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We reaffirm our Neutral recommendation on Guess Inc. (GES - Analyst Report), a specialty retailer of fashionable and contemporary apparel and accessories for men, women and children following an appraisal of its first quarter 2014 results.

Though we are optimistic about the turnaround strategies undertaken by the company, soft top line results in the first quarter of fiscal 2014 and the lowered fiscal 2014 earnings guidance keep us on the sidelines. Further, the tough retail conditions are expected to prevail throughout 2014.

Why the Reiteration?

On May 31, 2013, Guess? reported first-quarter fiscal 2014 earnings of 14 cents per share, which beat the Zacks Consensus Estimate of 8 cents by 75% and exceeded the company’s guidance of 5 cents to 10 cents backed by its initiatives to increase sales.

However, earnings slipped year over year due to higher product cost leading to a rise in the operating expenses. Moreover, revenues in the quarter slipped 5.2% to $548.9 million due to lower sales at the North American retail and European segments.

The significant decline in total sales from the year-ago period was due to the slower pace of economic recovery and lower spending by domestic customers. Transactions per store declined, although traffic was on the rise, implying an increase of window shoppers.

The company has, however, taken several initiatives in order to improve sales. It has embarked on a three-pronged approach to improve the performance of its retail business. Firstly, it is enhancing its denim stocks to revamp the denim heritage of the company, which is the essence of the collection of Guess?.

Secondly, the company is shifting its focus from higher margin products and is offering its stocks at entry point prices in an attempt to attract the young generation. Thirdly, Guess? is geared to change its stocks more often so as to reflect the current fashion trends.

Following the release of first-quarter 2014 earnings, the Zacks Consensus Estimate for fiscal 2014 fell by 8.0% to $1.84 per share. For fiscal 2015, however, the estimate went up by only 1.0% to $2.12 per share.

The company narrowed its guidance for fiscal 2014 following the first quarter earnings results. For 2014, the company expects earnings in the range of $1.70 to $1.90 per share, which is narrower than the band of $1.70 to $1.94 per share as announced previously. The company gives a conservative outlook due to the prevailing tough retail conditions and higher product costs

Other Stocks to Consider

Guess? carries a Zacks Rank #3 (Hold). Other diversified retailers worth considering include Restoration Hardware (RH - Snapshot Report), Dollar Tree, Inc. (DLTR - Analyst Report) and Ross Stores (ROST - Analyst Report). While Restoration Hardware carries a Zacks Rank #1 (Strong Buy), Dollar Tree and Ross Stores carry a Zacks Rank #2 (Buy).

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