Guess? (GES) Stock Declines 12% Despite Q3 Earnings Beat

Guess?, Inc. GES posted mixed third-quarter fiscal 2018 results, with earnings beating the Zacks Consensus Estimate and revenues missing the same. Management raised earnings outlook for fiscal 2018 and lowered the high end of its previously issued sales guidance.

On a GAAP basis, the company reported a loss and also witnessed a sharp decline in adjusted operating profit in the third quarter.

These factors dented investors’ confidence as the company’s shares lost 12.3% in the after-market trading session on Nov 21. Nevertheless, an impressive earnings surprise history has helped this Zacks Rank #3 (Hold) stock gain 43.8% in the past three months, surpassing the industry’s rally of 6.1%.

Quarter in Detail

Guess? delivered earnings of 12 cents per share in the third quarter which surpassed the Zacks Consensus Estimate by a penny. Notably, this marked the company’s third consecutive earnings beat. Adjusted earnings also improved 9% from the prior-year quarter and surpassed management’s guidance of 8-11 cents.

However, on a GAAP basis, the company reported a loss of 4 cents per share as against earnings of 11 cents in the year-ago quarter.

Net revenues amounted to $554.1 million, up 3.3% year over year. On a constant-currency basis, revenues grew 0.6%. This signifies the fifth straight quarter of revenue improvement.  The upside came on the back of solid sales in the Europe and Asia segments driven by store openings, positive comps and wholesale growth. These were partly offset by soft revenues in the Americas Retail and Americas Wholesale segments.

However, the top line missed the Zacks Consensus Estimate of $566 million.

Gross profit increased 6% to $191.1 million on the back of higher revenues. The company’s gross margin also expanded 90 basis points (bps) to 34.5%, owing to improved supply chain initiatives. This was partially offset by higher distribution costs stemming from the development of a new distribution center in Europe.

The company reported adjusted operating profit of $12.6 million, which plunged 21.1% from the prior-year quarter. Operating profits were negatively impacted by higher selling, general and administrative (SG&A) expenses led by resetting of performance-based compensation. Also, adjusted operating margin contracted 70 bps to 2.3%.

Guess?, Inc. Price, Consensus and EPS Surprise

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

Segment Results

Revenues of $187 million at the Americas Retail segment fell 13.4% (down 14.3% on a constant-currency basis) year over year primarily due to lower traffic. Further, Retail comp sales, including e-commerce, declined 10% (down 11% on a constant-currency basis). However, operating margin in the segment improved 240 bps, driven by the positive impacts of lower markdowns, rent reductions and store closures. These were partially countered by negative comps.

The Europe segment's revenues of $221.2 million rose 18.8% (up 11.9% on a constant-currency basis). Store openings and comps growth boosted the region’s performance. Retail comp sales, including e-commerce, improved 10% (up 4% on a constant-currency basis). Operating margin for the segment declined 320 bps to 3% due to higher distribution costs from the repositioning of the European distribution center. This was partially compensated by higher initial markups.

Revenues of $74.3 million from Asia increased 16.8% (up 18.5% on a constant-currency basis) on the back of improving comps. Retail comp sales, including e-commerce, grew 3% (up 5% on a constant-currency basis). Operating margin at the segment surged 680 bps to 3.7% on overall expense leverage.

Net revenues of $45.6 million at the American Wholesale segment declined 2.5% (down 4.5% on a constant-currency basis). Operating margin at the segment rose 70 bps to 18.1%, courtesy of lower SG&A expenses and higher gross margins.

Net revenues of $25.9 million at the Licensing segment increased 9.1% in both U.S. dollars and constant currency. Operating margin at the segment increased 620 bps to 90.8%.

Other Financial Update

Guess? exited the third quarter with cash and cash equivalents of $233.1 million and long-term debt and capital lease obligations of $38.8 million. Further, the stockholders’ equity as of Oct 28 was $926.3 million.

During the third quarter, the company’s board approved a quarterly cash dividend of 22.5 cents per share payable on Jan 3, 2018, to shareholders of record as of Dec 13, 2017. The company also repurchased 435,000 shares worth $7 million during the quarter.

Further, capital expenditure is expected in the band of $85-$95 million for fiscal 2018, owing to consistent investment in retail improvement in European and Asian regions as well as in technology infrastructure to aid long-term growth.

Guidance for Fiscal 2018

For fiscal 2018, management expects consolidated net revenue growth in the range of 6-6.5% versus the previous range of 6-7.5%. On a constant-currency basis, consolidated net revenues are expected to grow 4-4.5%. The 53rd week in the year is likely to have a positive impact of 1% on sales growth.

The company’s adjusted operating margin is projected in the band of 3.2-3.5%. Adjusted earnings per share for fiscal 2018 are estimated in the range of 56-63 cents, up from the previous range of 52-60 cents. Currency is likely to have a impact of 2 cents. The Zacks Consensus Estimate for fiscal 2018 earnings of 57 cents is currently pegged within management's guidance.

The company is on track with cost-reduction and margin-expansion initiatives in the Americas. It continues to adhere to celebrity endorsements in the United States to enhance brand presence.

Guidance for Fourth Quarter 2018

For the fourth quarter of fiscal 2018, management expects consolidated net revenues to improve in the range of 10-12%. On a constant-currency basis, consolidated net revenues are anticipated to grow 5-7%. The 53rd week is likely to have a positive impact of 3% on sales growth.

Moreover, the company’s adjusted operating margin is projected in the band of 8-9%. Adjusted earnings per share for the third quarter are projected in the range of 48-55 cents. Currency is likely to have an impact of 5 cents on earnings during the quarter. The Zacks Consensus Estimate for the fourth quarter is currently pegged at 49 cents.

Looking for More? Check These 3 Trending Picks

Investors interested in the same sector may consider stocks such as Michael Kors Holdings Limited KORS, Deckers Outdoor Corporation DECK and Ralph Lauren Corporation RL. While Michael Kors and Deckers Outdoor sport a Zacks Rank #1 (Strong Buy), Ralph Lauren carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Michael Kors delivered an average positive earnings surprise of 23.7% in the trailing four quarters. It has a long-term earnings growth rate of 7.5%.

Deckers Outdoor Corporation pulled off an average positive earnings surprise of 88.3% for the trailing four quarters. It has a long-term earnings growth rate of 10.7%.

Ralph Lauren came up with an average positive earnings surprise of 11.6% for the trailing four quarters. It has a long-term earnings growth rate of 15%.

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