Guess? Revised To $36 As Near Term Weakness Clouds Outlook

GES: Guess? logo

Specialty retailer Guess? Inc.’s (NYSE:GES) shares plummeted by nearly 20% after the disclosure of its Q2 fiscal 13 results on August 22. [1] Guess’ significant exposure to Southern Europe, where the impact of sovereign debt crisis has been most severe, continues to torment the company, resulting in declines of 6% in quarterly sales and 430 basis points in gross margins compared to Q2 fiscal 12. Additionally, a disappointing performance in the North American retail channel with an 8.5% drop in its quarterly North American same-store sales also added to the investor concerns. Guess competes with other specialty retailers such as Aeropostale (NYSE:ARO), Gap Inc. (NYSE:GPS),  Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN).

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Significant Exposure to Southern Europe Hits Guess’ Q2 Results

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Guess significant exposure to Southern Europe severely impacted the company’s Q2 results. Low consumer confidence particularly in sizable markets such as Italy and France resulted in Guess’ Q2 fiscal 13 European revenues declining by 15% to $247 million, compared to the same period last year. Additionally, a higher promotional stance to offset declining European comps also took a toll on company’s Q2 margins.

Going forward, we expect the company’s European revenues and comps to improve as growth in newer Northern European markets such as Germany and Russia is expected to offset the declines in Southern Europe. However, we expect the decline in Guess’ European margins to continue for the next quarter as Guess ended its Q2 European inventories at a much higher level compared to Q2 fiscal 12. Guess plans to sell these carryover products through its European outlet stores, which should eventually reflect as a decline in its Q3 fiscal 13 margins.

Challenging North American Retail Business

In addition to Europe, North American retail was another challenging business channel for Guess where traffic was down specifically in its tourist locations. Talking in terms of categories, accessories remained the most challenging category for Guess, whereas, its women apparel line continued to be the best performing category in the full-price North American stores. A lack of balance in Q2 accessories merchandise resulted in company’s North American retail comps declining by 8.5% compared to the same period last year.

Going forward, we expect Guess’ North American retail comps to improve, as Guess is working hard to improve its holidays accessories merchandise. Additionally, continued strength in women’s apparel lines and handbags category should also reflect as an improvement in Guess’ comparable sales in the next quarter.

We have a revised price estimate of $36.15 for Guess stock, which is roughly 35% above the current market price. Along with a change in Guess’ current net cash/debt position, the adjustments in our price estimates primarily reflect a decline in Guess’ near-term revenue and margin outlook and adjustments to the 2012 capital expenditures.

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  1. Guess reports Q2 fiscal 13 results, Source: Guess’ IR []