Image: Guess?
The retail industry has been a minefield lately, with many companies reporting tough results. Jeans specialist Guess? (GES -2.00%) hasn't been immune from the problems facing retail peers like Gap (GPS -3.83%), and coming into its fiscal third-quarter financial report, Guess? investors were bracing for substantial declines in earnings and revenue. In the end, the company didn't do nearly as badly as many had feared, and that helped to send the stock higher in relief. Let's take a closer look at how Guess? fared and what its latest results mean for the industry going forward.
Guess? remains under pressure but still held up well
Fiscal third-quarter results for Guess? still had plenty of ugly numbers. Revenue fell 12% to $521 million, which was almost exactly in line with what most investors had expected to see from the jeans maker. On the bottom line, net income fell 40% to $12.4 million, but even though earnings of $0.15 per share were down substantially from year-ago levels, they were still $0.04 per share ahead of the consensus forecast among investors.
As we've seen several times in recent quarters, Guess? took a hit from weak foreign currencies. The strong dollar cost the company $0.13 per share in earnings and pulled down overall revenue by about eight percentage points. Retail comparable sales including e-commerce fell 6% in dollar terms but only 2% on a constant-currency basis.
Guess? saw considerable weakness throughout its business. The Americas retail segment suffered a 7% drop in sales, with Europe taking a 15% hit and Asia seeing sales fall 17%. Wholesale revenues in the Americas fell 12%. Even with the strong dollar, all four areas suffered declines in constant-currency terms. On the margin front, results were mixed, with operating margins improving in the Americas retail and Asia segments but falling in Europe and in the Americas wholesale business. The company continued its strategy of boosting initial mark-ups in its retail segments, but fixed costs offset some of the resulting margin gains.
CEO Victor Herrero emphasized the positives, noting that overall results exceeded expectations and that comps in the European business were especially strong. "I am laser focused on driving the organization to raise the level of execution," Herrero said, "as this will be a critical enabler of successful achievement of our strategies." The CEO pointed to initiatives to boost sales and merchandising quality, build its business in Asia, and reinforce purpose and accountability within the company as having shown signs of success during the quarter.
Can the jeans maker keep moving forward?
Investors were also pleased with Guess?'s guidance. For the fiscal fourth quarter, the company expects revenue to fall 4% to 7%, with currency accounting for about 5.5 percentage points of the decline. Earnings of $0.53 to $0.62 per share would also be in line with what investors already expect from Guess? next quarter.
For the full year, Guess? was more optimistic. The company narrowed its earnings guidance to the upper end of its previous range, now expecting $0.93 to $1.02 per share. Sales declines of 8.5% to 9.5% will look ugly, but they're not inconsistent with the expectations that investors have for the company.
What Guess? needs to execute on is its longer-term strategic plan. Investors want to see real progress for fiscal 2017, including stable revenue and rising earnings. That could prove difficult, especially in light of what rival Gap said in its recent report. Gap disappointed investors with its future guidance, including a 15% decline in earnings per share for its holiday quarter. Gap investors also expect it to have trouble rebounding in the coming fiscal year, calling for minimal sales growth and only about a 6% rise in earnings per share.
Investors nevertheless remain optimistic about Guess?, sending the stock up more than 3% in the first hour of after-market trading following the announcement. As with most companies in the retail industry, Guess? will rely on solid holiday results in order to drive future growth in the months and years to come. If sales climb to finish the year, then Guess? could build further on its share-price gains.
