Times haven't been easy for companies in the apparel industry lately, and Guess? (NYSE:GES) in particular has struggled to hold its own in an increasingly competitive environment. Coming into Tuesday afternoon's fiscal first-quarter financial report, investors believed that despite fairly good results last quarter, Guess? would have trouble making money during what has historically been a fairly slow quarter for the company. Yet as it turned out, the retailer actually managed to earn a modest profit, and more importantly, it boosted its outlook for the remainder of the fiscal year as well. Let's take a closer look at the latest from Guess? and what it sees coming down the road.
Guess? earnings put on a pretty show
A look at Guess? and its quarterly results show the headwinds that the apparel industry faces right now. Overall revenue fell by more than 8% to $478.8 million which was about a percentage point worse than the contraction that investors had expected to see. On the earnings front, though, Guess? managed to earn $3.3 million, which works out to $0.04 per share. That reversed a year-ago loss for the company and defied expectations for another negative earnings quarter this year.
A closer look at the numbers reveals some concerns, though. Of the retailer's gains for the quarter, $2.6 million came from what Guess? calls "other net income," which it says primarily included unrealized and realized gains on non-operating assets. Still, even if you take away that item, Guess? still earned a small profit for the quarter.
Operationally, Guess? still faces some big challenges. North American retail revenue fell 6.2%, with comparable-store sales falling 5.9%. European sales suffered a steeper decline of 13.7%, but currency impacts played a huge role in that result, as constant-currency results actually rose by 7.5%. Sales in Asia were also weak, and even with adjustments for foreign currency movements, constant-currency revenue from the region dropped 6%. The North American wholesale segment saw sales decline 5.2%, and licensing revenue only managed a small 1% increase.
CEO Paul Marciano attributed the positive results to the company's efforts to control margins, noting "Overall first quarter results were better than our expectations, mainly driven by tight expense management." Marciano once again pointed to the success of the e-commerce business and improving conditions for its women's category.
Can Guess? get back on track?
Guess? also has high hopes for the future. "So far during the second quarter," Marciano said, "we continue to see improvements in these same areas. ... We are very encouraged by the first quarter performance and early reads on the second quarter."
Those hopes did entirely get reflected in the company's guidance. On one hand, fiscal second-quarter projections for revenue to shrink 11% to 13% and for earnings of just $0.12 to $0.16 per share are somewhat worse than most investors were hoping to see. Yet when you look at what Guess? is anticipating for the full fiscal year, earnings of $0.86 to $1.02 per share marked an increase of between 7% and 15% from its previous range of $0.75 to $0.95. Moreover, without the negative impact of currency fluctuations, which hopefully will be temporary, Guess? would have produced substantially better earnings. The retailer said it believes that the strong dollar will cost it around $0.45 per share for the full year.
Investors seemed to anticipate good news before it came, with the stock climbing 6% in the regular trading session preceding the announcement but then trading near the unchanged level in after-hours trading following the announcement. What Guess? still needs to establish is that it can not only slow the pace of its revenue contraction but also get back on track for more lasting growth both in the bottom line and on the sales front. Given what other high-end retailers are seeing, that might be tough, but if Guess? can pull it off, then shareholders could have a lot of upside ahead of them in the long run.