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Retail results from this year's second quarter have been nothing if not disheartening. As a follower of the industry, it's been hard to watch good brands have bad quarters as consumer spending pulls back or refocuses on other purchases. So, I will admit to being absolutely shocked when Guess? (NYSE: GES  ) put up great numbers this week.

The company had been fighting weakness overseas last quarter, and its U.S. business was fine, but not great. Now, here it is, making a mockery of the difficulties that other brands have experienced recently. The stock jumped over 10% on Thursday, and has only pulled back slightly since then. How in the world did that happen?

Muddling the cart-horse setup
The term "great numbers" may be a bit out of line. Guess? saw declines all along its income statement, although it did manage to grow overall sales by 1%, and earnings per share by 6%. The middle of the statement was filled with comparable-sales declines, and overseas-revenue drops. A better term may be "substantially less-bad numbers."

The key to the stock's surge is in expectations. The market was expecting Guess? to do very badly, with earnings coming in at just $0.36 per share. Guess? managed to turn its small sales gain into a much bigger earnings bump, and the company hit an adjusted earnings per share of $0.52, which excluded some restructuring costs. Per-share earnings also benefited from the company's stock repurchasing program, and this quarter, there were 3% fewer outstanding shares than during the same period last year.

To put all that up and down in context, let's take a look at how Guess? is matching up against its competitors in performance and price -- like we're the Consumer Reports of stocks.

Middling is a good word
Year-over-year comparable sales in North America dropped 2% at Guess?, global revenue grew 1%, and operating margin came in at 9.5%. For all that, the company is now valued at around $30.50, which gives it a trailing share price-to-earnings ratio of 16. Guess? makes youth-focused denim and accessories, so we'll compare it to American Eagle (NYSE: AEO  ) , Buckle (NYSE: BKE  ) , and Gap (NYSE: GPS  ) .

American Eagle is the clear loser of the bunch, like a vacuum that fails to even pick up half the glitter, to extend the Consumer Reports idea. The company had drops in revenue, comparable sale, operating margin, and earnings per share. The comparable-sales fall was worse than the fall at Guess?, and American Eagle's operating margin came in at just 4.1%. As expected, the stock trades at a P/E ratio of just 13.

Buckle managed to do a bit better, with revenue up 7.9%, comparable sales up 3.2%, and operating margin hitting 16.9%. That's some solid performance and, as an added benefit, Buckle trades at a P/E of just 15. To be fair, July sales failed to meet market expectations, and Buckle has been on a downward trend, but the performance is still more than solid.

Finally, Gap increased revenue by 8%, comparable sales by 5%, and its operating margin was 13.5%. Of the three, Gap easily snags the fast-grower award, but its price doesn't really reflect that status yet. The stock now trades at a P/E ratio of 15, but it seems to be moving ahead of Buckle in terms of sales. Buckle still holds that solid margin spot, and it pays a substantial dividend.

Handing out all the top and bottom spots, we've come to the end with nothing left for Guess? That's about right. The company is doing better than people thought, and it has high hopes for the third quarter, but it's not yet a turnaround. I think the third quarter may bring stabilization -- depending on how Europe's economies manage -- but growth is still a ways off. However, if you're looking to beat the crowd to a long-term turnaround play, Guess? might be a good place to investigate.

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.

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9/23/2016 4:02 PM
AEO $18.31 Down +0.00 +0.00%
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