Guess Earnings Preview: Traffic Decline In the U.S. And Strong Dollar To Offset Slight Economic Recovery In Europe
Guess‘s (NYSE:GES) stock has fallen by more than 30% during the past year due to consistent weak performance, and we expect to learn that this continued with its Q1 fiscal 2016 results, which it will report on June 2nd. Over the past few quarters, the company has not done well in its main markets and this trend likely continued in the first quarter as well. In Q4 fiscal 2015, Guess reported 24% decline in its profits and guided to a 1%-2% increase in revenues for its Q1 fiscal 2016 with EPS at $0.75-$0.95. If the retailer manages to meet its first quarter target, it will be reporting positive revenue growth for the first time in awhile.
However, much of that can be attributed to the fact that Guess will be posting against a notably weak comparable period, one in which it had reported a net loss of $2.1 million with a revenue decline of 5.6% in constant currency. This time around, while the company may be able to beat its last year’s performance, its underlying results will remain weak, subdued by traffic decline in North America, weak economic conditions in Europe and Asia, as well as negative currency headwinds.
Our price estimate for Guess stands at $28.32, implying a premium of close to 50% to the market price.
See our complete analysis for Guess
Fall In Foot Traffic In North America
Store traffic across the industry has declined significantly over the past couple of years, owing the ongoing online shift. Due to growing Internet penetration, proliferation of smartphones and tablets, and the convenience and incentives associated with web shopping, U.S. buyers have been purchasing more online, and are subsequently visiting fewer stores. During the holiday season, industry wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext.
In a separate report, RetailNext had reported that store traffic across the U.S. retail market declined 7.7% in January. This decline in number of shoppers visiting stores continued in February as RetailNext reported that foot traffic fell 12.5% owing to the online shift as well as prolonged cold weather. ((Winter Weather Wrecks Havoc on Retail Stores, PR Newswire, Mar 5 2015)) Though better weather would have encouraged buyers to get out of their homes and traffic would have had some positive impact from the pent-up demand, year over year change in traffic would still have been negative.
Surprisingly in April, store traffic increased 12% compared to the year ago period, probably driven by pent-up demand and Easter weekend, but growth in apparel sales was slow. [1] According the U.S. Census Bureau, while overall sales of apparel and accessories increased 2.5% year over year in February and March, they increased just 1.1% in April, as consumers remained highly cautious with their spending. Also, the comparable period had accounted for higher sales during the Easter weekend. [2] Note that in 2015, Easter sales were accounted in the month of March. Overall, we believe that Guess might not have seen any promising improvement in its performance in Q1 fiscal 2015.
Negative Currency Headwinds
The dollar has appreciated significantly against other currencies over the past year, signalling the strengthening U.S. economy. Since July last year, it has gained 16% against the euro and 15% against the yen. [3] For U.S. retailers such as Guess, Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF), this has suppressed revenues coming in from European and Asian markets. In Q4 2014, there was a 2 percentage point difference in Guess’s Asian revenue decline on a reported basis and a constant currency basis. In Europe, this difference was a startling 11 percentage points. Exchange rate analysts at BMO Capital believe that dollar can appreciate 5%-15% against other currencies in 2015, which means Guess’s international revenues will feel a formidable downward pressure, even if it somehow manages to reduce the intensity of its promotions. [4]
Marginal Economic Recovery Won’t Help
Weakness in the European economy still continues to affect Guess. While economic growth in Italy and France (Guess’s main markets) in Q4 was apparently better than the preceding quarter, Guess still posted a decline in revenues on a reported basis. In Q4, Italy’s GDP growth was flat and France managed a rise of 0.1% in its GDP, but Guess’s overall revenues fell 5% in constant currency. In Q1 however, these markets registered some notable growth in GDP, indicating a rebound in domestic demand and consumption. Italy’s GDP was up 0.3%, ahead of the expected 0.2% growth and following a year of negative or flat growth. Euro zone recorded 0.4% GDP gains quarter-over-quarter and 1% gain year-over-year. French economy grew 0.6% sequentially, beating analysts’ expectations of 0.4% gains. [5] However, despite this marginal recovery, Guess’s growth in the region will remain subdued, thanks to the strengthening dollar.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research
Notes:- Study: April sales fall despite traffic boost, Chain Store Age, May 8 2015 [↩]
- Clothing and Clothing Accessories Stores, U.S. Census Bureau [↩]
- The winners and losers of a strong dollar, The Washington Post, Jan 23 2015 [↩]
- Dollar Forecast to Rise 15 Pct in 2015 Say BMO Capital, PoundSterling Live, Jan 22 2015 [↩]
- Euro Zone Q1 GDP outpaces U.S., CNBC, May 13 2015 [↩]