Will Guess’ Net Income For The Current Year Cross The $100-Million Mark?

by Trefis Team
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Guess (NYSE: GES) has seen a steady growth in revenues over recent years, with expenses following the same trend. Though the company’s expenses are expected to increase in dollar terms in the near term, total expenses as a percentage of revenue are expected to decline in FY 2020 (ending February 2020) primarily due to the absence of a $45.6-million fine imposed by the European Commission on Guess in fiscal 2019.  This should help Guess’ earnings margin  (i.e. revenues less all expenses, expressed as a percent of revenues) increase from 0.5% in FY19 to an estimated 3.8% in FY20. Taken together with our forecast for Guess’ Revenues for the year, this works out to a net income figure just north of $100 million for Guess in FY20 – marking its highest level since 2014.

Trefis breaks down the company’s major expense components in its interactive dashboard How Does Guess Spend Its Money? parts of which are summarized below. Notably, Guess’ expenses are largely driven by the cost of goods sold (COGS), and selling, general & administrative (SG&A) expenses. These two expense categories together account for almost 96% of the company’s total expenses. Guess’ SG&A costs are expected at $828 million in FY 2020, making up 32% of Guess’ $2.6 billion in 2020 expected total costs. In fact, Guess’ selling expenses are only about 50% of the company’s manufacturing costs, the cost of goods sold. Guess has struggled to keep expenses in check, which is why its net incomes fell from an average of roughly $250 million over 2009-12 to just $25 million over the last four years.

  • Guess’ Total Expenses as a % of Revenue have increased from 96.1% in 2016 to 99.3% in 2019 mainly due to an increase in the selling, general & administrative expenses.
  • Moreover, asset impairment and other charges incurred over FY 2016-19 due to under-performance and expected store closures have further aided the growth in the total expenses.
  • Total expenses as % of revenue are expected to decline from 99.3% in 2019 to and 96.2% in 2020 mainly due to the absence of the fine imposed by the European Commission.

 

Breakdown of Guess’ Total Expenses:

Cost of Goods Sold Have Remained Stagnant Over The Years

  • Cost of Goods Sold (COGS) includes raw materials, direct labor, and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities.
  • The cost of goods sold as % of revenue has remained constant around 64% over the last few years. The metric rose to 66% in FY 2017 due to a combination of higher markdown and a higher occupancy rate.
  • We expect the cost of goods sold to decline marginally to 63.9% in FY 2020 likely to be driven by higher mark-up prices and better occupancy leverage (ability to derive higher revenues from existing fixed assets), resulting in a gross margin of 36.1%.

Operating Expenses Have Seen A Steady Increase 

  • Guess’ Operating Expenses include selling, general and administrative (SG&A) expenses, and asset impairment & other charges.
  • Operating Expenses have increased 33% since 2016, going up from $669 million to $887 million in 2019, led by a $ 169 million increase in SG&A as well as a $49 million increase in restructuring and other expenses.
  • The increase in SG&A expenses can be attributed to higher distribution costs, higher advertising expenses as well as higher store selling expenses driven by retail expansion, partially offset by lower performance-based compensation costs.
  • Asset impairment and other charges have shot up from just $3 million in 2016 to more than $52 million in 2019 mainly due to a $45.6 million fine imposed by the European Commission in 2019.
  • We expect total operating expenses to decline by 6% in 2020 due to a reduction in SG&A as well as restructuring and impairment charges.

Non-Operating Income Has Trended Lower

  • Guess’ non-operating income has decreased from $6 million in 2016 to -$6 million in 2019 driven by a combination of higher interest and other expenses.
  • Additional details about how Guess’ Non-Operating Income has trended are available in our interactive dashboard.

Income Tax Expense Has Been Highly Volatile

  • The company’s effective tax rate has been highly volatile, ranging from 33.4% in 2016 to more than 105% in 2018.
  • The company’s effective tax rate for 2018 included an additional income tax expense of $47.9 million related to the enactment of the Tax Reform.
  • The effective tax rate is expected to be around 28% in FY2020.

 

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