Shares of fashion retailer Guess (GES: Charts, News) slid sharply this week after it reported weak fourth quarter numbers and even weaker guidance. The Los Angeles, California-based company posted fourth quarter earnings of $1.05 per share, or $95.9 million, on revenue of $756.92 million. This was a 7% decrease and 2.5% increase in earnings and revenue, respectively. Analysts on average had expected earnings of $1.05 per share on revenue of $778.53 million. The company's weakness surprised many investors, who had expected stronger results from improving consumer sentiment and discretionary spending across most markets. CEO Paul Marciano stated, "We are pleased to deliver fourth quarter earnings consistent with our expectations, even as economic pressures impacted consumer confidence in some of our markets."
At first glance, Guess' earnings didn't look that bad, falling in line on profit but missing on revenue, but then the company offered dour guidance as well for the next quarter and all of fiscal 2012. For the next quarter, Guess anticipates earnings between 25 to 28 cents per share on revenue of $560 million to $575 million. Analysts had expected at least 48 cents per share on revenue of $609.7 million. Marciano's remained downbeat regarding growth prospects. "We enter this fiscal year in a challenging macroeconomic environment, especially in Europe," he stated, "though there are some signs of improvement in the United States."
For the full year ahead, Guess expects earnings of $2.50 to $2.65 per share on revenue of $2.74 billion to $2.78 billion. The earnings estimate accounts for 35 to 40 cents of unfavorable currency impact and increased marketing expenditures. This was well below the analyst expectations of $3.18 per share on revenue of $2.83 billion. Shrinking margins are a primary concern. Gross margin dipped from 44.4% to 43.5%, and operating margin declined from 19.1% to 17.5% from the prior year quarter. The larger decline in operating margin hints at problems with rising costs, especially in the company's Selling, General and Administrative Expenses (SG&A).
Guess' primary markets consist of North America, Europe and Asia. Its North American market is split into wholesale and retail. The company's wholesale segment posted a 7.5% gain in revenue to $70.6 million, while its retail segment posted a 1.4% increase to $343.5 million. However, same-store sales dropped 4.6%. Adjusting for the U.S. dollar, however, same-store sales actually dropped 5%. The company increased its North American brick and mortar stores from 481 to 504 within the year.
Meanwhile, its European operations posted an expected revenue decline of 1.4%, and Asia remained the brightest spot, posting a 27.5% gain in sales. However, Asia remains its smallest business segment, and the region is increasingly saturated by American retailers attempting to carve out a niche in the lucrative Asian market.
Guess has attempted to appease investors with a share buyback of 3.2 million shares, worth $92 million. Under the current repurchase plan, $158 million can still be bought back. Guess' Board of Directors did not increase the company's 20 cent quarterly dividend. The company's last dividend increase of 25% occurred at the end of 2010, a strong year which was capped off by a $2 special dividend. Both these factors suggest that Guess is treading water as it hopes to weather ongoing macro concerns in the year ahead.
On a fundamental basis, shares of Guess are looking increasingly cheap, trading at a mere 9.9 times forward earnings with a 5-year PEG ratio of 1.03. However, investors shouldn't be in any hurry to buy shares, as there are more attractive, momentum-based retail growth plays - such as Michael Kors (KORS: Charts, News), Nike (NKE: Charts, News), or Lululemon (LULU: Charts, News) - rising in the market.
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