Guess?, Inc. (NYSE: NYSE:GES), one of the world's leading retailers of apparel, handbags, footwear, and accessories, announced third quarter earnings after the market closed on December 3, with the results coming in mixed compared to expectations, and its stock has reacted by making a slight move to the upside. Let's take a closer look at the report and the company's outlook going forward to determine if we should be initiating long-term positions in the stock right now or if we should avoid it for the time being.
The Quarterly Breakdown
Here's a summary of Guess's earnings per share and revenue results compared to what analysts had anticipated and its actual results in the year ago period, and a breakdown of the other most important statistics from the report:
| Metric | Reported | Expected | Year Ago |
|---|---|---|---|
| Earnings Per Share | $0.24 | $0.18 | $0.42 |
| Revenue | $589.83 million | $595.63 million | $613.50 million |
Guess's earnings per share decreased 42.9% and its revenue decreased 3.9% compared to the year ago period, driven lower by comparable-store sales falling 7.0% at its retail stores in North America; however, including the positive impact of the company's 2.2% growth in e-commerce during the quarter, comparable-store sales declined by just 4.8% in North America. Here's a breakdown of Guess' revenues and revenue growth by segment (in thousands):
| Segment | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| North American Retail | $243,238 | $253,820 | (4.2%) |
| Europe | $189,852 | $200,943 | (5.5%) |
| Asia | $71,271 | $72,727 | (2.0%) |
| North American Wholesale | $53,501 | $53,591 | (0.2%) |
| Licensing | $31,972 | $32,416 | (1.4%) |
| Total | $589,834 | $613,497 | (3.9%) |
For the quarter, Guess's gross profit decreased 6.3% to $213.96 million and its operating profit decreased 48.2% to $24.87 million, as its gross margin contracted 90 basis points to 36.3% and its operating margin contracted 360 basis points to 4.2%; these weak results can be attributed to the company's costs of sales decreasing just 2.4% and its selling, general, and administrative expenses increasing 6% compared to its 3.9% decline in revenue.
In terms of its store count, Guess reported nine net closures during the quarter, including four net openings in the United States and Canada, one net opening in Central and South America, 10 net closures in Europe and the Middle East, and four net closures in Asia. At the end of the quarter, Guess' store count stood at 1,676, with 844 being directly operated by the company.
As a result of its performance in the first nine months of the year, Guess reduced its full year outlook on fiscal 2015; here's a summary of the company's new outlook versus its previous outlook and its actual results in fiscal 2014:
| Metric | New Outlook | Previous Outlook | Fiscal 2014 |
|---|---|---|---|
| Earnings Per Share | $1.00-$1.10 | $1.05-$1.20 | $1.91 |
| Revenue | $2.42 billion-$2.43 billion | $2.44 billion-$2.48 billion | $2.57 billion |
| Operating Margin | 5.0%-5.5% | 5.5%-6.0% | 8.7% |
Lastly, Guess provided its outlook on the fourth quarter, calling for the following performance:
- Earnings per share in the range of $0.53-$0.63, a decrease of 24.1%-36.1% from the $0.83 earned in the year ago period.
- Revenue in the range of $695 million-$710 million, a decrease of 7.6%-9.5% from the $768.36 million reported in the year ago period.
- Operating margin in the range of 9.5%-11.5%, a decrease of 180-380 basis points from the 13.3% margin reported in the year ago period.
Should You Go Long Guess Today?
Guess?, Inc. is one of the world's largest apparel retailers, but slowed traffic at its stores led it to a weak third quarter performance; the company reported year-over-year declines in earnings per share, revenue, comparable-store sales, gross profit, and operating profit, and its margins contracted, all of which led the company to reduce its full year outlook on fiscal 2015.
Even though just about every statistic in Guess's earnings report was negative, its stock has reacted by moving higher in the after-hours trading session. I do not think the positive reaction is warranted, so I would avoid a new investment for the time being; however, I would also urge long-term investors to keep an eye on the stock going forward, because at current levels, it trades at just 16.8 times next year's earnings estimates and has a bountiful 4% dividend yield, so any significant weakness in the future would represent an intriguing opportunity.
