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Why Is Guess? (GES) Down 11.5% Since its Last Earnings Report?

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It has been about a month since the last earnings report for Guess?, Inc. GES. Shares have lost about 11.5% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is GES due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Guess? Posts In-Line Loss in Q1, Raises '19 Guidance

Guess? posted first-quarter fiscal 2019 results, wherein adjusted loss came in at 23 cents per share, in line with the Zacks Consensus Estimate. The bottom line improved 4.2% from the year-ago quarter level. During the quarter, currency had an unfavorable impact of 3 cents on the bottom line.  

Net revenues amounted to $521.3 million, surpassing the consensus mark of $510.5 million and increasing 14.7% year over year. This marks the seventh straight quarter of year-on-year revenue improvement. On a constant-currency (cc) basis, revenues grew 7.7%. The upside can be attributed to solid sales in the Europe, Asia and Americas Wholesale segments. These were partly offset by soft revenues in the Americas Retail.

Gross profit improved 20.2% from the prior-year quarter’s tally to $174 million on the back of higher revenues. The company’s gross margin also expanded 160 basis points (bps) to 33.4%, owing to lower markdowns and rents along with increased IMU’s. These upsides were partially offset by occupancy deleverage stemming from increased European logistics costs.

Adjusted operating loss in the quarter was $20.5 million, up 7.8% from the prior-year quarter’s level, owing to higher revenues and gross margin. This was offset by higher SG&A expenses. Also, adjusted operating margin rose 100 bps to negative 3.9%, including a 30 bps negative impact of currency. Operating margin gained from lower markdowns in Americas Retail and segment mix, partially countered by higher distribution costs stemming from relocation of the European distribution center.

Segment Performance

Revenues of $171.3 million in the Americas Retail segment fell 1.4% (down 2.1% at cc) year over year, primarily due to lower traffic. Further, Retail comp sales, including e-commerce, declined 2% (down 1% at cc). Operating margin in the segment improved 910 bps to negative 3.3%, driven by the positive impacts of higher initial markups, lower markdowns and rent reductions.

Net revenues of $40.7 million in the Americas Wholesale segment increased 13.4% (up 11.3% at cc). However, operating margin in the segment declined 470 bps to 14.8%, primarily due to lower gross margins.

The Europe segment's revenues of $205.4 million rose 24.2% (up 9.1% at cc). Store openings and comps growth boosted the region’s performance, which was backed by efficient sales-driving initiatives. Retail comp sales, including e-commerce, improved 15% (up 1% at cc). Operating margin declined 930 bps to reach a negative 9.9%, thanks to higher distribution costs from the repositioning of the European distribution center.

Revenues of $84.1 million from Asia increased 32.6% (up 25.1% at cc) on the back of improved comps. Retail comp sales, including e-commerce, grew 22% (up 15% at cc). Operating margin in the segment surged 430 bps to 4.8% on higher gross margins.

Net revenues of $19.8 million at the Licensing segment increased 23.5% in U.S. dollar and at cc. Operating margin in the segment improved 440 bps.

Other Updates

Guess? exited the first quarter with cash and cash equivalents of $232.5 million as well as long-term debt and capital lease obligations of $37.2 million. Further, the stockholders’ equity was $857.7 million. Net cash used for operating activities during the period amounted to $67.6 million.

During the first quarter, the company’s board approved a quarterly cash dividend of 22.5 cents per share payable on Jun 29, 2018, to shareholders of record as on Jun 13, 2018. The company also repurchased 1.5 million shares worth $24 million during the quarter.

As on May 5, the company’s directly-operated stores were 1,020, which are located across Asia, Europe and the Americas. Its distributors and licensees operated additional 624 stores.

Guidance

Management is impressed with Guess?’ solid business progress in Europe and Asia. It continues to make capital investments in these regions to improve sales and margins. Additionally, the company has been striving to improve performance in the Americas and has undertaken several initiatives to reduce costs and enhance profits. Further, the company is on track with expanding digital capabilities and plans to launch the Guess? Digital Office — an innovation hub directed toward developing new technologies to meet consumer demand efficiently.  

That said, management raised its outlook for fiscal 2019. It now expects net revenue growth in the range of 8.5-9.5% compared with the previous range of 7-8%. At cc, consolidated net revenues are expected to grow 6.5-7.5%, up from the previous projection of 5-6%. Further, adjusted earnings per share for fiscal 2019 are estimated in the range of 88-99 cents,compared with the prior view of 86-98 cents. Currency is likely to have a positive impact of 10 cents on earnings.

Additionally, for the second quarter of fiscal 2019, management expects consolidated net revenues to improve in the range of 14-15.5%. At cc, consolidated net revenues are projected to grow 11-12.5%. The company anticipates adjusted earnings for the quarter in the range of 27-30 cents, including currency impacts of 8 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 30.6% due to these changes.

Guess?, Inc. Price and Consensus

Guess?, Inc. Price and Consensus | Guess?, Inc. Quote

VGM Scores

At this time, GES has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, GES has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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