Trading Guess Into Earnings - Looking For A Correction

| About: Guess? Inc. (GES)

Guess, Inc. (NYSE:GES) - a designer, manufacturer and distributor of a variety of clothing apparel and accessories mostly tailored to teenagers - is expected to schedule its third quarter results release date very shortly, with the results conference call likely commence at the November-December date turnover.

I have earlier taken a stab at the company's second quarter press release and conference call webcast with an overall bearish outlook takeaway given the competitive landscape, economic turmoil and potential shift in teen-retail away from apparel merchandise.

Nonetheless, the above guidance beat (mostly attributed from Q3 pull-in) in the second quarter and overall inline guidance for the remainder of the year was so much better than the results posted earlier by Abercrombie & Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO) that shares quickly regained pre-Q2 declines, spiking 12% just after the earnings release, closing at $30.62 on August 29. As of last night's (11/21/13) close, shares of Guess are valued at $34.64 - another 13% premium gain post second quarter analysis. But is this valuation justified and what should we expect in the third quarter earnings?

Expectations and Assessment:

I think it is obvious by now that Q3 has turned out to be very tough for many companies in a variety of industries. Abercrombie which reported its Q3 earnings just recently witnessed 18% declines in its U.S. business revenues with a 14% drop in comparable store sales.

On the upside, economies outside of North America, particularly in Europe seem to be doing better - Abercrombie's negative results were actually somewhat offset by positive 2% revenue growth in international markets. Guess derives roughly half of its revenues internationally, which has a potential for a positive surprise when the company announces.

I think that overall going into third quarter Guess is favorably positioned compared to its competitors with a good chance to surprise analysts. Given the divergence in Q2 results from rivals, I speculate Guess has picked up a few market share points and with new designs launched earlier this year could recover some sales dollars and margin points.

Going into Q2 earnings, I had a fairly successful bear-spread ride, closing out long puts before earnings release and covering short leg position just after the rebound. Assessing the results, I picked up a few more shares around $31 expecting further upside on a short squeeze and raised bottom line guidance. That didn't realize - shares declined and I've spent September and October in the red on my position, finally closing out at $32 per share at the end of October. My thought of the upside was correct, but the timing and patience did not align :)

Today trading at 52-week highs, I think the expectations baked in are exceptionally high. I think that less-than-stellar results or weak guidance may reset shares to a more reasonable valuation - I figure somewhere around $31-32 per share range.

Playing it safe:

A few days ago I opened a put ratio spread expiring in December, selling two $32 puts @ $.71 for each purchased $34 put @ $1.45. The payoff is maximized if shares trade at $32 on expiration date - the target price I expect the shares to rebound to post earnings. Should the company beat and go further up - my upside risk exposure is nonexistent, just the few dollar difference between $1.42 (2 * $.71) and $1.45.

But of course there is a loss risk - which will be the case should the shares fall below $30 (I will owe $2 on each short and be making $4 on each long, balancing out to net-zero). However, barring some really negative developments in Guess I will be willing to take a long side of the trade here, likely taking the profits in the long puts and taking on the assignment with expectations of at least partial recovery.


And just to help out - the best tool for building your option trades that I've came across can be found is SamoaSky Online Tool that I highly recommend :)

Disclosure: I am short GES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.