Investing In Guess? Is Not A Good Idea

The economic slowdown has led consumers to tighten spending. People have become highly calculative about their expenses, and are trying to make the most of their hard-earned money.

Low demand in Europe has been a matter of concern for many companies. One such company is Guess? (NYSE: GES  ) , an apparel and accessories retailer. Guess? is facing great difficulties selling its products in Europe, especially in Italy and France. This has led to a poor performance by the retailer in the last few months.

Economic uncertainty and low demand in Southern Europe and China led analysts to expect very little from the company. However, things were not that bad for Guess? when it reported its first-quarter performance. Results not only met expectations, but were also way above the Street's estimates. The retailer's well-planned strategic efforts led to a better quarter, helping the stock price to move north.

The drivers
Sales were expected to be as low as $623.6 million due to unfavorable weather conditions, while the retailer's actual revenue stood at $639 million. Increased demand in regions such as Korea and good performance in the licensing segment led to higher revenue.

In fact, the bottom line came as a greater surprise. Earnings stood at $0.52 per share, way above expectations of $0.35 per share. This was all thanks to the company's cost-control measures. Guess? managed its costs remarkably well, and assures investors that it will cut down even further.

Successful strategies
The apparel retailer has been undertaking a number of strategies to address the prevailing conditions of low demand and restrained consumer spending. Guess? has been putting in a lot of effort into its e-commerce business. It has also initiated deliveries of online orders at its stores, which boosted North American e-commerce revenue by 25%. It also plans to integrate its online business with mobile and social media in addition to the stores in the U.S. and Canada.

The company is also moving into new markets and plans to spend between $80 and $90 million during the year on new stores and the remodeling of its existing stores.

The most effective move made by the retailer was providing the right product. It made its product assortment better by providing apparels, which were inline with trends. The availability of products such as denims and dresses attracted customers and drove sales higher.

Along with a strong product line, Guess?' promotions were very helpful. It plans to continue to work on its advertisement strategies, aided by a Windows ad campaign.

These efforts have been undertaken by the retailer in order to fight the current low demand environment. The company believes that the second half of the year will be difficult to deal with since there will be no discounts on products. Hence, it lowered its revenue guidance to slightly less than $2.6 billion. At the same time, it increased its earnings outlook to a range of $1.78 and $1.92 per share, much higher than earlier estimates .

Other retailers
The problem of shrinking demand is not unique to Guess?. Its peers, such as Abercrombie & Fitch (NYSE: ANF  ) , are also facing a similar situation. Its recent quarterly results could not meet expectations in the wake of weak demand, especially in Southern Europe. The top and bottom lines fell by 0.6% and 33%, respectively.

Moreover, if we look at the P/E ratio of both the companies on a trailing-12 months basis, Abercrombie might look cheaper at 11.6 as compared to Guess?, which stands at 16.3. However, Guess? is expensive because investors foresee growth in the company. Hence, its forward P/E ratio is at 14.3, whereas Abercrombie's forward P/E multiple is at 11.3.

On the other hand, Ralph Lauren (NYSE: RL  ) has higher multiples than both of the companies. Its P/E multiple, on a trailing-12 month basis, is 21.1, and the forward P/E multiple is 16.7. The company has been performing slightly better than its peers and reported a 6% increase in revenue, on a constant currency basis.

Its investment in technology upgrades and the addition of new stores was justified. Also, it has been focusing on its e-commerce revenue, which is driving retail sales higher. Hence, a higher price for such a stock seems to be justified.

Bottom line
Given the slowdown in consumer demand, retailers are apprehensive about the second half of the year. This is reflected in Guess?' lowered outlook. Though Guess? has been making a number of moves and has an effective cost management technique in place, soft European markets and weak consumer spending in the U.S might also be a deterrent. Hence, holding back your money and staying on the sidelines will be safer for investors.

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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