At a Wall Street conference over the summer, Guess? (NYSE: GES ) officials outlined the company's growth strategy, which included store development and improving gross margins. Another key component is retail sales productivity, which is one of the catalysts for its amazing track record in same-store sales. Last week, following the release of its second-quarter results, the iconic apparel retailer updated investors. Using remarks from management from the earnings conference call, let's see what we might expect from comps over the second half of the year.
The story behind strong comps
One figure that grabs your attention from the second quarter is the same-store sales, which grew 16.2% from the year-ago period. I follow the apparel retailing industry intently, and I can tell you that high double-digit comps growth isn't something you see every day. In fact, any number of retailers like Gap (NYSE: GPS ) , Hot Topic (Nasdaq: HOTT ) , or Wilsons The Leather Experts (Nasdaq: WLSN ) would be satisfied with positive comps growth, no matter how nominal.
What's so impressive about Guess? is that it has been doing this consistently for some time now. The 16.2% comps growth is built on top of 13.7% same-store sales growth in the second quarter last year, a 4.2% increase in the second quarter of 2005, a 15.1% jump in the same quarter in 2004, and an 11.7% increase in Q2 of 2003. Fellow Fools, again, I cannot say enough how impressive a track record this is. It's no wonder the company's stock has rocketed ahead since that 2003 quarter, bringing somewhere in the vicinity of a 1,600% return to investors.
Healthy inventory management
There are a number of variables that contribute to consistent comps growth, including sound inventory management, trend-right merchandise, and in-store productivity. If Abercrombie & Fitch (NYSE: ANF ) is considered one of the best at inventory management, Guess? isn't far behind. Maintaining just the right levels of merchandise allows Guess? to minimize markdowns and thereby maximize full-price sales, which, by the way, leads to increasing profitability.
If we look at current inventory levels, it may be a bit alarming to see that inventories are up 70.9% from a year ago. In the conference call, management sought to alleviate investor concerns. Around 50% of this increase can be attributed to growth opportunities in South Korea, China, and Mexico, and to support rapid development of its latest concept, called "G by Guess." Another 25% of the increase is supporting core European growth both in apparel and accessories. The rest will support domestic growth opportunities.
Chief Operating Officer Carlos Alberini said, "Regarding inventories, we are well-positioned to capitalize on key business opportunities." What this tells me is that if Guess? is right about its inventory levels, shareholders should expect to see strong growth in the coming months.
Inventory management is extremely important, but no amount of tight inventory controls will help sales performance if customers aren't digging the goods. Those who have invested in Urban Outfitters (Nasdaq: URBN ) have seen firsthand the roller-coaster effect on sales from a hit-and-miss merchandise strategy. One of the company's best qualities is that it is consistently at the right point of the fashion curve, offering fresh and trendy threads.
One bet that has paid off handsomely for Guess? and competitor Polo Ralph Lauren (NYSE: RL ) : dresses. In addition to denim products, woven tops, and shorts, dresses have been one of the strongest categories this year. As the retailer shifts into the fall and winter months, the biggest investments in merchandise will be in coats, sweaters, and denim, according to Alberini.
Retail sales productivity
Yet another way that Guess? has been able to consistently improve sales from stores that have been open for more than a year is by continuously complementing its offerings, particularly with accessories and new footwear. These sorts of items enable a retailer to use every bit of store floor space to improve what management likes to refer to as retail sales productivity.
Over the summer, management indicated that it has a near-term goal to get stores operating at $500 a square foot. To put this in perspective, in 2004, Guess? operated at $369 per square foot. To go from where it was to where it would like to be, categories like footwear, watches, and handbags will play a vital role.
CEO Paul Marciano identified three key global initiatives for the company. You guessed it: They are footwear, watches, and handbags. The newest of these initiatives is its footwear business, an area that Marciano believes could be as successful as its accessory line.
Following a stellar second quarter, Guess? shares dropped because investors were disappointed by what many considered too conservative a forecast for the second half of the year. Let's assume that Guess? manages only single-digit comps growth for the second half of the year, as management suggested in the call -- a figure I believe to be very conservative, in light of its recent comps trends. If we add, say, 5% comps growth to almost 25% growth in new retail development (between domestic and international opportunities), we are looking at roughly 30% sales growth just in its retail segment. Management is also predicting wholesale growth for the rest of the year to come in at 30%. That's pretty good.
Recent trends and current inventory levels suggest that this 30% growth estimate is definitely on the conservative end. Nonetheless, it suggests there is plenty of opportunity here for both the retailer and its shareholders. As such, I echo the sentiments of Foolish colleague Lawrence Rothman, who suggested that the recent sell-off presents a compelling opportunity for Foolish investors.