Europe Debt Deters Guess?' 4Q

Guess? Inc.’s (GES - Analyst Report) fourth quarter 2012 adjusted earnings per share (EPS) of $1.05 came in line with the Zacks Consensus Estimate and missed the year-ago EPS of $1.11 by 5.4%. Fiscal year 2012 earnings went down 1.9% year over year to $3.05 per share compared with$3.11 per share in the prior year. Fiscal earnings missed the Zacks Consensus estimate by a penny

A slight improvement of conditions in North America was offset by lower spending in Europe, as the region adhered to the austerity measures undertaken by the government to combat the debt crisis. Moreover, the lingering debt crisis affected the company’s profit during the fourth quarter.

The Way Forward

The company’s continuing strong business momentum, even in face of the challenging weak consumer and category growth environment and inflating input cost, boosts the confidence to perform better going forward. Management also feels new strategic initiatives like promoting its brands in North America will reap benefits in the coming quarter. Additionally, management derives confidence from unexplored markets in Europe and momentum in Asia. To bolster its presence in the emerging markets, the company plans to develop a joint ventures in Brazil, and expand its presence in India in 2013.

The company expects the first quarter 2013 earnings to be in the range of 25 cents to 28 cents. The outlook includes benefit of about 3 cents to 4 cents from inclusion of the53rd week and the impact of last year's share repurchase. For the fiscal year 2013,the company expects EPS to be in the range of $2.50 to $2.65. The company expects rate of earnings decline to gradually lessen throughout the year and forecasts the fourth quarter of the coming year to post first earnings growth.

In North America retail, the company plans to focus on better product, lean inventory, tight markdown management, and increased full price selling, thus improving profitability while maintaining quality. In Europe, the company plans to develop in a balanced way across geographies, while in Asia, it plans continued expansion with productivity improvements.

Revenues and Margins

Revenues in the quarter climbed up 2.5% to $775.8 million from $756.9 million in the prior-year quarter. Revenues for fiscal 2012 went up 8.1% to $2.69 billion from $2.49 billion in the prior year.

Retail stores in North American segment generated 1.4% higher revenue of $343.5 million in the fourth quarter compared with $338.6 million in the same period last year. Comparable store sales shrank 5.0% from last year.

Asian markets reported 27.5% increase in revenues, while European markets reported a drop of 1.4% in revenues. However, North American Wholesale segment posted a year-over-year increase of 7.5%, while licensing segment net revenue in the fourth quarter was flat year over year.

Operating income grew 5.9% to $135.8 million, reflecting unfavorable currency translation impact.

Operating income margin shrank 160 basis points to 17.5%, year over year, as improved product margins were more than offset by higher occupancy and Selling General & Administrative rates.

As on January 29, 2012, Guess? had $491.80 million of cash and cash equivalents compared with $427.03 million in the prior-year quarter.

Operating activities provided $364.5 million of cash, of which $132.1 million was used in investing activities.

Conclusion

Commodity-price inflation, global recession and competition in the highly fragmented apparel industry coupled with stiff competition from rivals like Abercrombie & Fitch Co. (ANF - Analyst Report) and Gap Inc. (GAP) are matters of concern.

Currently, Guess? holds a Zacks #4 Rank, implying a short-term Sell rating. On a long-term basis, we maintain an ‘Underperform’ rating on the stock.