Guess? Earnings Will Be Anybody's Guess

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Guess? (NYSE: GES) reports Q3 earnings on Nov. 28 and the company has been trading near 52 week lows lately for good reason. The company missed on their Q2 with earnings at $0.49, down considerably from $0.84 the same quarter a year ago. Margins also shrank. The company already said they expect a range of third quarter earnings of $0.42-46 and net income to decrease to $620-630 million from Q2 revenues of $635 million.

Guess?, designer, marketer, and distributor of self-described "lifestyle clothing with European sensibilities," blamed the decline on a 15% drop in European revenue and a 3.8% drop in North American revenue only slightly offset by a 21% increase in Asia.

Rival Abercrombie & Fitch Co. (NYSE: ANF) reported on Nov. 14 and hit it out of the park on the back of much improved international sales for a 30% rise in the stock. To be fair there was a huge short interest in Abercrombie since it hadn't reported a profit in a year. But Abercrombie also guided higher and so investors have lost patience with Guess? with trading volumes decreasing.

Guess?, the company, operates 251 stores outside the US and Canada and 230 small concession size stores internationally, but licensees operate 804 stores overseas and 119 concession stores in Asia for 90 countries total. The company operates 504 stores in the US and Canada and operates e-commerce sites. The company's sales are mostly international so it is possible but not very likely they may have an Abercrombie-like beat.

Good For Guess

The company does have some good points. Their debt is very low for a fashion company at only $11.35 million to cash of $281.51 million. The company has bought back 5 million shares, but mostly at higher prices. At these lows the yield is 3.50% with a 24% payout ratio.

The current P/E is now 9.35, almost half of the industry average at 17.96 and considerably lower than that of Abercrombie standing at 33.92. Abercrombie's yield is smaller by half at 1.70%. And Guess? does have a higher insider hold at 30% than Abercrombie's 1% so inside the company they still believe.

When the company presented at the Goldman Sachs 2012 Global Retailing Conference in September CFO Dennis Secor explained their G by Guess stores featuring lower price point merchandise like the Michael line at Michael Kors Holding Ltd. (NYSE: KORS) have really been gaining traction. He called G "a solid niche at a moderate price" and surprisingly popular with young men. He further added that the G by Guess stores are a big driver for revenues.

The last analyst call was an inititation by Avondale on Oct. 3 to Market Underperform. Before that there were three calls by Standpoint Research in four months from Buy to Hold to Buy again from May through August. The mean analyst target is $28.82 for more than 20% upside.

Now The However

The apparel is fairly pricey and it competes with Michael Kors as well as Abercrombie & Fitch. The Guess? by Marciano line in particular targets the same shopper as Michael Kors; women over 25 who are sophisticated, affluent, and like to travel. Like Michael Kors it also runs a licensing segment for glasses, fragrance, etc. The similarities end there as Michael Kors has significantly outperformed Guess? in its first year as a publicly traded stock.

When Michael Kors last reported, like Abercrombie, it reported good international sales, especially in Asia but Europe wasn't bad either. Yes, Guess? is performing well with leading market share in South Korea and a respectable showing in China. However, CFO Secor was downbeat about Southern European numbers but maintained growth in Germany and Russia was strong. He also explained that the European economy has caused currency headwinds as well as a sharp decrease in European tourists shopping the North American stores.

Accessories weren't performing as well this year as in the past, he also noted. Michael Kors accessories seem to be performing quite well, giving Coach a run for their money. Secor cited another reason for lower numbers was increased ad spending to celebrate the company's 30th anniversary which did drive increased traffic and comps in May.

Going Forward

The company intends to ratchet up social media and digital media with increased dialogue with bloggers and entertainers and creating more in-store events to attract the Guess? customer. They will keep their iconic billboards and magazine ads, just lately bringing on as a model Gigi Hadid, a daughter of one of the Real Housewives of Beverly Hills, for some extra buzz.

If you're looking at Q3 earnings they will likely be right where the company already guided, around $0.42 for the quarter and between $2.15-$2.30 for the full year. All the factors that made Q2 "challenging" haven't changed. Plans for increasing brand awareness by collaboration with social media players haven't kicked in yet. Since they already disappointed and guided lower, I "guess" if anything it will trend slightly lower unless something dramatic is announced.

The company is certainly cheaper with a single digit P/E than Abercrombie and Michael Kors with its 40.85 P/E. The yield is attractive. But with sentiment so negative and no particular catalyst other than an earnings release that is even lower than the last, this is a name that remains a wait and see until after earnings.

 

 


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Guess?. Motley Fool newsletter services recommend Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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