Global fashion companies often face the major challenge of where to concentrate their efforts to get the best financial results. Guess? (GES 0.51%) has dealt with that issue for quite a while, with strength in areas like Europe and Asia battling against strong headwinds in the Americas.
Coming into Tuesday's fiscal third-quarter financial report, Guess? investors had hoped that the jeans maker would be able to sustain some of the positive momentum it had generated in recent quarters. Instead, the company's results were mixed, again showing the disparities across its geographical footprint. Let's look more closely at Guess? and what happened to the retailer this quarter.
Image source: Guess?
Guess? deals with ups and downs
In the broadest terms, the denim specialist's results looked reasonably solid. Revenue was up more than 3% to $554.1 million, slowing slightly from its fiscal second-quarter pace but seeing better growth than it had early in the year. Guess? posted a GAAP net loss, but adjusted net income climbed 8% from year-ago levels, and that resulted in adjusted earnings of $0.12 per share. That figure matched the consensus forecast among those following the stock.
The company's numbers were a tale of two hemispheres. The once-key Americas retail segment saw revenue drop more than 13% on a 10% decline in comparable sales. The wholesale side of the business in the Americas also saw declines, albeit more modest ones, with a 2.5% drop in segment revenue. Yet in Europe, revenue soared 19% on a 10% boost in retail comps including e-commerce, and although much of that gain came from favorable currency movements, Guess? still had solid organic growth on the continent. Asia also remained strong, with a 17% rise in sales coming largely from expansion efforts and a 3% rise in comps.
From a profitability standpoint, Guess? faced some additional issues. Lower markdowns, rent reductions, and higher initial markups helped improve operating margin in the Americas, although the unit there still posted a -2.5% figure on that metric. In Europe, operating margin got cut in half to 3%, with Guess? citing relocation costs for its European distribution center. Asia saw operating margin swing from -3.1% in last year's period to +3.7% in this year's. Licensing revenue was higher by 9%, almost all of which translated into bottom-line profit.
CEO Victor Herrero accentuated the company's positives. "We continue to see good momentum in Europe and Asia," Herrero said, "mainly driven by new store openings, wholesale growth, and positive comp sales." The CEO also noted that the company's profit improvement plan has helped to cut expenses and avoid costly merchandise markdowns.
Looking forward
Guess? has high hopes for the future. Herrero sees a lot of opportunity in Europe and Asia, and cost controls should also help the company make more profit from its sales. The numbers support those assertions, especially since the European segment passed up Americas retail to become the highest revenue generator for the retailer.
However, the guidance that Guess? gave was mixed. For the fiscal fourth quarter, sales will likely rise 10% to 12% year over year, with adjusted earnings of $0.48 to $0.55 per share expected. Yet the retailer downgraded its full-year fiscal 2018 projections on the top line, guiding for a rise of 6% to 6.5% compared to previous calls for a 6% to 7.5% rise. Still, full-year adjusted earnings of $0.56 to $0.63 per share would be $0.03 to $0.04 higher than Guess? had previously anticipated.
In response, Guess? shareholders weren't pleased, and the stock plunged 11% in pre-market trading Wednesday morning following the announcement. Even if the jeans maker can turn things around and keep doing well in Europe and Asia, investors want to see more signs of strength in the Americas in order to feel completely confident in the company's prospects in the long run.
