Why Is Guess Closing 50 Stores In North America?

| About: Guess? Inc. (GES)

Summary

According to specialty retailers, full year earnings per share are expected to range between $1.05 and $1.20.

After analyzing its market in North America, the company has identified 50 stores that do not generate sufficient store traffic.

Revenues in Asia fell by 8% because the economic environment in South Korea weakened. Consumer spending in China also declined.

After having reported a 45% decrease in earnings for the second quarter for FY 2015, shares of Guess (NYSE:GES) slumped by almost 8%. Based on these reports, the company also slashed its guidance for the third quarter and the full year as well. According to specialty retailers, full year earnings per share are expected to range between $1.05 and $1.20, though the previous guidance lay between $1.40 and $1.60. Third quarter EPS projections are far lower, ranging between $0.15 and $0.20; much below estimates of $0.37.

These disappointing earnings were due to low product performances and soft traffic. The company explained that its fall collection did not perform as well as expectations and this could also impact the third quarter results for the company as well. The company also believes that the shift to online buying has caused a decline in store performances, especially in the United States, and this will only add to the problems that the company is already facing. The slow growth in the European economy doesn't lift moods for the company either since purchasing power of the customers in countries like France and Italy, which are considered to be the biggest markets in the region, will not improve. With demand in this region decreasing, the company has also experienced a decline in its wholesale fall and winter orders to low double digit rates. In other words, the company is set to have another weak performance in the next quarter for the business in Europe, which itself accounts for a significant percentage of the company's gains.

How Will Guess Respond?

Based on its weak performance in the United States, the company has made decisions about consolidating the stores network it has in the United States. This practice has now become a popular trend for businesses operating in the United States clothing industry. After analyzing its market in North America, the company has identified 50 stores that do not generate sufficient store traffic and has plans of closing them over the period of the following 18 months. It is believed that closing these stores might slightly improve revenue generated by the company per square feet and could translate into better operating margins as well, but it could simultaneously lead to lowering revenue growth.

50-Store Shut Down

It is no secret that the company has been struggling in North America for some time now and several stores are operating below full capacity in the region. Despite operating below full capacity, these stores contribute to SG&A expenses in the same proportion as fully operating outlets of the company. Already struggling to attract customers because the brand has now lost its brand loyalty amongst many, the company believes that this shutdown is a step in the right direction.

The shutdown of these stores will reduce the SG&A expenses that the company is incurring and the rate of this decrease is believed to be faster than the revenue decline that the company is already experiencing. The step could lead to improved cash flows for the retailers and also improve stock process. The step itself is a very small one compared to the one that the company should be taking regarding the issues that have started popping up with the merchandise it is introducing in the market.

Declining Revenue Still Ahead

Revenues in the North American region for Guess declined by about 4%. Comparable sales declined by 5%, despite a 50% growth in the revenue received from online sales. This is a good indication about which direction retailers should be heading in but the company still needs to think about how it will recover from the dents it has experienced in the future. The fashion designs that Guess seems to be introducing are not doing well with customers, and this was very evident from the weak response to the fall collection.

Revenues in Asia fell by 8% because the economic environment in South Korea weakened. Consumer spending in China also declined, which also contributed to a fall in the company's revenues in this region.

Revenues for the company declined by 6.3% to $608 million. This was well below the estimates of $615-$630 million that was anticipated. Guess is expecting revenues to range between $590 million and $600 million for the next quarter while analysts have set their estimates at $613 million. The full year estimates of the company were set at $2.53-$2.57 billion but have now been brought down to $2.44-$2.48 billion because the company is anticipating dismal performances in the next quarter as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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