Guess’s Results And Guidance Disappoint, But E-Commerce Shows Promise
Specialty apparel retailer, Guess (NYSE:GES) once again reported disappointing results, as weak demand in North America and economic uncertainty in Europe and Asia weighed heavily on its sales and profits. The company’s Q3 revenues dropped 4% to $589.8 million and its profits fell by 39% to $20.8 million. Driven by hefty promotional activities across the board, Guess’s gross margins shrunk by 90 basis points and its SG&A rate ticked up almost three percentage points on account of higher asset impairment charges related to underperforming retail stores. [1] Although the retailer’s EPS at $0.24 was marginally better than its projections of $0.15-$0.20, significant lowering of Q4 and full year earnings guidance was a much bigger news. Guess revised its Q4 EPS guidance to $0.53-$0.63, which is some way below the consensus estimate of $0.69. For the full year, the company slashed its guidance to $1.00-$1.15, down from its earlier view of $1.05-$1.20. It even lowered its revenue guidance for the full year by more than $30 million. [2]
Guess’s retail revenues in North America dropped 4%, as the company had to resort to heavy markdowns to compensate for weak demand and low store traffic. Aggressive discounting and higher impairment charges pulled the retailer’s operating margins down by 670 basis points to -4.3%. Overall, the segment reported a loss of 11 million during the third quarter. In Europe, Guess had projected its comparable store sales to remain flat, but they declined in mid-single digits, driven by persistent weakness in macro-economic conditions. Even wholesale shipment volumes remained low, which resulted in 3% decline in revenues on a constant currency basis. However, the fall in profits was much more intense as higher asset impairment charges troubled the company in Europe as well. Guess’s operating earnings in Europe crashed 43% to just $8 million. In Asia, weakness in the Chinese and South Korean economies brought the retailer’s revenues down by 5% in constant currency and operating earnings down by 64%. Overall, it turned out a dismal quarter for Guess’s bottomline growth.
Our price estimate for Guess stands at $32, implying a premium of close to 60% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
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While Guess reported weak results for its Q3 fiscal 2015, its Q4 guidance was disappointing as well. It expects its North American retail revenues to decline in high-single digits, even though the National Retail Federation expects retail sales during the holiday season to increase by close to 4.1%. [3] Most of the expected growth is likely to come from the online channel, where Guess’s presence remains small. Interestingly in Europe, the retailer’s comparable sales have improved in low-single digits so far in the fourth quarter, and it expects them to range from an increase in low-single digits to a decline in low-single digits for the full quarter. However, considering the significant mismatch in the retailer’s Q3 projections for Europe and actual results, Guess could fail to meet its expectations yet again. For Asia, the company said that it expects mid-to-high-single digits decline in revenues on account of a challenging economic environment. [1]
Amid its weak performance and frail guidance, there was a silver lining in Guess’s results. The company’s online revenues increased by a very strong 48% during the quarter, following similar gains in the previous two quarters as well. The retailer’s online growth even had a noticeable offsetting impact on its revenue decline. For instance in North America, e-commerce revenues increased 38% and had a positive impact of two percentage points on the segment’s overall comparable sales. [1] Interestingly, Guess’s online growth during the quarter was much better abroad as compared to North America, which suggests that the company’s web channel is gaining significant visibility even in struggling European and Asian economies. It is worth noting that Guess’s online growth has been better than its peers for several quarters now, which places it in an advantageous position in the context of omni-channel development. If the retailer is able to sustain its growth momentum over the Internet, it won’t be too long before its web channel starts making a material contribution.
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Notes:- Guess’s Q3 fiscal 2015 earnings transcript, Dec 3 2014 [↩] [↩] [↩]
- Guess Reports Disappointing Sales, Again Cuts Outlook, The Wall Street Journal, Dec 3 2014 [↩]
- Optimism Shines As National Retail Federation Forecasts Holiday Sales To Increase 4.1%, National Retail Federation, Oct 7 2014 [↩]