Guess Rises On Profits Beat While Currency Headwinds Subdue Topline Growth
Guess (NYSE:GES) reported significant decline in its revenues and profits for the fourth quarter of fiscal 2015, but its bottomline growth wasn’t as bad as the market expected. The company’s net income declined a sizable 24.1% to $53.9 million or 63 cents a share, but it was still better than analysts estimates of 58 cents per share. Although 9% decline in revenues to $696.7 million fell short of the consensus estimates of $704.3 million, the company’s shares increased 10% in after-hours trading on earnings beat.
In North America, Guess’s retail revenues decreased 4% with 5% decline in comparable sales including e-commerce. Wholesale revenues in the region were down 10%, mainly on account of weakness in foot traffic. European revenues fell a sharp 16%, bogged down by negative currency headwinds. In Asia, revenues declined 9% driven by economic weakness in China and South Korea. For the first quarter of fiscal 2016, Guess projected 1%-2% increase in revenues and earnings per share in the $0.75-$0.95 range. [1]
Our price estimate for Guess stands at $32, implying a premium of close to 90% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Guess
Currency Fluctuations Troubled Guess Across The Board
Apart from the consistent decline in foot traffic, negative currency headwinds also troubled Guess’s North American results. On a constant currency basis, North American retail comparable sales decline was 3%, 2 percentage points below the reported figure. For the wholesale segment, the constant currency revenue decline was 7%, while on a reported basis it was 10%. The impact was most profound in Europe as the past quarter saw a dramatic weakening of euro against dollar. While Guess reported 16% decline in its revenues from European countries, segment revenues declined just 5% in constant currency. Since the dollar is expected to gain additional strength this year, it is most likely that the retailer’s revenue decline in Europe will remainsizable. Even in Asia, there was a 2 percentage point difference in Guess’ revenue decline on a reported basis and a constant currency basis. Overall, Guess reported 9% decline in its revenues but excluding the impact of negative currency headwinds, revenue decline was 4%. Guess is the latest addition to the list of retailers who have struggled in the recent past due to strengthening dollar, as they have their operations spread out globally.
E-Commerce Continued To Show Promise
Guess’s e-commerce channel has performed very well over the past several quarters and Q4 fiscal 2015 was no different. The retailer’s web sales in North America improved 37% in the fourth quarter and had a positive impact of 3 percentage points on overall comparable sales growth. However, it was insufficient to completely offset the impact of the drastic decline in foot traffic. Nevertheless, this strong trend in e-commerce growth should please the retailer and encourage it to deploy new and improved strategies for online and omni-channel retailing. Guess stated in it earnings call that it is banking on online growth for a fair portion of its fiscal 2016 global topline growth. During the past year, the retailer expanded its European e-commerce business and will continue to focus on this channel in fiscal 2016, to offset the impact of sluggish economic growth in key markets. Guess also mentioned that there is substantial room for web expansion in Canada, and for factory channel and Marciano brand. [2]
Guess Is Getting A Little Better Customer Response Now
The main reason behind Guess’s under-performance in North America has been weak customer response to merchandise offerings. However, the retailer said that it saw some improving trends in buyer response during the fourth quarter. In accessories, women’s handbags and footwear delivered positive comparable sales growth mainly on account of product newness. In apparel, outwear performed very well throughout the quarter. Also, while woven, knit tops and basic denims remained soft in the fourth quarter, they have shown encouraging signs so far in the first quarter of fiscal 2016. Interestingly, the Marciano collection saw astonishing customer response in the brand’s standalone store, in Guess stores as well as over the Internet. The collection delivered double digit comparable sales growth.
While a few examples of categories performing well don’t reflect an improvement in overall product portfolio, it somewhat indicates that Guess is finally heading in the right direction with its merchandise design and pricing. Consistency on these fronts can help the company create more excitement among its target demographic in the near-medium future.
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Notes:- Guess Reports Fourth Quarter Results, Guess, Mar 18 2015 [↩]
- Guess’s Q4 fiscal 2015 earnings transcript, Mar 18 2015 [↩]