Guess’s Earnings Preview: Foot Traffic Decline In The U.S. And Economic Weakness In Europe Will Subdue Sales
As specialty apparel retailer Guess (NYSE:GES) comes out with its Q3 fiscal 2015 earnings on December 3rd, we expect its ongoing struggle to continue. Over the past few quarters, the company hasn’t done well in its main markets and this trend likely continued in the third quarter as well. In Q2 fiscal 2015, Guess had reported 45% decline in its earnings and it had slashed its guidance for the third quarter and full year. For the recently concluded quarter, the retailer had projected its EPS to be around $0.15-$0.20, dramatically below analysts’ estimates of $0.37. [1] The company had said that its fall collection did not gain enough traction, that might have had a mitigating impact on its Q3 sales. Moreover, the consistent decline in industry-wide foot traffic in the U.S. and Guess’s plans to close under-performing stores likely also weighed on its North American revenues. Overall, the company guided to mid-single digit declines in comparable sales and revenues.
In Europe, demand for Guess’s products has been sluggish on account of the uncertain economic environment. The retailer’s revenues from the region have declined consistently over the past 12 quarters, barring marginal positive growth in Q4 fiscal 2014. However, in its Q2 fiscal 2015 earnings call, the company had stated that its comparable sales in the third quarter are expected to range from flat to an increase in low-single digits. It will be interesting to see how Guess manages positive growth in Europe, even though consumer demand in France and Italy (Guess’s biggest European markets) was weak throughout the third quarter.
Our price estimate for Guess stands at $32, implying a premium of over 40% to the market price.
See our complete analysis for Guess
Traffic Decline and Store Consolidation will Pull North American Revenues Down
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% in almost every month over the past two years. [2] [3] In fact, foot traffic in September was about 17% below what it was in the same month last year. [4] This is impacting sales at Guess, which earns a significant portion of its revenues from its store sales. [5] During the second quarter of fiscal 2015, Guess’s North American comparable sales declined by 5% despite 48% surge in online revenues, which indicates that the retailer’s web channel is very small at the moment.
While Guess’s comparable sales in North America for Q3 will be down on account of a fall in foot traffic, consolidation of the underperforming store network will have a negative impact on revenues. In its last quarterly earnings call, the company had stated that it has identified 50 North American stores to close over the course of next 18 months through lease expiration and kick out. We believe that a certain number of these stores would have been closed during the recently concluded quarter, which will mitigate the retailer’s revenue growth.
Sluggish Economy Likely To Suppress European Results
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 had stated that the economic situation in Southern Europe had improved, its impact on the results wasn’t visible. During the second quarter of 2014, Italy had fallen back into recession and French economic growth had stagnated. [6] As a result of weak demand across these nations, coupled with heavy discounting, Guess’s European revenues had declined by 9% (local currency) in Q2. Economic trends in these countries haven’t changed much in the third quarter, which suggests that the retailer likely struggled in Q3 as well. [7] Although Guess had projected marginal growth in comparable sales for the third quarter during its Q2 earnings call, it seems unlikely that the retailer will match its expectations.
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Notes:- Guess Cuts Outlook As Fall Collection Disappoints, The Wall Street Journal, Aug 27 2014 [↩]
- Shoppers Are Fleeing Physical Stores, The Wall Street Journal, Aug 5 2014 [↩]
- Back-To-School Slump Raises Concerns About Holiday Season, Bloomberg, Sept 23 2014 [↩]
- Brick-and-Mortar traffic falls 17% in September, Retail Dive, Oct 10 2014 [↩]
- Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 [↩]
- Euro zone growth stagnates, CNBC, Germany contracts, Aug 14 2014 [↩]
- Eurozone GDP Shows Meager Expansion, The Wall Street Journal, Nov 14 2014 [↩]