What Could Eat Into Guess Inc’s Profitability In Q1 2020?

by Trefis Team
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Guess Inc (NYSE: GES) is expected to release its Q1 2020 results on June 6, 2019, followed by a conference call with analysts. The company is expected to report revenues of $536.6 million in Q1 2020, marking a growth of 2.9% over the previous year period. Higher revenue is expected to be led by healthy growth in Europe and Asia, benefiting from new store opening, strong e-commerce sales, continuous investment in brand building through social media platforms, and rising customer base due to strong growth in digital sales in China. However, on a sequential basis, revenue is expected to drop significantly, mainly due to the seasonality factor, as revenues are the highest in the fourth quarter of the year due to the holiday season. GES is expected to post an adjusted loss of $0.26 per share in Q1 2020, slightly higher than the loss of $0.23/share in the year-ago period. The earnings drop is likely to be driven by higher distribution and logistics cost in Europe and an increase in advertising expense.

We have summarized the key expectations in our interactive dashboard – How is Guess Inc expected to fare in Q1 2020 and what is the full year outlook? In addition, here is more Trefis Consumer Discretionary Services data.

A Quick Look At Guess Inc’s Revenue Sources

GES reported total revenue of $2.61 billion in FY 2019. The key revenue sources are:

  • Americas Retail: $0.82 billion revenue in FY 2019 (32% of total revenue). The segment includes retail stores and concessions in Americas. It also includes the e-commerce business which has directly operated retail and other marketplace websites in the U.S., Canada, Mexico, Brazil, Chile, and Peru.
  • Americas Wholesale: $0.17 billion revenue in FY 2019 (7% of total revenue). Under the segment, GES sells products through wholesale channels throughout the Americas and to third-party distributors based in Central and South America as well as licensed retail locations operated by wholesale partners.
  • Europe: $1.14 billion revenue in FY 2019 (44% of total revenue). Includes European retail stores, e-commerce sales, and the wholesale business which sells Guess apparel and accessories in Europe.
  • Asia: $0.39 billion revenue in FY 2019 (15% of total revenue). The division includes retail, wholesale, and e-commerce sales of Guess apparel and accessories in Asia.
  • Licensing: $0.08 billion revenue in FY 2019 (3% of total revenue). Under this segment, the company offers trademark license agreements to operators that manufacture and distribute apparel and accessories.

A] Revenue Trend

Americas Retail

  • In spite of quarterly volatility, Americas retail has been the biggest drag on GES’ top line.
  • Segment revenues saw a steady decline on a y-o-y basis throughout all the quarters of FY2019, mainly driven by net closure of about 41 stores during the fiscal.
  • Reduced customer traffic due to significant upswing in online retail is expected to continue weighing on revenues from the segment in Q1 2020.

Americas Wholesale

  • The wholesale business in the Americas witnessed y-o-y growth in revenues through FY 2019, driven by higher shipments, mainly in the US and Mexican wholesale business.
  • Due to lack of footfalls in the brick-and-mortar stores, GES has been focusing on its wholesale operations in the Americas.
  • This is expected to benefit segment top line growth in Q1 2020 as well.

Europe

  • The European segment saw healthy growth through FY 2019, driven by an increase in store count, higher shipments in the wholesale business, and comparable sales growth.
  • The company’s focus on linking brick-and-mortar stores, e-commerce, and mobile sales to improve online operations, is expected to contribute revenue growth in Q1 2020.

Asia

  • This has been the best performing segment for the company over recent quarters.
  • Strong revenue growth in the region has been driven by retail expansion, healthy comparable sales growth, strong online sales, and favorable currency.
  • Digital sales growth in China has been a major driver as the company’s alliance with Tmall is yielding positive results.
  • Revenue is expected to increase on y-o-y basis in Q1 2020 as GES continues to reap the benefits of rising customer base and increasing online presence.

Licensing

  • Licensing revenue growth over recent quarters was driven by higher royalty payment.
  • We expect segment revenue to see marginal growth in Q1 2020.

B] Expense and Profitability Trend

The company’s total expenses have largely trended upward over the recent quarters, driven by higher distribution costs, increase in advertising and marketing cost, asset impairments, and volatility in tax outgo.

  • Cost of Goods Sold: Though cost of sales was high in absolute terms and largely increased, higher revenues led to a slight increase in gross margins over recent quarters. Increase in cost was mainly due to high distribution cost related to relocation of company’s European distribution center, offset by lower markdowns.
  • SG&A Expense: Increase in SG&A cost was primarily due to an increase in professional service and legal fees, along with CEO severance charges. Expenses are expected to remain elevated in Q1 2020 as well, mainly due to higher advertising cost.
  • European Commission Fine: The company incurred a charge of $45.6 million for a fine imposed by the European Commission related to alleged violations of European Union competition rules by the Company. Since this was a one-time charge, we do not expect this to recur in Q1 2020.
  • Effective Tax Rate: The effective tax rate was lower than the previous year due to the implementation of TCJ Act in the US. Re-measurement of certain deferred taxes and related amounts led to volatility in the tax rate over recent quarters.

Net income margin witnessed a lot of fluctuation in recent quarters due to a volatile trend in revenue and expenses. We expect margins to be slightly lower in Q1 2020 on a y-o-y basis due to higher cost pressures, in line with management guidance.

Full Year Outlook

  • For the full year, we expect total revenue to increase by 4.2% from $2.61 billion in FY 2019 to $2.72 billion in FY 2020.
  • Higher revenue is likely to be driven by healthy growth in Europe and Asia, led by increasing store count, rising share of online sales, strong comparable sales growth, and growth in wholesale business, partially offset by decreasing footfalls at brick-and-mortar stores, especially in the Americas.
  • Net income margin is expected to rise from 0.5% in FY 2019 to 0.6% in FY 2020, primarily due to an increase in revenues, lower markdowns in the retail business, and absence of non-recurring costs.

Trefis has a price estimate of $23 per share for GES’ stock.

 

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