Guess Inc. (GES) is a teen, young adult, and young, middle aged apparel retailer. My take on its offerings is that its fashions are not exciting enough for many teen women, but they are generally chic and stylish for young adult women and older women who keep themselves in great shape. Their men's fashions have some appeal, but their models tend to make all of their men's fashions seem made for wimps. The men's lines are also much less extensive. Guess is really a women's apparel retailer.
We have recently seen retail companies such as Abercrombie & Fitch (ANF), Nike (NKE), Coach (COH), Starbucks (SBUX), and others report worse than expected earnings results due in large part to problems with their international business. Actually ANF has not reported yet, but it did announce at the beginning of August that it was cutting it full-year 2012 guidance by approximately $1 per share. Guess, which reports on August 24, 2012, seems likely to follow these companies with lower than estimated Q2 results. More than that, its results for future quarters in at least the next year are likely to be lower than expected. This means the new forward guidance given with earnings on August 24, 2012 should disappoint. I do not mean to imply that Guess's results or outlook will be as dramatically bad as Abercrombie & Fitch's recent guidance lowering. Guess's clothes lines are more chic. However, Europe is doing particularly badly now. Its economies are poised to worsen appreciably after more of the austerity measures are put into place in coming months. If EU economies receive other significant shocks such as Greece leaving the Euro, European economies and Guess will do that much worse. It will not be pretty.
Guess's stock price has been in decline since late in 2010. It has recently showed signs of bottoming. However, this may be a short-term bottom given current world economics. Further Guess's operating margin has been in steady decline since 2008. The European economic crisis makes a reversal of this trend virtually impossible for the next year or more. Investors can expect the European GDP growth to get significantly worse.
Analysts cut Guess's Q2 earnings estimate from $0.62 per share to $0.50 per share almost three months ago. However, they did not cut Q3 earnings by much if at all. They did not cut full-year estimates by much. Yet there has been no worldwide economic recovery. Rather the overall European economy appears to be worsening. Europe accounted for 37% of Guess's revenues in Q1. Asia, another slowing area, accounted for 10% of Guess's revenues in Q1; and don't forget the US is slowing itself. The analysts and/or the company have not adequately accounted for coming quarters' worsening world economics in current estimates. It will be hard for the company to go beyond this quarter's earnings report without lowering its longer-term guidance. Otherwise the officers could be accused of deliberately misleading investors. I expect a significant lowering of forward guidance with the Q2 earnings announcement. This should pressure the stock price.
Not only is the global economic slowing a problem for the near term, but it is a problem for Guess's long-term expansion plans. As we all know first impressions can be very important. If you open a store in a recession, its sales may be hurt for many years into the future if few people go there its first year. Currently Guess has 576 stores in the Americas, 577 in Europe and the Middle East, and 442 in Asia. All told it has 1595 stores in 88 countries. Its recent five year plan calls for 720-740 stores in the Americas, 850-875 stores in Europe and the Middle East, and 720-750 stores in Asia. Most significantly those plans call for an increase of 278-303 stores in Europe and the Middle East (mostly Europe). One of the areas Guess is emphasizing is Spain, which is in a recession. Ugh!
The big problem is that Europe will be in or near recession for at least three of the next five years. Any new store openings will be lucky to see appreciable numbers of customers in that kind of environment. If you add in the fact that Europeans in general like to sneer at the US, Guess's plans for a lot of new European stores seem very likely to fail dramatically. The Middle East will likely be far worse off than Europe, especially given the poor grain crops this year. The increase in food prices seems likely to throw the Middle East into another series of riots and demonstrations against the various governments. This is not the kind of environment in which Guess will do well. Asia and US openings will be hurt too, but they will likely be hurt to a much smaller extent.
In sum, investors should expect the downtrend in Guess's stock price to continue. I am never sure exactly what will happen on earnings. In fact I am surprised that the US equities markets have been rising lately. This is more likely due to HFT/momentum traders than it is to any fundamental factors. Earnings, especially revenues, have been disappointing this earnings season. With 87% of the S&P 500 companies having reported, only 51% have beaten earnings estimates. The usual figure is 60%-70%. Further 62% of companies have missed on revenues. For the Consumer Discretionary segment, which includes retail apparel, that figure is 76% misses on revenues. For the first time since the Lehman collapse, year-over-year revenue growth will be negative. It is down -1% from Q2 2011. Further US companies are expected to see further pressure from the EU recession in Q3 as well as slowing demand due to apprehension about the looming US fiscal cliff. In other words, US companies will be going from negative sales growth to still more negative sales growth in Q3 and beyond. This sounds suspiciously like a looming US recession. Guess's estimates are far too high for this scenario.
As much as I expect bad news on earnings, I would not necessarily play Guess short just for earnings, which are scheduled for August 24, 2012. HFT/momentum traders have been lifting the overall market and the retailers in general lately. I would definitely sell Guess into this recent rally. If I were going to short it, I would short it with a longer term horizon than just the earnings report. Guess stands to do badly for many quarters going forward. That factor should smooth out any HFT/momentum trader induced short-term effects. Some may balk at shorting a stock with a 2.70% dividend and a 11.49 PE, but over the long term, Guess is destined to disappoint significantly. Even in a six month time frame shorting is probably a sure thing. The downward price movement of the stock in the next year should be a multiple of the dividend. You should not lose money, especially with the extra damage that will be done by the fiscal cliff fiasco. Even if the fiscal cliff is put off, damage beyond the current slowing will be done. When the media use terms like tax-maggedon and fiscal cliff to describe coming troubles, it is safe to assume a significant negative impact on revenues and earnings for Guess. Guess is already slowing without these things.
The two year chart of Guess provides some technical direction to this trade.
The slow stochastic sub chart shows that Guess stock is near over bought levels. This is good if you are thinking of selling or shorting the stock. The main chart shows that the price line is near the upper Bollinger Band (over bought). The 50-day SMA is below the 200-day SMA. This shows that even with the recent run up in retail stocks, including Guess, Guess stock is still in a downtrend. This behavior contrasts with stronger retailers such as PVH Corp. (PVH) and American Eagle Outfitters Inc. (AEO), which are in up trends. Therefore Guess is not among the strongest US retailers. It can continue to fall. Guess does already have 10.87% of its float shorted. Institutions have sold 25.97% of the stock they owned from the previous quarter to this quarter. It seems primed for another leg downward.
Note: Some of the fundamental fiscal data above is from Yahoo Finance.
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GES over the next 72 hours.