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Shares of Guess? GES have significantly outperformed the industry in a year’s time, on the back of its Asian and European businesses that have been performing well for quite some time. Notably, the company has rallied 88%, comfortably outpacing the industry’s growth of 44%.
Let us delve deeper into the factors to see if this Zacks Rank #3 (Hold) stock can sustain this momentum amid the hurdles.
Impressive sales growth
The company witnessed strong sales performance year over year for the seventh straight time, in first-quarter fiscal 2019. The major driving force has been the continuous sales growth in Asian and European regions. Notably, these regions have been delivering superb results for quite some time now, courtesy of constant store openings and e-commerce growth, ultimately leading to positive comps growth.
In the European region, sales grew by 24% in the first quarter, courtesy of the company’s strategy to improve sales quality and merchandising structure. While in Asia, revenues increased 33%.
Further, the company opened seven stores in Europe and 12 stores in Asia during the first quarter. In Europe, comps increased amid adverse weather, marking its 11th consecutive quarter of growth. Comps in Asia benefitted from the shift in timing of Chinese New Year. Greater China and Japan performed considerably well in this region.
Management is committed toward making capital investments to tap into the bountiful opportunities in these regions in fiscal 2019. Thanks to these factors, the company expects sales in Europe and Asia to continue rising in double-digits in the second quarter.
Apart from this, the company is making efforts to launch its new digital and technology innovation hub. Although the company markets its products through Facebook FB and Twitter, it is actively pursuing actions to make its online operations even stronger. Both in Europe and Asia, e-commerce has played an important role in generating revenues. Additionally, Guess?’ association with Alibaba provides an opportunity to the former to experiment in physical retail, thereby stimulating its e-commerce business.
Can These Drivers Offset Hurdles?
However, the company incurred higher distribution costs from the repositioning of the European distribution center that led to 9.9% decline in the operating margin in the region. Management stated that this cost pressure was greater than anticipated. Also, overall SG&A costs at Guess? are expected to increase year over year in the second quarter, owing to these expenses along with higher digital marketing and advertising costs. This remains a worry for margins and bottom line.
Also, Guess? is facing headwinds in the Americas retail segment. Revenues in this segment decreased 1.4% in the first quarter, owing to soft traffic. The company has been making efforts to bring a turnaround to this region and is also witnessing some improvements on that front.
All said, we expect Guess?’ robust sales drivers to offset the aforementioned headwinds and keep the company going. This is also evident from management’s raised sales and earnings outlook for fiscal 2019.
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