Guess' (GES) Slips To Sell: What's Wrong With The Stock?

In order to cushion their portfolio, it is important for investors to exit underperforming stocks, which may dent their portfolio returns. Well, apparel retailer Guess’ Inc. (NYSE:GES) seems to be one such underachiever that needs to be plucked out of investors’ stock garden immediately.

The shares of this apparel retailer which carries a Zacks Rank #4 (Sell) have declined 27.1% so far this year, underperforming the Zacks Categorized Textile-Apparel Manufacturing market, which has reported a decline of 8.2%. Let’s delve deeper to find out what’s weighing upon investor sentiment.

What’s Wrong with Guess’?

Guess’ has been reporting lackluster results for quite some time. In fact the stock missed earnings in three of the last four trailing quarter. This is reflected in the fact that the stock has been witnessing downward estimate revisions since the past 60 days. During the recently reported third quarter fiscal 2017 results released on Nov 30, 2016, earnings of 11 cents per share missed Zacks Consensus Estimate as well as year ago results by 21.4% and 26.7%, respectively.

Further earnings came in at the lower end of the management’s projected earnings range of 11–16 cents. The dismal performance weighed upon the stock and its price dipped 10.2% on Dec 1, a day after the company released its earnings. (Read: Guess' Q3 Earnings, Sales Miss; 2018 View Lowered)

Notably, Guess’ lowered its earnings outlook for fiscal 2017 to reflect lower comps and gross margin in the Americas Retail segment. It now estimates adjusted earnings per share in the range of 42–52 cents compared with 62–75 cents expected previously. This compares unfavorably with 96 cents per share reported in fiscal 2016. Further, the company lowered its revenue growth outlook and now anticipates net revenue to rise in the range of 1% and 2% in constant currency compared to a range of 2.5% to 4.5% expected earlier.

Apart from this, Guess’ remains susceptible to macroeconomic headwinds like increased payroll taxes, fluctuating fuel prices, risk of unemployment and delayed tax refunds. Additionally, the company has been witnessing lackluster traffic in North America.

Guess’ is strategically focusing on expansion in Asia and expects long-term growth in the region. However, a soft macroeconomic condition in Greater China is slowing the company’s growth in Asia. Lower consumer spending owing to uncertain economic environment along with falling exports and slow growth in industrial production, retail sales and construction activity is denting Guess’ sales growth in the country.

Additionally, its business is heavily dependent on the tastes and preferences of consumers that keep changing with time. Consequently, the failure to identify consumer needs and act accordingly may reduce demand for its products and weigh on its financial performance.

Other Picks in the Sector

Better ranked stocks in the broader consumer discretionary sector include:

Perry Ellis International Inc. (NASDAQ:PERY) has an average earnings surprise of 19.5% in the last four trailing quarters.

While PVH Corp. (NYSE:PVH) has an expected earnings growth of 11%, Devry Education Inc. (NYSE:DV) has an expected earnings growth of 9.2%.All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>