A Good Earnings Report From Guess? Guess Again

Aug.28.14 | About: Guess? Inc. (GES)

Summary

Guess? earnings showed big declines in results and missed analyst expectations.

Guidance is for even bigger declines.

The excuses from Guess? don’t pass the smell test.

Guess (NYSE:GES) reported its fiscal second quarter after hours on August 27. I'm not sure which was more disappointing: the year-over-year declines or the miss versus analyst expectations.

Revenue dropped 5% to $609 million. Adjusted EPS got sliced in half from $0.52 to $0.26. Analysts had been expecting a year-over-year sales drop but to only $618 million and a year-over-year earnings drop but only to EPS of $0.29 per share. As if that miss and decline weren't bad enough then the guidance was just downright awful.

Guess? guided for sales next quarter of between $590 million and $600 million compared to expectations of $613 million. That part wasn't too bad in light of Wednesday's results, however, the earnings per share guidance is what really bad. Guess? guided for EPS of between $0.15 and $0.20 compared to the analyst estimate of $0.37. Ouch. That's an enormous miss.

What's going on? According to CEO Paul Marciano it was due to the soft environment in North America that is putting brick-and-mortar retailers under pressure. He pointed out that the company's e-commerce sales were up 50% as evidence of this excuse being valid. "Promotional" pressure is cutting into margins hence the much more drastic earnings miss in outlook than the sales miss.

While I have no doubt the retail environment could be better for Guess?, I have trouble believing the environment is the only problem. In the conference call, for example, Guess? said the back-to-school season was "much weaker than we expected."

I have a hard time believing parents quit buying clothes for their growing children to wear. Sure, there will be some hand-me-downs and other cost cutting compared to maybe 10 years ago, but on a year-over-year basis? It's a hard pill to swallow to tell me budgets for school clothes have drastically changed over the last year. If owned Guess? right now I would be selling aggressively.

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