Guess Earnings Preview: Sluggish Economic Environment To Weigh On Results
As specialty apparel retailer Guess (NYSE:GES) comes out with its Q2 fiscal 2015 earnings on August 27, we expect its ongoing struggles to continue. Over the past few quarters, the company hasn’t done well in its main markets and this trend is likely to continue in the second quarter as well. In the U.S., a decline in foot traffic, weak consumer sentiment and fierce competition from fast-fashion brands will weigh on Guess’s results.
In Europe, sluggish economic growth is likely to translate into another weak quarter for the company. Guess’s revenues from the region have declined consistently over the past 11 quarters, barring marginal positive growth in Q4 fiscal 2014. In its Q1 fiscal 2015 earnings call, the company stated that its comparable sales in the second quarter were declining in low double digits and it expects mid-single-digit decline in this metric for the complete year.
After flourishing for a couple of years, Guess’s growth in Asia stalled last year due to a consumer spending pullback in China. The retailer’s Asian revenues declined by 4% in the first quarter and we expect a similar decline in this quarter as well.
Our price estimate for Guess stands at $34, implying a premium of about 30% to the market price.
See our complete analysis for Guess
Foot Traffic Decline in the U.S. Will Add To Problems
Due to the increased proliferation of smartphones and tablets, and the convenience of shopping online, U.S. buyers have been making more purchases on the Internet. Subsequently they are visiting fewer stores, which is a concern for a number of retailers including Guess. According to data compiled by ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year-over-year in each month in the past two years, except for April 2014. This is impacting sales at Guess, which earns a significant portion of its revenues from its store sales. [1] During the fourth quarter of fiscal 2014, Guess’s North American comparable sales declined by 4% despite 35% surge in online revenues, which indicates that the retailer’s web channel is very small at the moment.
Even if we consider the industry-wide fall in foot traffic as a proxy for traffic declines at Guess, we get a minimum of 5% store traffic decline in the second quarter. However, Guess has its own problems when it comes to attracting customers, and there is a possibility that its traffic decline in Q2 was worse than 5%. Although the company is trying hard to attract customers with its competitively priced products, a turnaround in Q2 is unlikely.
Sluggish Economy Likely To Suppress European Results
Guess’s revenues in Europe declined by 7% in fiscal 2013, and by 13%, 3% and 7% respectively, during the first three quarters of fiscal 2014 (in local currency). Although this trend continued in the fourth quarter with an 8% decline in revenues, retail comparable sales improved marginally. The company saw high-single-digit positive comps in Spain and low-single-digit positive comps in France. Even though Italy’s comparable sales growth remained negative in Q4, it turned out to be positive during the early part of Q1 fiscal 2015. In recent years, Guess has been unable to perform well in the region due to economic crises in its mature markets such as Italy and France. Early signs in the first quarter suggested that the trend was about to reverse. However, the company’s results showed otherwise.
Guess’s revenues in Europe fell by 8% in Q1 and its operating margins declined to -4.2% from -3.2% in the same quarter last year. Although the company stated that the economic situation in Southern Europe has improved, its impact on the results isn’t visible. Moreover, during the second quarter of 2014, Italy fell back into recession and French economic growth stagnated. [2] Given that these two countries are the biggest markets for Guess in Europe, it is unlikely that the retailer’s results in the region will be any different from its historic trends.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Notes:- Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 [↩]
- Euro zone growth stagnates, CNBC, Germany contracts, Aug 14 2014 [↩]