Mixed 3Q for Guess?, Guides Down

Guess?, Inc. (GES - Analyst Report) reported third quarter fiscal 2013 results with earnings of 43 cents, missing the Zacks Consensus Estimate of 44 cents by 2.3%. The results declined sharply by 39.4% from the year-ago earnings of 71 cents due to lower consumer demand and currency headwinds. However, earnings remained within the company’s guidance range of 42 to 46 cents.

Revenues and Margins

Revenues in the quarter dropped 2.2% to $628.8 million due to decline in comparable store sales and lower traffic in North American stores. Revenue exceeded the Zacks Consensus Estimate of $621 million, while it remained within management’s expectation of $620 million to $630 million. However, on a currency neutral basis, revenues increased 1.2%.

Operating margin shrank 590 basis points year over year to 9.2% in the third quarter owing to increased occupancy and selling costs in Europe, negative same store sales and increased marketing expenses. The increase in promotional expenses in North America and pricing changes in Canada also led to lower product margins.

Segment Results

The North American stores generated revenues of $262.1 million in the third quarter, down 1.3%, due to the ongoing macroeconomic headwinds, which resulted in lower store traffic. Comparable store sales shrank 6.0% from the year-ago quarter, due to soft accessories business, offseting the strong performance in men’s apparels.

The European segment’s revenue slipped 8.3% to $202.6 million in the third quarter, largely due to currency headwinds. On a currency neutral basis, segment revenue increased 1.7%, particularly driven by growing business in Russia and Germany.

The Asian segment’s revenue increased 15.5% to $74.8 million, driven by double-digit growth from South Korean and Greater China businesses. On a currency neutral basis, segment revenue increased 15.6%.

Net revenue in the North American Wholesale segment increased 1.0% to $57.9 million.

Other Financial Update

During the third quarter, the company’s board declared a cash dividend of 20 cents and a special cash dividend of $1.20 per share, both to be payable on December 28, 2012 to shareholders as of December 12, 2012.

Guidance

For the fourth quarter, the company expects revenue in the range of $780 to $800 million, operating margin in the range of 14.5% to 15.5%, and earnings in the range of 85 to 95 cents per share.

Following the weak third quarter results, the company has lowered its expectation for sales, margins and earnings per share for fiscal 2013. The company now expects earnings in the range of $2.05 to $2.15 per share compared with the prior range of $2.15 to $2.30.

Net revenue is now expected to be in the range of $2.62 billion to $2.64 billion compared with the previous guidance of $2.62 billion to $2.65 billion. Operating margin is now expected in the range of 10.0% to 10.5% compared with 10.5% to 11.0% expected previously.

The Zacks Consensus Estimate is pegged at 95 cents and $2.17 per share for the fourth quarter and fiscal 2013, respectively.

Currently, we have a Neutral recommendation on the stock. Guess? holds a Zacks #4 Rank (short-term Sell rating) in sharp contrast to its peer, Gap, Inc. (GPS - Analyst Report), which holds a Zacks #1 Rank (short-term Strong Buy rating).