How Can Guess? Get Back on Top?

In an ongoing theme, Guess? did less poorly than it expected to, but still didn't find a way to really succeed.

Jun 2, 2014 at 12:51PM

I'm sensing a new trend in teen clothing. Next time you're in the mall, look for businesses that are doing really poorly, but that could be doing even worse -- that's the trend. Guess? (NYSE:GES) is the latest company to jump on the bandwagon, last week putting up a solid quarterly decline in sales and a loss per share of $0.03. But here's the twist -- the company had forecast an even larger earning- per-share loss.

Unfortunately, the market hadn't bought into quite so much doom and gloom, and the stock took a 5.5% hit on Friday, pushing Guess stock's 12-month loss to 20%, 37 percentage points below the return of the S&P 500. White denim!

Parents just don't understand
The major difficulty with teen-apparel retailing -- and there are a few problems, at least -- is that teens aren't really "affluent." Not only do they have almost no money of their own, they're also worse off now than they have been for a long time. The unemployment rate for the 16 to 19-year-old crowd is over 19%. Teens are largely still dependent on their parents for clothing money, and parents aren't interested in what's hot.

Or, maybe, they're only interested in what's hot. As a result, retailers like Guess and Abercrombie & Fitch (NYSE:ANF) are getting hammered. Teens can only buy a few new items of clothing, so they avoid less popular brands like the plague. Guess' North American comparable-store sales dropped by 3.8%, while Abercrombie's comps fell by 9%. Teens are fleeing these brands and taking their parents' cash with them.

Guess makes a stab at the future
While the stores were gathering dust and product was flying on the shelf, Guess was hatching a longer-term plan. Just kidding -- it was doing the same sorts of things it always did. The company said it is still focused on its three big initiatives: omnichannel growth, supply-chain efficiency, and allocation planning.

So far, results have been mixed. Guess' online sales increased 49% over the quarter a year ago, but gross margin fell 2 percentage points. Abercrombie & Fitch is in the same boat, having its gross margin knocked down 3.5 percentage points last quarter.

Guess needs to make more of its opportunities. The growing online business is great, but it doesn't mean much in the face of sharply falling in-store sales. Like Abercrombie, Guess must find a way to turn a well-known brand name back into a strong brand.

Part of the business's underlying problem is that it still is a white denim retailer. Guess has made strides toward becoming a more contemporary business, but at heart it's not much changed from the early '90s. If it can use its online success to promote a grown-up brand -- focusing on its newer, trendier fashions, for instance -- then Guess might find a way back into the good graces of teens and their parents. If not, it's a long slow road to failure alongside the other also-rans.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Guess?. 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.

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