Do You Think Guess? Is a Good Choice for Your Portfolio? Guess Again.

Weakness in U.S. consumer spending is hurting a lot of companies, especially in the apparel retail industry. Apparel retailers are finding it increasingly difficult to drive traffic and revive sales, and teen apparel retailer Guess? (NYSE: GES  ) is no exception. Guess?'s dismal third quarter was expected by the Street, but a lowered outlook added to its woes.

The quarter
Revenue dropped 2% to $613 million over last year's quarter as the retailer witnessed lower customer demand. Guess? not only experienced lower sales in the North American region, but also in Europe and China as well. Macroeconomic factors played a major role in lower sales from the European region, while lower consumer spending in China led to lower revenue from the region.

Although the higher cost of sales led to shrinkage of margins, the retailer's cost-controlling measures favorably effected its bottom line. Adjusted earnings stood at $0.42 per share, way ahead of estimates of $0.38 per share. On the other hand, specialty retailer Abercrombie & Fitch (NYSE: ANF  ) was unable to manage its costs, resulting in sharp decline in its bottom line.

Abercrombie's recent quarter was a lackluster one with a 12% decline in its top line, as the retailer has been unable to lure young customers in both the domestic and the international markets. Its adjusted earnings halved to $0.52 per share over last year since the company was unable to manage its costs . On the other hand, despite lower sales, Guess? was able to manage its costs well. In fact, Guess? raised its earnings outlook since it plans to control its costs further in the months to come.

Abercrombie is trying to revive its business and has taken a number of initiatives to overcome the tough environment. It has started offering larger sizes of apparel and has added more styles and colors in order to resonate with potential customers . Moreover, Abercrombie has been closing its Gilly Hicks stores, which have been eating away at its earnings.

Challenges galore
Apart from weak demand in most geographical regions, Guess? has other problems too. Since shoppers are unwilling to open their wallets, most retailers are trying harder than ever to lure in customers. As a result, other players' promotional efforts are making competition in the industry even stiffer.

For example, Urban Outfitters (NASDAQ: URBN  ) planned to spend heavily on promotions during the holiday season, as well as provide great discounts to attract more customers. The retailer reported a sparkling quarter recently with an 11.7% jump in revenue and a 17.5% surge in net income. Urban Outfitters witnessed sales growth in both the retail and the wholesale segment. The company also opened nine new stores during the quarter and plans to open another 10 in the current quarter. Additionally, the retailer's same-store sales also grew by 7% as customer traffic increased at its existing stores . Guess? will have a tough time overcoming competition from such retailers.

In fact, Guess? has been seeing declines in Europe's contribution to its total revenue. Sales from Europe dropped from 38% last year to 35% in 2013 . Moreover, the retailer has been quite inactive on the advertising front, which is leading to low customer interest.

What's the plan?
Guess? has been taking steps to revive its business. It is investing heavily to make its presence felt in underdeveloped markets, something that should bring in customers and boost its revenue. However, demand in the U.S. and Europe still remains a matter of concern.

Additionally, the retailer is making significant efforts to control its costs. Its lower selling and advertising costs as well as lower store expenses have helped the company's bottom line to grow . These efforts should continue to benefit Guess? in the future.

The bottom line
Although the apparel retailer plans to introduce new products and focus on its e-commerce business, it has a number of challenges to face. With low consumer confidence and a heavy promotional environment, Guess? might not be able to drive sales. Also, making cuts to advertising spending might not be a prudent thing to do. A lack of effort and a lackluster revenue outlook makes me think twice about investing the company. I think it is better to stay on the side lines until customer confidence strengthens and the retailer starts turning itself around.

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  • Report this Comment On January 03, 2014, at 10:22 AM, segreto wrote:

    Abercrombie's clothing is no longer high quality. Their target customers no longer like the brand, and that is something almost impossible to get back. Stores in Chicago have been virtually empty all holiday season, even with the 60% off sales. I cannot imagine how much of a bit their lost margins is going to take out of the cash reserves. How can the possibly pay out their unrealistic dividend without going into massive debt?

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