Last week, Guess? (NYSE: GES ) announced its first-quarter results, and expectations were exceeded. The denim retailer jumped on the day, and has held on to most of its gain in the following days. The leap in the share price becomes a little less impressive once the numbers are fully revealed. Comparable sales were down, operating income dropped, and earnings per share got hit.
Still, the company did better than Wall Street had expected, so should investors be on the lookout for a rebound? I think any predictions of certainty in a bounce would be misplaced, but here's a deeper look for investors, hoping that there's good news down the road.
The problems in the first quarter
Apart from the increase in the stock's price, it wasn't a great quarter for Guess?. Revenue in Asia rose, but dropped across the rest of the world. That small increase wasn't enough to keep overall sales afloat, though, and Guess? saw a 5% drop globally. That stumbling block was indicative of deeper problems at the retailer, though management was quick to point the finger at "global economic challenges."
That seems unlikely to be the entire problem, as other retailers were able to increase sales over a similar period. Both The Buckle (NYSE: BKE ) and Gap (NYSE: GPS ) managed to turn in positive comparable sales moves, despite the global economy. Buckle put up a fairly weak 1.2% increase in comparable sales, while Gap managed to kick out a 2% increase.
Some of the hardest areas for Guess? are Italy and France. Wholesale shipments continued their fall last quarter, and Guess? is also having trouble with payments in Italy. Distributors are apparently having a difficult time getting credit, and that's hurting the payment timeline. France is suffering from unseasonable cold and household austerity, which has caused consumers to hold off on new purchases.
The future of Guess?
With all the challenges facing it, Guess? isn't an easy buy. The company's current plan for Europe consists largely of waiting for European governments to change things. Management has stated that it's looking for a turnaround in the third quarter, and that the basis for that claim is the belief that austerity measures will begin to pull back at that point, taking pressure off consumers.
In North America, Guess? is making actual strides toward a positive comparable sales figure. While comparable sales declined 9.8% this quarter, that's an improvement. The company is hopeful that it can start to see real growth soon, but I wouldn't hold my breath.
In fact, Guess? still seems too chaotic for me to have much hope for a meaningful and sustained turnaround anytime soon. The company has a lot of hope pinned on a turnaround in Europe, but there's nothing in my view that ties "European turnaround" to "more sales at Guess?." The brand just isn't as strong as it used to be. Instead, I'm sticking with Buckle and Gap, both of which have clear plans and good growth potential. Guess? may get my nod later down the line, but for now, I'm steering clear.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.