Guess' (GES) Beats Q2 Earnings, Misses Revenue Estimates

Apparel retailer Guess’, Inc. (NYSE:GES) reported second-quarter fiscal 2017 results, wherein earnings outpaced the Zacks Consensus Estimate but revenues lagged the same.

Guess’ reported adjusted earnings of 14 cents per share, which beat the Zacks Consensus Estimate of 6 cents by 16.7%. Earnings also compared favorably with management’s projected range of a loss of 4–8 cents.

The bottom line, however, was 33.3% lower than year-ago result. The underperformance can be attributed to top-line weakness and currency headwinds, which impacted results by 4 cents.

Revenues and Margins

Revenues were almost flat year over year at $545 million as improvement in Europe was offset by deterioration in American retail and wholesale business. On a constant currency basis, revenues inched up 0.5%, in line with management’s guided range of 0.5%–2.5% increase. However, revenues missed the Zacks Consensus Estimate of $554.5 million.

Total gross margin contracted 220 basis points (bps) to 34.1%, primarily due to the negative impact of currency and increased markdowns in the Americas.

Operating margin contracted 190 bps to 2.9%, mainly due to higher expenses stemming from retail expansion and the negative impact from currency exchange rate fluctuations.

Segment Results

Starting from fiscal second-quarter, Guess’ changed the names of its "North American Retail" and "North American Wholesale" segments to "Americas Retail" and "Americas Wholesale," respectively.

Revenues from retail stores and e-Commerce sites at the Americas Retail segment declined a respective 3% and 1%, on a constant currency basis. Consolidated comparable store sales (comps) including e-commerce decreased 2%, both in U.S. dollars and on a constant currency basis. Retail business in the U.S. and Canada met management’s expectations.

The European segment's revenues were up 7%. On a constant currency basis, revenues increased 6%. Retail comps in the region were up in the low-double digits due to comp increases across most markets, particularly Italy and Spain.

Revenues from Asia decreased 6% (down 4% in constant currency) as positive comps in Korea, Mainland China and Japan were offset by weakness in Greater China.

Net revenue at the American Wholesale segment were down 8% due to softness in the U.S. wholesale business. At constant currency, the segment's revenues declined 4% year over year.

Other Financial Update

During the second quarter, the company’s board approved a quarterly cash dividend of 22.5 cents per share on the company's common stock. The dividend will be payable on Sep 23, to shareholders on record at the close of business on Sep 7, 2016.

Guidance for Fiscal Third Quarter

The company expects net revenue increase of 4.5% to 7.5%, on a constant currency basis.

The company anticipates operating margin between 3.5% and 4.5%, including 30 bps of currency headwind. Adjusted earnings per share are expected in the band of 11–16 cents.

Guidance for Fiscal 2017

For fiscal 2017, Guess’ raised the lower end of its earnings outlook and now expects adjusted earnings per share in the range of 62–75 cents compared with 55–75 cents expected previously. This compares unfavorably with 96 cents per share reported in fiscal 2016. The guidance considers comps to improve for the second half of the year.

However, the company lowered its revenue growth outlook and now anticipates net revenue to rise 2.5% to 4.5% on a constant currency basis compared with the previous range of 5.5% to 7.5%. Currency is expected to have a positive impact of about 0.5%.

The lowered guidance reflects a challenging environment for the company and its soft start to fiscal 2017

Operating margin guidance was raised and is now expected between 4.0% and 5.0% compared with the previous guidance of 3.5% and 4.5%.

Guess’ currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the consumer textile apparel sector include Differential Brands Group Inc. (NASDAQ:DFBG) , Ralph Lauren Corporation (NYSE:RL) both of whom carry a Zacks Rank #2 (Buy). Another stock in the broader consumer discretionary sector includes Central Garden & Pet Company (NASDAQ:CENT) sporting a Zacks Rank #1 (Strong Buy)