Investors reacted harshly last week to the final quarterly earnings report of Guess?'s (NYSE:GES) fiscal 2019, which also included an official outlook for sales growth and profitability for the year ahead. The retailer's headline figures both edged past expectations for the holiday period, and it posted some of its best market-share results in years, yet management's guidance disappointed many shareholders.
In their March 20 conference call with analysts, incoming CEO Carlos Alberini and his team added context to that forecast, and explained why they see lots of room for growth ahead for the Guess? family of apparel brands.
I was very pleased to see that several businesses which may have been considered mature are showing healthy trends of growth.
There were many bright spots in these results when it comes to demand for Guess? apparel. Sales in the U.S. market rose 7% on the retailing side, and jumped 22% in the wholesale segment. Management noted that this was the fourth consecutive quarter of positive comparable-store sales, with comps up 7% in the U.S. region, 6% in Europe, and up 17% in the China geography. And fiscal 2019 was the first time in eight years that the retailer had year-over-year comps growth in the Americas.
Results weren't as strong on the profitability front: Gross margin slipped to 36.6% of sales in fiscal Q4 from 37.2% a year earlier. Executives said the biggest drags were Europe and China, where markdowns were needed to keep inventory moving. In the U.S. division, by contrast, the company was able to raise prices.
Check out the latest earnings call transcript for Guess?
Too much product
We exited the year with higher inventories than planned, and we plan to move through this inventory over the course of the coming fiscal year, through a combination of our own retail outlet stores as well as stock liquidation channels.
-- CFO Sandeep Reddy
The inventory overhang in Europe and China was large enough to impact Guess?'s outlook for fiscal 2020. Due to the price cuts it plans to offer by moving products into its factory outlet retailing arm -- which should peak over the next two quarter -- management predicted operating losses of between 4.5% and 4% of sales in the first quarter. Margin should improve to around 5% of sales for the full fiscal year, which is below management's long-term target of at least 8%.
The high end of our new guidance represents a 23% increase over last year's adjusted [earnings per share].
Guess? plans to offset some of the profitability pinch by dialing back the amount it will spend on store remodeling. Investors might see other adjustments that include focusing more on key pieces of its portfolio that today spans eyewear, kids and adult apparel, jewelry, handbags, and more. Alberini may decide after completing his strategic review to steer the company in new directions in terms of its core retailing focus.
In the meantime, executives say they believe that collectively, Guess? brands including Guess Jeans, Marciano, and Guess Kids, have the potential for annual retail sales of between $7 billion and $9 billion -- 40% to 80% higher than current levels. One key to achieving that potential will be to move deeper into international markets like China, Japan, and Eastern Europe by launching new stores, partnering with more retailers, and building out the online fulfillment infrastructure there. The retailer gets over half of its revenue from markets outside of the U.S. and credits these geographies for delivering most of its growth lately. .
But the more immediate concerns are the inventory-management struggles and cost overruns that have hobbled the retailer's short-term profit outlook. Before management can realistically hope to position Guess? as a world-class retailer, they'll need to demonstrate that can they effectively navigate their global business through those inevitable demand swings.