Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.

Guess? Fails to Impress in Disappointing Second Quarter

This article originally appeared as part of ongoing coverage in our premium Motley Fool Hidden Gems service ... we hope you enjoy this complimentary peek!

Guess? (NYSE: GES  ) shareholders' hopes of a quick turnaround were dashed as the company delivered disappointing second-quarter results Wednesday night. The struggling fashion retailer came up short of analysts' estimates on both the top and bottom lines.

Analysts had expected $0.29 in EPS, but the company reported just $0.26 in EPS. On the top line, analysts were looking for $618 million in revenue, but Guess? generated only $609 million in revenue. Let's take a deeper look at the numbers to see what investors can take away from the disappointing second-quarter performance.

The good
First, it's important to note that not all was bad in the quarter. Guess?'s e-commerce business grew 48% compared to the year-ago quarter and now represents 6% of North American sales. Online sales are crucial to the company's turnaround plans. Guess? uses its physical stores as fulfillment centers for online sales, thereby increasing comparable-store sales. Look for e-commerce to become a bigger part of North American sales going forward.

Gross profitability was another positive in the quarter. Guess?'s Q2 gross margin was 35.6%, up from 33.7% in Q1. This indicates that the company is making progress on working through older inventory that has to be marked down. Unfortunately, the gross margin is still below Q2 2013's 38.9%, showing that Guess? still has room for improvement.

The bad
Guess? shareholders may wish they could ignore this part, but there is no getting around the company's poor Q2 results. Overall retail comparable-store sales declined 4% including e-commerce sales. North American comparables were even worse, falling 4.4% including e-commerce and falling 7.1% excluding e-commerce.

The only way for North American comparables to fall so much is if sales took a dive in the last two months of the quarter. On the Q1 conference call -- about one month into Q2 -- COO Mike Relich said Q2 comparables had declined in the low single digits and he therefore expected full-quarter revenue to be flat or slightly negative. Instead, comparables were decidedly negative and revenue declined by mid-single digits. As a result, Guess? likely has significantly negative sales momentum heading into Q3.

The takeaway
Guess? continues to be a work in progress as management tries to right the ship in the highly competitive North American retail market. In the days leading up to the Q2 report, Chief Design Officer Sharleen Ernster became the latest in a flurry of executives to leave the struggling retailer.

In addition, management made significant downward adjustments to the full-year guidance that it issued just a few months ago. It lowered projected revenue by 3.5%, operating margin by 1.75 percentage points, and EPS by 25%. The company now expects to earn $1.05 to $1.20 per share for the year, down from guidance for $1.40 to $1.60 in the Q1 earnings release.

Management departures and lowered guidance reflect the most important takeaway from the company's Q2 report. Guess? is performing worse than expected and management has not yet figured out how to resolve the problem. "So far in the third quarter, our Fall collection in North American Retail has not seen the traction with the consumer that we were expecting and we have adjusted our expectations for the back-half of the year accordingly," said CEO Paul Marciano in the company press release.

Clearly, whatever progress the company made in the first four months of the fiscal year has been erased by unexpected circumstances. Management is working to fix the company's problems, but it hasn't fixed them yet. That's the best that Guess? shareholders can take away from the disappointing quarter.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3084767, ~/Articles/ArticleHandler.aspx, 3/26/2015 10:20:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!