It's starting to feel like Guess? (NYSE:GES) is never really going to make the successful turnaround that investors are waiting for. Over the last 12 months, the company has seen two solid run-ups in the stock, followed by two sudden drops. The problem is that Guess? seems incapable of keeping consumers' attention for more than a few months at a time. That was one of the biggest problems in the last quarter, and Guess? was forced into a promotional environment that simply mutilated its margins.
Those shortfalls aren't just frustrating, they're indicative of bigger issues at Guess?. The brand, which had a lot of potential to shake off its 1990s dullness, just can't get it together. Management needs to focus on a few areas to make sure that the turnaround finally gets off the ground. Here's what's gone wrong, and what Guess? can do to turn it around.
The problem of promotion
Last quarter, gross margin dropped 2.5 percentage points to 40.8%. That helped pull operating margin down under 15%, and resulted in a $0.10 drop in earnings per share to $0.95. On one hand, this is not the worst problem in the world to have -- the reason for the drop in income is easy to see, and should be straightforward to address. On the other hand, the drop in margins is probably reflective of a drop in consumer interest.
That thesis meshes with the 6.3% drop in comparable sales in North America last quarter, and highlights why Guess? had to drop prices so sharply over the last quarter. The company blamed its shortfall on a failure to resonate with younger shoppers. CEO Paul Marciano said, "[We] have excluded the youngest version of Guess? girl who is more price-conscious than ever." The focus was on the aspirational shopper, instead, which led to the need for markdowns to bring in those price-conscious shoppers.
To fix the problem, the company is going to "return to iconic jeans wear roots of Guess? for fall of ." That's worked well for other retailers recently, but it doesn't address the problem of multitasking that Guess? seems to have.
Doing more than one thing right
It's important to address your core customer, and you do that through those iconic products. Gap (NYSE:GPS) has come back to denim over the past two years, and has seen excellent results. Guess? could learn a lot from the push seen at Gap. Gap has said that the "denim offering ... has not only driven and lifted the overall business, but I think has been bringing in the right customer." The key term there is "right customer."
Gap has learned that a single-minded focus on denim isn't enough to drive sales. Instead, the company needs to use its denim offering to bring in customers who identify with the brand that the denim portrays. Once they're in-store, the other products increase the sale. That customer helped Gap grow its operational margin 2.5 percentage points over the last year, and drove comparable sales up 5%.
Now contrast that with the failed multitasking over at Coach (NYSE:COH). The handbag company tried to push out too fast, and lost sight of its core demographic. As a result, sales of menswear did well, as did international sales, but women's handbags fell short. That pushed comparable sales down 2% in North America. To the company's credit, it didn't follow Guess? down the short road to heavy promotions, but it fell short, nonetheless. Now the company needs to refocus on its bags, and get those "right customers" back in the door.
The bottom line
Guess? can still make things right, if it can figure out how to do two things at once. History certainly isn't on the company's side. Over the past few years, Guess? hasn't been able to get everything running in the same direction, and that's what it needs to do if it's going to sustain growth. The beginning of 2013 isn't looking good, so don't hold out for any big changes until the middle of the year. Management has said that the promotional environment has carried over into the first quarter, at least. Until there are clear signs of multitasking, I'd steer clear of Guess?.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Coach and Guess?. The Motley Fool owns shares of Coach and Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.