Guess Cuts Outlook On Weak Traffic; To Close 50 Stores In North America

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Guess‘s (NYSE:GES) shares slumped by almost 8% after it reported a 45% decrease in its Q2 fiscal 2015 earnings and slashed its third quarter and full year guidance.  Accounting for the disappointment are weak product performance and soft traffic. The specialty retailer now expects its full year earnings per share to be in the $1.05-$1.20 range, which is significantly less than its previous guidance of $1.40-$1.60. For the third quarter, Guess projected its EPS to be around $0.15-$0.20, dramatically below analysts’ estimates of $0.37. [1]

During its earnings call, the company stated that its fall collection hasn’t performed as expected, which could well subdue its third quarter results as well. Moreover, consistently declining store traffic in the U.S. on account of online shift will only add to Guess’s problems. In Europe, a sluggish economic environment will continue to impact consumer afford purchasing power in Italy and France, which are the retailer’s biggest markets in the region. With a significant decrease in demand, Guess’s European wholesale orders for fall and winters have declined at low-double digit rates. This will likely translate into another weak quarter for the retailer’s European business, which accounts for about 34% of its value as per our estimates.

Due to its weak performance, the company has decided to consolidate its U.S. store network, which has become a prominent trend in the U.S. apparel industry lately. Following an analysis of its North American store fleet, Guess identified 50 stores to close during the next 18 months, that no longer generate sufficient store traffic. Closing them can have a slight positive impact on the retailer’s North American revenue per square feet and operating margins, but it will weigh on its revenue growth.

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Our price estimate for Guess stands at $32, implying a premium of more than 35% to the market price.

See our complete analysis for Guess

Revenue Decline Continued

The entire U.S. apparel industry struggled in the second quarter as buyers remained cautious on their spending and purchased more online. Guess’s North American revenues declined by 4% driven by 5% decline in comparable sales. It is interesting to note that the company’s comparable sales declined significantly despite 50% growth in online revenues. While this is a promising sign for the retailer’s omni-channel development, it can not help it recover in the near future. Guess’s fashion is still not resonating well with its customers, which is evident from weak response to its fall collection. It is unlikely that the company will gain any significant momentum towards the latter half of the year.

In Europe, Guess’s revenues stumbled by 9% in local currency, driven by heavy discounting and low demand in the wholesale channel. During the second quarter of 2014, Italy fell back into recession and French economic growth stagnated, which severely impacted consumer spending. The retailer’s revenues in Asia declined by 8% on a constant currency basis primary due to the weak economic environment in South Korea. Also contributing was continued softness in Chinese business on account of a consumer spending pullback.

Overall, the company’s revenues declined 6.3% on a constant currency basis to $608 million, which was well below its guidance of $615-$630 million. For the current quarter, Guess expects to generate $590-$600 million in revenues, while analysts were expecting this figure to be around $613 million. For the full year, the company has slashed its guidance to $2.44-$2.48 billion, down from its previous outlook of $2.53-$2.57 billion. [2]

The Company Plans to Close 50 Stores in North America

Guess has been struggling in North America for a while now, which means that some of its stores aren’t operating at their full capacity. However, all of its stores are contributing proportionally to SG&A expenses, which is weighing on the retailer’s operating margins. During its earnings call, the company unveiled plans to close 50 stores that do not generate adequate revenues. Since Guess is already struggling to attract customers due to low brand loyalty, it is planning to close under-performing stores to offset the impact of low store traffic.

The retailer has identified 50 stores that it will shut over the course of next 18 months through lease expiration and kick out. [3] While this will weigh on the company’s revenue growth, it can positively impact its revenue per square feet. Moreover, closing such stores will reduce Guess’s SG&A expenses at a faster rate than its revenue decline, which can push its margins upwards. Both these factors can uplift the retailer’s cash flow, which can ultimately have a positive impact on its stock price. However, this is just a small step and Guess needs to rectify its merchandise issues to facilitate a complete turnaround.

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Notes:
  1. Guess Cuts Outlook As Fall Collection Disappoints, The Wall Street Journal, Aug 27 2014 []
  2. Guess?, Inc. Reports First Quarter Results, Guess, May 29 2014 []
  3. Guess’s Q2 fiscal 2015 earnings transcript, Aug 27 2014 []