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Can Guess? (GES) Continue to Put Up a Superb Show in 2019?

Zacks Equity Research

Guess?, Inc. GES has been showcasing a splendid bull run, with its shares having rallied 42.4% in the past year, against the industry’s drop of 2.3%. The company has been largely gaining from strength of its international businesses, apart from other growth drivers. However, escalated costs are a hindrance.

So, let’s delve deeper and see if Guess? can sustain its robust momentum in 2019.

Guess? on a Roll

Guess?’s Europe and Asia businesses 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. These factors helped revenues in Europe surge 14.8% (up 19.8% on a constant-currency basis) in the third quarter of fiscal 2019. Markedly, comps improved for the 13th straight quarter in Europe. Management’s strategy to improve sales quality and merchandising structure yielded results. Coming to Asia, sales advanced 20.4%, while it grew 21.8% on a currency-neutral basis, with results being especially strong in China and Japan. Management is committed toward making capital investments to tap into the opportunities in these regions in fiscal 2019. Management earlier projected fiscal 2019 sales in Europe and Asia to rise double digits.

Also, Guess? is on track with its digital-first initiative and has been investing in brand building through social media platforms, such as Facebook FB, Twitter TWTR, Instagram and YouTube. The company is also optimistic about its partnership with video sharing application, TikTok. Further, the company has been focusing on linking brick-and-mortar stores, e-commerce and mobile sales to improve its online operations. This has enabled customers to reserve merchandise online and pick them up from stores. In fact, e-commerce growth in the company’s Europe and Asia segments played a major role in augmenting the company’s comps and top line. In fact, digital sales in China have been a major driver as the company’s alliance with Tmall is yielding. These efforts are expected to help the company enhance its customer base and drive sales.

Can High Costs Ruin the Solid Trend?

In the third quarter of fiscal 2019, Guess?’s SG&A expenses (as a percentage of sales) increased on account of higher distribution costs stemming from the repositioning of the European distribution center. This also caused a 120 basis point (bp) contraction in Europe operating margin, which declined 200 bps in the preceding quarter due to the same factor. Management expects SG&A expenses (as a percentage of sales) to increase year over year in the fourth quarter, due to higher digital-marketing and advertising costs along with increased distribution costs in Europe.

Also, intense competition is a threat to the company that shares space with Columbia Sportswear COLM, among others. Nonetheless, we cannot ignore Guess?’s strong driving factors, which also include its stringent cost control and margin-growth initiatives. Incidentally, the company posted its sixth and fourth straight quarter of gross and operating margin expansion in third-quarter fiscal 2019. During the quarter, gross margin expanded 160 bps to 36.4%, owing to lower markdowns, increased IMU’s and overall cost control. Further, adjusted operating margin expanded 130 bps to 3.7%.

Management is confident of ending fiscal 2019 on a solid note, wherein it expects to deliver operating margin of 7.5%, backed by continued revenue improvements and cost-containment efforts.  Also, the company expects gross margin to increase in the fourth quarter and fiscal 2019, backed by lower markdowns and rents, and IMU enhancements from supply-chain efforts. All said, we expect this Zacks Rank #3 (Hold) stock to keep its robust record going in 2019.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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