Apparel retailers have witnessed difficult times due to weak consumer spending and stiff competition. The clothing industry is still witnessing a contraction. As per a NRF report, job gains were seen in every retail sector with the exception of clothing and clothing stores, which witnessed a contraction of 12,500 positions in September . This is indicative of weakness in the apparel retail industry. In such circumstances, it isn't surprising that Guess? (NYSE:GES), known for its hipster jeans, is also feeling the heat and it reported weak third-quarter results like its peers American Eagle Outfitters (NYSE:AEO) and The Buckle (NYSE:BKE).
What's up with Guess?
In the third quarter, Guess? saw a revenue decline across all its segments, except for the licensing segment, in all major markets. As a result, consolidated revenue declined 2.4% to $613.5 million. In constant-currency terms, revenue declined 4.1%. North American comparable-store sales, or comps, dropped 5% due to lower mall traffic in the U.S. and Canada. The North American wholesale segment registered the steepest decline of 7.4% in revenue , followed by Asia and Europe.
The decline in revenue also affected the company's net income. In addition, this also resulted in cost of sales expanding from 60.6% to 62.8% of revenue . As a result of this, Guess? reported a 7% decline in earnings. However, there was one positive takeaway -- earnings were above management's own guidance and also higher than analysts expected. So not everything is bad at Guess?.
Guess? has been working toward building a strong omni-channel presence over the past year and it's integrating e-commerce with its stores in the U.S. and Canada. The strategy continued to take shape during the previous quarter, and now 100 stores participate in its in-store fulfillment program.
Moreover, sales of jeans are among the highest in North America, Australia, and Western Europe . Of American consumers, 74% say they love or enjoy wearing denim. The global market for denim jeans is projected to reach $56 billion by the year 2018 . The market, however, is cyclical and sensitive to employment rates, production levels, fashion trends, celebrity endorsements, lifestyle changes, and other such factors. This could be a good growth opportunity as macroeconomic headwinds ease.
Going forward, due to weakness in consumer spending and declining comps, Guess? expects revenue in the range of $750 million-$770 million and adjusted earnings in the range of $0.74-$0.84 per share. For fiscal 2014, the company narrowed and lowered its earnings outlook. Management now expects earnings in the range of $1.73-$1.83 per share, down from prior guidance of $1.70-$1.84.
American Eagle: Looking at international growth
American Eagle also saw a comps decline of 5% which compares to a 10% gain in the comparable quarter last year. The in-store comps decline was partly offset by 17% year-over-year comps growth at AEO Direct, which signifies that the company's investments in omni-channel initiatives have started to yield results. Consolidated sales declined 5.8% year-over-year to $857.3 million. Earnings came in at $0.19 per share. This represented a decline of 53.7% from $0.41 in the prior-year quarter .
American Eagle continues to make good progress internationally and this will be important going forward as it will reduce the company's reliance on the domestic market. The company inked three new licensing deals in Central and South America and Thailand for opening multiple stores in these regions .
Going forward, in the fourth quarter American Eagle expects a mid single-digit decline in comps. Due to weak macro-economic indicators, the company issued a weak forecast. As a result, earnings are expected to be in the range of $0.26-$0.30 per share.
Buckle: The best pick?
Buckle, meanwhile, can eat Guess?' lunch entirely on pricing. Buckle offers Big Star, Miss Me, Rock Revival, Silver Jeans, and Buffalo Jeans brands which address the same hipster-jeans market segment. Half of the branded merchandise Buckle sells is exclusive. In addition, Buckle is contemplating expanding its product portfolio to include active-wear and footwear products which would allow it to compete with Guess? on a broader scale.
Moreover, Buckle follows a slow but steady growth plan, as it employs only experienced managers that are trained in-house at new stores. This strategy has helped Buckle steadily improve its earnings in the past.
Of the three companies discussed, Buckle had the smallest decline in comps of 0.5% in the previous quarter, excluding the impact of online sales which grew 11.9% year-over-year to $22 million. Consolidated revenue came in at $286.8 million, 0.9% higher versus the comparable quarter a year ago.
Thus, of the three, The Buckle appears to be a safer investment option at this time. The stock is the cheapest of the three with a P/E ratio of 14.5, while the other two have P/E ratios of around 16.5. Buckle also has a dividend yield of 1.70%. The company is looking to expand its product line and it is also seeing good growth in its e-commerce business. Investors looking to buy an apparel stock this holiday season should definitely consider Buckle for their portfolios.
Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Guess? and The Buckle. The Motley Fool owns shares of The Buckle and has the following options: short December 2013 $45 puts on The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.