Guess Earnings Preview: Traffic Decline & Currency Headwinds To Weigh On Results
Guess‘s (NYSE:GES) stock has fallen by more than 40% during the past year due to consistent weak performance, and we expect to learn that this continued with its Q4 fiscal 2015 results, which it will report on March 18th. Over the past few quarters, the company has not done well in its main markets and this trend likely continued in the fourth quarter as well. In Q3 fiscal 2015, Guess reported 39% decline in its profits, slashing its guidance for the fourth quarter and full year. For the recently concluded quarter, the retailer projected its EPS to be $0.53-$0.63, well below analysts’ estimates of $0.69. [1] Guess’s struggle for growth can be easily gauged from the fact that it had already cut its full year outlook after Q2 results as well.
For the fourth quarter, the retailer expects North American retail revenues to decline in high-single digits, which can be attributed to an industry-wide decline in foot traffic, its small online channel and the decreased number of stores versus the prior year period. In Europe however, the retailer projects only low-single digit decline in comparable sales, while they declined in mid-single digits in Q3 fiscal 2015. A relatively better economic environment in Italy and France, which are Guess’s biggest markets in Europe, is expected to help the retailer. However, the strengthening dollar will weigh heavily on the company’s results on a reported basis. In Asia, the retailer expects mid-to-high-single digits decline in revenues, mainly due to challenging economic environment in China and South Korea.
Our price estimate for Guess stands at $32, implying a premium of close to 90% to the market price. We will update our pricing model post earnings release.
See our complete analysis for Guess
Traffic Decline and Store Consolidation To Weigh On North American Revenues
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. Consequently they are visiting fewer stores, which is a concern for a number of retailers including Guess. During the holiday season, industry wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext. [2] In the subsequent month, the foot traffic decline remained intense at 7.7%, implying that store based retailers had a tough time during the quarter. Having an online channel that is significantly small relative to its store network, Guess has been at the receiving end of the ongoing online shift. During the third quarter of fiscal 2015, Guess’s North American comparable sales declined by 5% despite 38% surge in online revenues. While we expect the company to report strong growth in online revenues for the fourth quarter, we believe it was insufficient to offset the fall in foot traffic.
Moreover, consolidation of the under-performing store network also likely had a negative impact on Guess’s North American retail revenues. In its Q2 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 were likely closed during the recently concluded quarter, which could well have constrined the retailer’s revenue growth.
Negative Currency Headwinds Can Offset Slight Economic Recovery In Europe
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 fell back into recession and French economic growth stagnated. [3] As a result of weak demand across these nations, coupled with heavy discounting, Guess’s European revenues declined by 9% (local currency) in Q2. Economic trends in these countries did not change much in the third quarter, which pushed Guess’s European revenues down by 3% in local currency. [4]
However In Q4, Italy’s economic growth was flat, slightly better than 0.1% decline in the preceding quarter. Given this stasis, the retail environment was only marginally better, as private consumption ticked up 0.1%. [5] France managed to post 0.1% growth in its GDP, resulting in a total improvement of 0.4% over the last one year. [6] While this growth figure doesn’t indicate that retailers such as Guess would have performed much better in Q4, it somewhat reassures that they might not have seen drastic decline in demand.
However, the factor that can trouble Guess’s European operations the most is the strengthening dollar. US dollar has appreciated significantly relative to euro over the past one year, which means that Guess’s reported results from Europe will be weighed down by negative currency headwinds.
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Notes:- Guess Reports Disappointing Sales, Again Cuts Outlook, The Wall Street Journal, Dec 3 2014 [↩]
- Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]
- Euro zone growth stagnates, CNBC, Germany contracts, Aug 14 2014 [↩]
- Eurozone GDP Shows Meager Expansion, The Wall Street Journal, Nov 14 2014 [↩]
- Economy posts flat growth in Q4; GDP contracts in full year 2014, Focus Economics, Mar 9 2015 [↩]
- French GDP ekes out 0.1 pct growth in Q4, meeting forecasts, Reuters, Feb 13 2015 [↩]