Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Guess? (GES) rose some 4.5% over the past trading week. The designer and marketer of apparel for men, women and children reported its third quarter results for its fiscal 2013 on Wednesday after the close.

Third Quarter Results

Guess? reported third quarter revenues of $628.8 million, down 2.2% on the year before. In constant currencies, excluding the adverse effects of a strong dollar, revenues were up by 1.2%. Revenues came in ahead of consensus estimates of $624.8 million.

Operating margins fell 590 basis points compared to the second quarter, coming in at 9.2%. Margin pressure was the result of higher occupancy costs, negative same store sales growth and increased investments in marketing.

The company reported net earnings of $36.6 million, down 45% on the year. As a result of share repurchases, earnings per share fell less, but were still down 39% to $0.43 per diluted share. Earnings missed consensus estimates by a penny.

The company opened 24 new stores during the quarter while it closed 15 stores, ending with 513 stores at the end of the quarter.

CEO Paul Marciano commented on the results, "Third quarter earnings were consistent with out guidance but fell short of our operational goals, as economic pressures impacted consumer confidence in most of our markets."

Detailed Information

Revenues in the important North American retail market fell a percent to $262.1 million. Store openings largely offset a 6.0% decrease in comparable store sales, offset by new store openings. Operating earnings fell 67% to $9.0 million in the area. The wholesale business reported a 1% increase in revenues coming in at $57.9 million. Earnings fell 7% to $14.9 million.

Revenues in Europe fell by 8.3% to $202.6 million, entirely the result of unfavorable exchange rates. In constant currencies, revenues would be up 1.7%. Operating earnings fell 57% to $14.6 million, before settlement charges.

A bright spot was the performance of the Asian division. Revenues rose 15.5% to $74.8 million, while operating earnings fell by 5% to $7.8 million.

Outlook

For the current fourth quarter of its fiscal 2013, Guess? expects revenues to come in between $780 and $800 million. Operating margins are expected to be between 14.5% and 15.5%. Diluted earnings per share are expected to come in between $0.85 and $0.95.

Analysts expected Guess? to guide for fourth quarter revenues of $789 million, on which the company is expected to earn $0.95 per share.

Consequently, full year net revenues are expected to come in between $2.62 and $2.64 billion. Full year operating margins are expected to come in between 10% and 10.5%, resulting in diluted earnings per share between $2.05 and $2.15 per share.

CEO Marciano commented on the near term outlook, "We do expect that the current market conditions in the global economy will continue for some time and we are more cautious on near term customer demand trends."

Valuation

Guess? ended its third quarter with $294.6 million in cash and equivalents. The company operates with $10.5 million in short and long term debt, including capital lease obligations. As such, Guess? operates with $284.1 million in net cash.

For the first nine months of 2012, Guess? generated revenues of $1.84 billion. Net income attributable to shareholders came in at $106.2 million, or $1.21 per diluted share.

The market currently values Guess? at $2.2 billion. This values operating assets at roughly $1.9 billion. Based on the company's full year outlook, this values the firm at 0.7 times annual revenues and 10-11 times annual earnings.

Guess? currently pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 3.1%.

Some Historical Perspective

Year to date, shares of Guess? have lost roughly 13% of their value. Shares started the year around $30 per share and rose to highs of $37 in March. A weak outlook for the third quarter send shares lower in August when shares were hitting lows of $22 in November. Shares are currently exchanging hands at $26 per share.

Shares of Guess? recovered from lows of $10 in 2008 to highs of $50 in 2010. Shares lost roughly half their value from that point in time. After years of consecutive revenue growth, full year revenues are expected to fall a little bit this year. Net earnings peaked already at $289.5 million in 2011, expected to come in around $180 million for the fiscal 2013.

Investment Thesis

Investors were pleased with the announcements of Guess? Third quarter performance and the fourth quarter outlook was largely in line with expectations. Investors are pleased with the $1.20 special dividend which the company announced.

After the sell-off in August, I argued that shares offered more appeal based on valuation motives. Guess? has a strong balance sheet and stable operating performance, despite the margin pressure as a result of lower consumer confidence across the globe. The valuation at roughly 10 times annual earnings is fair.

Shares offer enough value appeal at these levels.

Source: Guess? Valuation Remains Appealing