After reporting an earnings beat in the second quarter of fiscal 2017, apparel retailer Guess’, Inc. GES succumbed to a negative surprise of 21.4% during the third quarter. In fact, we note that in the trailing four quarters (including the quarter under review), the retailer has missed the consensus mark thrice. The dismal performance weighed upon the stock and its price dipped 13.2% in the pre market trading on Dec 1, 2016, a day after the company released its earnings.
In fact, so far this year, the shares of this apparel retailer have declined 18.9%, underperforming the Zacks Categorized Textile-Apparel Manufacturing market, which has showcased a decline of 6.5%.
Guess’ reported adjusted earnings of 11 cents per share, which missed the Zacks Consensus Estimate of 14 cents by 21.4%. Earnings came in at the lower end of management’s projected earnings range of 11–16 cents. Further, the bottom line declined 26.7% from the year-ago result. However, currencies did not have a meaningful impact on diluted earnings per share in the third quarter of fiscal 2017. Soft results compelled management to lower fiscal 2018 guidance during the quarter.
Revenues and Margins
Revenues gained almost 3% year over year to $536.3 million as deterioration in American retail and Wholesale business was offset by improvement in Europe and Asia. On a constant currency basis, revenues grew 3%, lower than management’s guided range of 4.5% to 7.5% increase. Further, revenues missed the Zacks Consensus Estimate of $563 million.
Total gross margin contracted 170 basis points (bps) to 33.6% due to the negative impact of currency markdown and occupancy deleverage in the Americas.
Operating margin contracted 120 bps to 2.8%, primarily due to higher expenses stemming from retail expansion and the negative impact from currency exchange rate fluctuations.
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 eCommerce sites at the Americas Retail segment declined 4.7% and 4.6%, respectively, on a constant currency basis. Consolidated comparable store sales (comps) including eCommerce decreased 4.9%, in U.S. dollars and 4.8% in constant currency basis. Decline of revenue in North American retail segment was due to lower average unit prices caused by unexpected warm weather and to higher promotional environment in North America. G by Guess concept was the best performing category during the quarter.
The European segment's revenues were up 16.4%. On a constant currency basis, revenues increased 16.8%. Revenue growth in the segment came on the back of new stores, higher traffic, higher conversion and a better product offering.
Revenues from Asia increased 10% (up 6% in constant currency) owing to positive comps in Mainland China.
Net revenues at the American Wholesale segment were down 4.3% due to softness in the U.S. wholesale business. At constant currency, the segment's revenues declined 2.2% year over year.
Licensing revenues dipped 13.8% both in U.S. dollars and constant currency
Other Financial Update
Guess’ exited the quarter with cash and cash equivalents of $349.1 million compared to $415.5 million in the previous quarter. The company had long-term debt of $23.54 million compared to $23.63 million in the previous quarter.
During the third 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 Dec 30, to shareholders on record at the close of business on Dec 14, 2016.
Guidance for Fiscal Fourth Quarter
The company anticipates net revenue increase of 4% to 8%, on a constant currency basis.
The company anticipates operating margin between 7.5% and 9.5%, including 30 bps of currency headwind. Adjusted earnings per share are expected in the band of 40–50 cents.
Guidance for Fiscal 2018
For fiscal 2018, Guess’ lowered its earnings outlook 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 previously. Currency is anticipated to have a negative impact of about 0.5%.
Adjusted operating margin guidance was also lowered and is now expected between 3% and 3.5% compared with the previous guidance of 4% and 5%.
Guess’carries a Zacks Rank #3 (Hold).
Other Stock Picks
Better ranked stocks in the broader consumer discretionary sector include:
Perry Ellis International Inc. PERY carrying a Zacks Rank #2 (Buy) and an average earnings surprise of 19.5% in the last four trailing quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PVH Corporation PVH also carries a Zacks Rank #2 and has an expected earnings growth of 11%.
Devry Education Inc. DV another Zacks Rank #2 stock has an expected earnings growth of 9.2%.
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