Shares of Guess? (GES), the designer and distributor of apparel, lost almost 20% over the past week. On Thursday, the company published disappointing second quarter results, accompanied by a weak outlook for the remainder of the year.
Second Quarter Results
Guess reported second quarter revenues of its fiscal 2013 of $635.4 million, down 6.2% on the year. The company published a net income of $42.9 million, compared to $78.3 million last year. Diluted earnings per share fell from $0.84 to $0.49 per share. Earnings missed analysts expectations by a penny.
The company reported severe operating margin compression. Margins fell by 770 basis points to 9.0% on the back of higher marketing and advertisement costs, lower comparable sales and higher costs in Europe. Asia remains a bright spot, while performance in North America and South Europe remains under pressure.
The company will use its strong balance sheet to limit the pain for shareholders. The firm remains committed to its $0.20 quarterly dividend. Furthermore, Guess repurchased 5.0 million shares at an average price of $27.83 during the quarter, for a total value of $140.1 million. The company still has $518 million available under its existing share repurchase program, sufficient to retire over 20% of its shares outstanding.
CEO Paul Marciano commented on the results, "The second quarter was both rewarding and challenging for us. While store traffic remained down in North America, our strategy to elevate our women's business appears to be working. We are now focused on driving improvements in accessories, which has become increasingly competitive, and are also developing plans to refine our North American strategy where necessary to remain competitive."
Revenues in North America fell 3.1% to $253.0 million. Comparable sales fell by 7.5% in local currencies. At the end of the quarter, Guess operated 511 stores which is 21 more than the second quarter last year.
Revenues in Europe fell 14.5% to $246.9 million, mostly due to the weakening of the Euro. In constant currencies, sales fell 1.9%. Strong performance in the northern and eastern areas was offset by weakness in the southern parts.
Asian revenues rose 20.8% to $66.8 million, up 26.2% in constant currencies. Sales in the area and in China remained resilient.
For the third quarter of its fiscal 2013, Guess anticipates revenues between $620-$630 million. Operating margins are anticipated to come in between 9.0%-9.5%. Diluted earnings per share are expected to come in between $0.42-$0.46.
For the full year of its fiscal year of 2013, Guess foresees net revenues between $2.62-$2.65 billion. Operating margins are expected to come in between 10.5% and 11.0%. Diluted earnings per share are expected to come in between $2.15 and $2.30 per share.
The full year outlook was revised downwards with respect to both revenues and operating margins. Earlier, Guess guided for annual earnings of $2.50-$2.65 per share. Analysts, expected Guess to guide for annual earnings of $2.59 per share.
Guess? ended its second quarter with $282 million in cash, equivalents and short term investments. The company operates with negligible amounts of short and long term debt.
For the first six months of 2012, Guess reported revenues of $1.21 billion. The company net earned $70 million, or $0.78 per share.
Currently, the market values Guess at $2.4 billion, or roughly $2.1 billion for its operating assets. Based on the full year outlook of sales of $2.62 billion, the firm is valued at 0.8 times annual revenues. Guess is valued at 10 times earnings, based on the full year outlook of earnings of $2.20 per share.
The valuation compares to a revenue multiple of 0.7 times for Abercrombie & Fitch (ANF) and 1.4 times for American Eagle Outfitters (AEO). These competitors trade at 29 and 23 times annual trailing earnings, respectively.
Currently, Guess pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 3.0%.
Year to date, shares of Guess have fallen little over 10%. Shares peaked at $37 in March of the year, but fell after the company guided for a weak first quarter. Trading around $26 at the moment, shares are approaching the lows of $24 set in May.
Over the past five years, shares have fallen almost by 50%. Shares traded within a wide range, trading between $10 and $50 per share. Between 2008 and 2012, Guess has steadily grown its annual revenues from $2.1 billion to $2.6 billion in 2012. Earnings per share are stable around $2.25.
While earnings were stagnant, the company more than doubled annual dividends. In 2008 it paid annual dividends of $0.36 per share, in 2012 it is expected to pay $0.80 per share.
After the latest sell-off, shares of Guess have increased valuation appeal. The company has a strong balance sheet, stable operating performance and offers a decent dividend yield. The operating assets are valued at merely 10 times earnings, making Guess a decent opportunity for long term investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.