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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.

Reference:

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.

Source: Trading Guess Into Earnings - Looking For A Correction