Although retail sales trends improved slightly in Spain, Germany and Portugal, these markets were unable to help the results due to their small size. The company expects low to mid single digits comparable store sales decline for the fourth quarter. This suggests that it will be a while before Guess can generate positive results in Europe. [1]

After flourishing for the past couple of years, Guess’ Asian business registered negative growth in Q2 fiscal 2014, primarily due to disappointing results from China. The company stated that the pull back in the Chinese consumer spending was the main reason behind this performance. The scenario somewhat worsened in Q3 as Guess’ Asian revenues fell by 6%. Weak consumer spending in China and lower shipments to licensee partners were responsible for the decline. Since the economic forecast for the entire year remains conservative, we do not expect a big change in the Chinese consumer spending patterns. [2] Hence, Guess is likely to have another tough quarter in Asia. The company expects mid to high single digits revenue decline for Q4 despite its efforts to stabilize the licensee business. [1]

Expense Control Helped The EPS Outlook

Even though Guess lowered its revenue outlook for the entire year in anticipation of a weak holiday season, it added 4 cents per share to the lower end of its earlier EPS forecast. [3] The company now expects per share earnings for the entire year to be around $1.82 to $1.92.

The raised outlook can find support in the fact that Guess was able to beat its earlier EPS forecast for Q3 with better operating expense leverage. The retailer’s SG&A rate was down by 110 basis points as compared to Q3 fiscal 2013 and overall SG&A expenses decreased by 6%. The decline in SG&A rate was primarily driven by lower selling and merchandise spend in Europe, lower store expenses in North America along with lower advertising and marketing spend. For the fourth quarter, the company is projecting flat to slightly down SG&A rate, which should help it achieve its EPS target. [1] We believe that Guess should continue focusing on reducing its SG&A expenses as it can help its operating margins amid a highly promotional environment.

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Notes:
  1. Guess’ Q3 fiscal 2014 earnings transcript, Dec 4 2013 [] [] [] []
  2. China Falters In Efforts To Boost Consumption, The Wall Street Journal, July 16 2013 []
  3. Guess Raises Earnings Outlook, Cuts Sales Forecast, Market Watch, Dec 4 2o13 []
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