It seems like Guess? (GES 1.16%) once again has a head of steam in its locomotive. The company reported earnings for the third quarter yesterday, and revenue beat analysts' expectations, sending the shares up 5% in after-hours trading. The company also released an upbeat view of its next quarter, which the market was quick to latch on to. But the last few jump-starts at Guess? have been more bluster than substance. If this round is going to end differently, there are three things that have to fall into place. Investors should be on the watch for all of them.
The margins are tight like the jeans
This last quarter, Guess? put up an operating margin of 9.2%, which was a 5.9 percentage point drop from last year's third quarter. Part of that has come from the company's expansion program, which is focused heavily in Asia. But on the call, management admitted that this Christmas season's environment is likely to be even more promotional than last year. That's not going to help margins at all, and Guess? is also entering the fray with inventory above its forecast levels. The company is happy with its plan to move that inventory without taking a huge price hit, but investors should be on the lookout for Guess? running sale after sale in the next quarter.
One of the things that should help the company is a move to shorten the time it takes to get products onto the shelves, thereby increasing the chance the products will still be in fashion when they get to stores. Gap (GPS -4.11%) worked through the same problem, and continues to manage its inventory movements very carefully to avoid having to sell things at too large a discount. On the earnings call, Guess? said that it was working to cut lead times down for women's clothing, specifically. That would certainly help, as the women's segment has been a lackluster performer.
The men are buying, but where are the ladies?
Right now, Guess? seems to be like a horrible ladies' night -- you know that one in the little dirty bar across town that attracts more men looking for ladies than ladies themselves? Guess? saw strong sales in its men's line last quarter, but those were offset by shortfalls in women's. The problem has been especially accentuated in women's tops, where Guess? sees the market as hyper-competitive. Starting in February, the company is going to start rolling out some knit top basics, which it hopes will bring more women through the door and give it a chance against its competitors.
This is the reverse of what Coach (TPR 0.07%) has done recently. Coach has been consistently expanding its men's lines, adding product to stores and opening men's-only locations. The key difference -- aside from gender -- is that Coach is making the move from a position of strength while Guess? is doing it to avoid sales slipping further than they already have. Keep an eye out for those new tops. If they're late to come in or don't catch on, then Guess? could miss the strongest opportunity it has to sell for next spring.
Looking into the Asian void
Like almost every major retailer, Guess? is trying to make a move into the Asian market. So far, things have been going well, and the company said that it is hoping to turn a profit in China next quarter. That would come on the heels of a 16% increase in revenue this past quarter, and would set Guess? up for strong international growth. Not only does the move to generate cash outside of the U.S. mean an expansion of the consumer base, it may also drive a tax discount. Guess? said that it has been able to push its tax burden down from near 40% to 33%, in part through diversifying overseas.
The leader in this space is Michael Kors (CPRI -1.02%), which has had fantastic growth both in the U.S. and abroad. Kors has been successful in part by going into new locations through wholesale and licensing deals. Those have helped the company build its brand, which allows it to then open more business lines. Watch what Guess? does with its Japanese business over the next year. The company used to have a presence in Japan, but due to the complex nature of the retail environment, it left. Now it has a chance to learn from its mistakes and make a huge brand impact.
