Are Shareholders of Guess? in for a Rude Awakening?

Source: Guess?

After the market closed on May 29, shares of Guess? (NYSE: GES  ) fell more than 3% on news that the retailer missed revenue expectations but managed to narrowly outperform on an earnings basis. Despite these mixed results and with shares in the iconic brand developer trading at a 26% discount to their 52-week high of $34.94, is now a great time to pick up some of the company's stock on the cheap? If not, should investors consider buying into Abercrombie & Fitch (NYSE: ANF  ) or The Gap (NYSE: GPS  ) instead?

Guess?'s mixed results are leaving investors guessing
For the quarter, Guess? reported revenue of $522.5 million. In addition to representing a 5% drop compared to the results management reported the same quarter last year, the retailer's top line narrowly missed analyst expectations of $526.4 million. According to the company's release, a 4% reduction in store count, combined with a 3.8% (7.1% if you exclude the company's e-commerce operations) drop in comparable store sales were to blame for the business's shortfall.

Source: Guess?

Looking at profitability, however, we can see that Guess?'s performance was bad but not as terrible as Mr. Market was anticipating. For the quarter, the company reported earnings per share of -$0.03. Admittedly, this is pretty bad when you compare Guess?'s results to the $0.12 management reported in last year's first quarter, but it managed to top the $0.07 loss that investors were looking for. This decline in profits was due in part to the company's lower revenue, but it can also be chalked up to its cost of goods sold falling from 64% of sales to 66.3%.

Is Guess? still a better play than its peers?
Just like this quarter, Guess? has had some pretty mixed results over the long run. Between its 2010 and 2014 fiscal years, the company's revenue rose an impressive 21% from $2.1 billion to $2.6 billion as the retailer increased its number of locations in operation by 14% from 432 to 494.

Over the closest comparable five-year period, Abercrombie & Fitch blew Guess? away. During the past five years, the retailer saw its revenue shoot up 41% from $2.9 billion to $4.1 billion. This increase in sales came in spite of an 8% reduction in store count and a 24% drop in aggregate comparable store sales and can be mostly attributed to the 168% increase in direct-to-consumer (i.e. e-commerce) operations the company enjoyed.

GES Revenue (Annual) Chart

GES Revenue (Annual) data by YCharts

Although Guess? hasn't been able to keep pace with Abercrombie & Fitch, the company's growth has exceeded Gap's top line performance. Over the past five years, Gap's revenue increased just 14% from $14.2 billion to $16.1 billion. For the most part, the company's revenue growth came from a 10% increase in store count to 3,539 locations from the 3,231 the business operated five years ago.

While Guess? has done pretty well for itself in terms of sales, the company's profits have been anything but great. Between 2010 and 2014 the retailer actually experienced a 37% falloff in net income from $242.8 million to $153.4 million. Management has attributed this to some degree on the company's lower sales, but it has also reserved some of the blame for lower margins on its products.

GES Net Income (Annual) Chart

GES Net Income (Annual) data by YCharts

During this same timeframe, Abercrombie & Fitch saw its net income soar from $0.3 million to $54.6 million for an aggregate rise of 18,100%. However, when you remove some one-time impairment effects booked in 2009 and 2013 and a $78.7 million loss from discontinued operations, the company's net profit increase of 51% from $87.9 million to $133 million looks a little more reasonable.

Gap has also done well when it's placed next to Guess?. Over the past five years, the retailer's net income has increased 16% from $1.1 billion to $1.3 billion. On top of enjoying higher profits from higher sales, the business also reported that its operating expenses had fallen from 27.5% of revenue to 25.7%.

Foolish takeaway
Based on the data provided, it's not hard to figure out why Mr. Market is sending Guess?'s shares lower. Yes, the retailer did manage to beat out forecasted earnings, but its top line weakness is a cause for concern. Over the past five years, the business has had pretty mixed results. This is likely to resonate with investors before they consider picking up a piece of the business.

For these reasons, it wouldn't be wrong for the Foolish investor to consider taking a stake in either Gap or Abercrombie & Fitch instead. During this five-year timeframe, both retailers have had results that are far better than those of Guess?. While that's not a guarantee that they will do well in perpetuity, it does imply that their chances of being great long-term picks are better than investors might get from Guess?. 

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