Guess? Fails to Impress in Disappointing Second Quarter

Shareholders are left guessing when management will turn things around. Guess? came in below even pessimistic expectations for its second-quarter results. Let's take a closer look at Guess?'s Q2 results.

Aug 28, 2014 at 12:18PM

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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.

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Ted Cooper 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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