Guess? (GES) exploded higher by more than 12% last Thursday after the company reported earnings that blew away Wall Street expectations. While there are many positives to take from the quarter, there is one massive problem that could make this stock a value trap.
Quarter at a glance
Looking at Guess' quarter, revenue was $13.8 million better than expectations at $639 million, and EPS was $0.52 ($0.17 better than the consensus).
Then, the company gave guidance above expectations. The company's full-year revenue guidance was $30 million better than analysts had projected and its EPS outlook is $0.06 better than the consensus. Therefore, the market liked what it saw!
Essentially, Guess' rally was in relation to expectations, not necessarily its fundamental improvements. Sure, the company beat expectations, but top-line performance was dismal.
For the quarter, revenue in North America and Asia declined 0.5% and 1.5%, respectively, year-over-year. Europe was the only segment that grew, and it was marginal at 1.4%.
If we look at the company's "impressive" full-year guidance, it is still expecting revenue to decline roughly $10 million compared to last year. While the company's guidance and top-line performance are gloomy when compared to last year, these two metrics are not what I find most bothersome.
Where's the volume?
Before looking at top-line performance, I always scroll to the comparable sales when looking at retail. Comparable sales tell you how a company's stores are performing relative to the year prior, not accounting for revenue earned during expansion.
This is important because rising comps indicate higher margins, as more revenue per square foot proves that a company is being successful in its marketing and is seeing customers return.
Guess' comp sales were negative 2% in North America, its largest segment. This shows that the company's 0.6% rise in total sales was mostly tied to expansion, online, and/or wholesale, rather than having a higher volume of consumers visit existing stores.
In many ways, I view Guess to be on the same page as Ralph Lauren (RL), which is not a compliment. Ralph Lauren saw its sales rise nearly 4% during its last quarter. While this may appear strong, the company's comps fell 1% over the prior year. As a result, its net income fell 6%, representing a decline in margins. Over time, this is what happens to retailers whose comps fall, and this is the path that Guess finds itself on.
With that said, I actually consider Guess to be a better investment than Ralph Lauren. Guess is trading at just 0.9 times sales while Ralph Lauren trades at 2 times sales, and Guess is also cheaper on a future price/earnings basis as well.
While its no secret that retail traffic has lagged as of late - declining in eight of the last 10 weeks - I still prefer existing store growth when investing in retail.
Two industry leaders to note
Urban Outfitters (URBN) and Michael Kors (KORS) are two retailers that you have to like in this retail environment. Urban is in the teen retail class, and if you've followed the likes of Aeropostale and American Eagle, then you know that comp growth in teen retail is a rare occurrence.
Yet, Urban has set itself apart in this space, as all three of its brands have delivered impressive quarterly growth. Free People saw 38% comp growth, and Anthropology and Urban Outfitters saw comp growth of 9% and 5%, respectively, year over year. As a result, the company's net income growth is outperforming its revenue growth by 100%, and at 2 times sales (same as Ralph Lauren), the stock is very attractive.
On the other hand, Michael Kors is in the luxury space, making handbags, wallets, and clothes. During its last quarter, comps grew a whopping 27.3% year over year, and total revenue grew 54.5% in the same period, representing both increased traffic and store expansion. Essentially, this performance shows that the Michael Kors brand is becoming more popular, which directly competes with the likes of Guess.
While many might think that Kors' 6 times sales valuation is pricey, I think investors must consider its strength in the industry, and realize that if you're going to invest in growth, then you're going to pay for it.
Clearly, the market was impressed with Guess' quarter, yet I don't see much to create excitement for long-term investors.
In 2013, Guess' stock has doubled the performance of the S&P 500, and while many might see it as a value investment, I prefer strong companies with growth that exceed the industry average. Both Urban and Michael Kors fall in this category, in both the teen and luxury spaces, making both present solid opportunities for investors.