For jeans retailer Guess? (GES 4.53%), the strong dollar has been a particularly big problem to overcome, with so much of the company's revenue coming from overseas sources. Yet even as Guess? has had to deal with sales declines and pressure on its earnings, the company has stressed its progress toward a long-term recovery. In last week's fiscal second-quarter financial report, Guess? posted mixed results that included continued difficulty with sales and disappointing guidance for the fiscal third quarter but an upbeat assessment of the full fiscal year. Let's look more closely at what Guess? said in its report and what investors should expect in the future.
Guess? keeps taking a hit from the greenback
As we've seen in past quarters, Guess? had a lot of trouble keeping its sales figures up. Overall revenue dropped more than 10% to $546.3 million, although that was actually better than the nearly 12% decline that most investors were looking to see from the jeans retailer. Similarly, net income fell by a sixth to $18.3 million, and earnings of $0.21 per share were down a nickel from year-ago figures but were considerably better than the $0.15 per share consensus estimate among investors.
The impact of the strong dollar was a huge factor in the results Guess? posted. The company said that currency issues cost the company a dime per share in earnings, and it also turned what would have been flat retail comparable sales including e-commerce into a 3% drop.
Looking at its business segments, Guess? has had to deal with weak conditions in several key areas in its business footprint. The Americas segment saw revenue fall nearly 5%, and European sales took an even steeper 15% haircut, with the strong dollar accounting for all of the sales declines on the continent. Asia saw sales drop nearly 12%, and even in constant currency terms, a 6% drop showed that Guess? is dealing with some problems beyond the dollar. The company's wholesale segment was also weak, with a 15% drop in revenue, and licensing proceeds fell 5.5% from the year-ago quarter.
Still, some things went well for Guess? during the quarter. Margins in the Americas rose by more than four percentage points, helping to offset margin weakness in Europe and Asia. Fewer markdowns and higher initial markups contributed to the solid results in the Western Hemisphere.
Chairman and former CEO Paul Marciano was happy with the company's performance, pointing to the success of Guess? e-commerce initiatives and good results in its key Women's sales category. Even as Marciano noted that comps were flat in constant currency terms to start the fiscal third quarter, he also believes that newly appointed CEO Victor Herrero can lead the company forward effectively.
Can you Guess? what's next?
In particular, Herrero believes that a multiphase process will take Guess? into the future more effectively. In its first phase, Herrero expects to boost internal sales results throughout its network and focus on building up the Guess? brand in Asia. With a central organizational structure, Herrero thinks that greater accountability will lead to more positive results.
Short-term headwinds will keep hitting Guess? hard, though. The company said that revenue will fall between 3% and 4.5% in the fiscal third quarter even after taking the strong dollar into account, and earnings will come in between $0.08 and $0.12 per share, well below what investors had expected to see.
In the long run, though, Guess? is still optimistic. The retailer narrowed its previous full-year fiscal 2016 guidance to the higher end of its previous range, now expecting earnings of between $0.89 and $1.02 per share. Yet the projections still include considerable disparities across its business segments, with constant-currency comps in the Americas and Europe expected to rise modestly while Asia and the wholesale segment will see more considerable declines even before accounting for the dollar's strength.
Investors were initially concerned about the results, sending the stock down sharply, but by the end of the following trading session, Guess? shares had risen, and the stock has held onto its gains since then. With investors clearly looking at the long run, Guess? needs to find a strategic plan that it can stick with and hopefully generate the success its executives believe is possible.