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Guess? Inc. Falls Prey to Retail Industry Woes

By Dan Caplinger - May 26, 2016 at 11:27AM

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The jeans maker didn't live up to expectations and sees tough times ahead.

Image source: Guess?.

Many retailers have struggled throughout much of 2016, and even as the current earnings season draws to a close, investors are still seeing signs of tough conditions for the industry. Jeans maker Guess? (GES -0.88%) had already shown weakness during its holiday quarter, and coming into Wednesday night's fiscal first-quarter financial report, Guess? investors were prepared to suffer a quarterly loss and slight revenue declines. What Guess? reported, though, was even worse than most had expected. Let's take a closer look at just what Guess? said about its quarter, and why things could remain difficult into the future.

Red ink and blue jeans don't match for Guess?

For Guess?, the company's fiscal first-quarter results weren't able even to match lowered expectations. Revenue was down 6% to $449 million, and that was roughly double the 3% rate of decline that investors were prepared to see from the jeans maker. Guess? posted a net loss of $25.2 million, reversing a modest profit in the year-ago quarter. That worked out to a loss of $0.30 per share, which was more than a dime worse than the consensus forecast among investors following Guess? stock.

Looking more closely at the jeans maker's numbers, comparable-store sales were once again weak. Excluding e-commerce sales, comps in the U.S. and Canada were down 5.7% in dollar terms, and down 4.5% after adjusting for adverse currency impacts. Even including modest gains from e-commerce driven revenue, overall comps were down 4.2%.

Guess? showed weakness throughout its geographical reach. In the Americas, the retail segment posted a 5% drop in revenue, with two percentage points of that coming from currency issues. Europe suffered a 1% sales drop that was actually helped by a strengthening euro, but Asia struggled the most, seeing a 15% decline in its top line. The Americas wholesale division saw revenue fall 12%, facing five percentage points of currency headwinds.

That weakness was apparent in the margin figures that Guess? posted. All three retail segments had negative operating margin, with Asia faring the best with just a -1.2% figure. Higher overhead costs and reduced gross margin due to discounting and promotional activity were largely to blame for the pressure on Guess?'s bottom line. Wholesale operating margin remained positive at 17.1%, but that was down a percentage point from year-ago levels.

CEO Victor Herrero took the news in stride. "I had highlighted on our last earnings call that the first six months of the year would be a transition period," Herrero said, and added "the start to the year has been a bit more challenging than we anticipated, especially in the Americas and to a lesser extent in Greater China." The CEO pointed to strong comps in Europe and Korea as being highlights in a tough quarter.

Going through a rough patch

The problem, though, is that Guess? won't necessarily be able to implement its longer-term strategic initiatives as quickly as originally anticipated. In Herrero's words, "We will be able to achieve the three-year plan goals we provided in March this year, but with a different cadence than initially planned."

That slower cadence showed up in the guidance that Guess? provided. For the fiscal second quarter, revenue will climb at just a 0.5% to 2.5% pace, and earnings will be between $0.04 and $0.08 per share. Both of those figures are considerably weaker than the 5% revenue growth and $0.11 per share earnings projections that investors had going into the report. Similarly, for the full fiscal year, Guess? cut half a percentage point from its revenue growth, now expecting 5.5% to 7.5% gains. Adjusted earnings of $0.55 to $0.75 per share would be a dime per share less than Guess? anticipated just three months ago. Ongoing weakness in the Americas will hold back the potential for better results elsewhere.

Guess? shareholders weren't happy about the report, sending the stock down 7% at midday on Thursday following the Wednesday afternoon announcement. Until the retail environment begins to look a bit more favorable, it will be hard for Guess? to emerge from its current slump and start performing better again.

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