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Guess? (GES) Q3 Earnings & Sales Grow Y/Y, Outlook Raised

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Guess?, Inc. (GES - Free Report) posted third-quarter fiscal 2019 results, wherein both top and bottom lines improved year over year and the former came ahead of the Zacks Consensus Estimate. Performance in the quarter was driven by strong revenue growth in the European and Asian regions. Further, the company raised outlook for fiscal 2019.

Quarter in Detail

Adjusted earnings of 13 cents per share missed the Zacks Consensus Estimate of 16 cents, though it grew 8.3% year over year. The bottom line growth mainly gained from higher revenues, though it was hurt by adverse currency fluctuations to the tune of about 17%.

Guess?, Inc. Price, Consensus and EPS Surprise



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

Net revenues amounted to $605.4 million, which surpasses the consensus mark of $603 million. Moreover, the top line improved 10.3% year over year. This marks the ninth straight quarter of year-over-year revenue improvement. On a constant-currency (cc) basis, revenues grew 13.1%. The upside can be attributed to solid sales in the Europe and Asia segments. These were partly offset by soft revenues in the Americas Retail.

Notably, the company’s European and Asian businesses have been delivering superb results for quite some time, which boosted the top line. This has been raising investors’ optimism in this Zacks Rank #3 (Hold) stock that surged close to 39% in a year compared with the industry’s growth of 14%.

The company’s gross margin expanded 160 basis points (bps) to 36.4%, owing to lower markdowns, increased IMU’s and overall cost control. These upsides were partially offset by occupancy deleverage stemming from increased European logistics costs. The quarter also marked the company’s sixth-consecutive period of gross margin growth.

Adjusted operating earnings in the quarter were $22 million, up 70% from the prior-year quarter’s level, courtesy of higher revenues and gross margin. This was offset by higher SG&A expenses (as a percentage of sales) that stemmed from increased distribution costs in Europe. Also, adjusted operating margin rose 130 bps to 3.7%. This marked the company’s fourth-consecutive quarter of adjusted operating margin expansion.

Segment Performance

Revenues in the Americas Retail segment dipped 0.1% year over year in U.S. dollar, though it rose 1.1% at cc. Further, retail comp sales, including e-commerce, increased 3% in U.S. dollar and 4% at cc. Operating margin in the segment improved 330 bps to 2%, backed by lower markdowns, rent reductions and higher comps, partially countered by greater store selling costs.

Net revenues in the Americas Wholesale segment rallied 15.5% (up 18.2% at cc). Operating margin in the segment grew 90 bps to 19.7%, mainly due to increased gross margins.

The Europe segment's revenues advanced 14.8% (up 19.8% at cc). Store openings, enhanced wholesale revenues and comps growth boosted the region’s performance, which was backed by efficient sales-driving initiatives. Retail comp sales, including e-commerce, improved 8% in U.S. dollar and 12% at cc. However, operating margin declined 120 bps to 2.9%, due to higher distribution costs from the repositioning of the European distribution center. These were somewhat compensated by expense leverage from enhanced wholesale shipments.

Asia revenues rallied 20.4% (up 21.8% at cc) on the back of improved comps and store openings. Retail comp sales, including e-commerce, grew 8% (up 9% at cc). Operating margin in the segment declined 180 bps to 2.2%, owing to adverse mix.

Licensing revenues ascended 7.4% in U.S. dollar and at cc. Operating margin contracted 100 bps to 87.4%.

Other Updates

Guess? exited the quarter with cash and cash equivalents of $138.9 million, and long-term debt and capital lease obligations of $36.3 million. Further, stockholders’ equity was $816.9 million. Net cash used in operating activities during the nine months period ended Nov 3, 2018 amounted to $46.9 million.

Additionally, management approved a quarterly cash dividend of 22.5 cents per share payable on Jan 2, 2019, to shareholders of record as of Dec 12, 2018.

Guidance

Management is impressed with its quarterly performance, marked by top and bottom-line growth as along with improved adjusted operating margin amid foreign currency headwinds. Moreover, comps improved across all regions and the company expects this trend to continue in fiscal 2019, with each business segment expected to be profitable.

Further, the company continues to see immense potential in Europe and Asia. It continues to make capital investments in these regions to improve sales and margins. Also, performance in the Americas has started to improve, and management expects further progress on this front. In fact, it has undertaken several initiatives to reduce costs and enhance profits. Guess? is committed toward its strategic initiatives, which are likely to boost revenues and profits, and also help the company achieve its operating-margin target of 7.5%.

That said, management raised outlook for fiscal 2019. It now expects net revenue growth of 10-10.5% compared with the previous range of 9-9.5%. An extra week in fiscal 2018 is likely to impact fiscal 2019 consolidated net revenue growth by 1%. At cc too, consolidated net revenues are expected to grow 10-10.5%, up from the previous projection of 8-8.5%.

Adjusted operating margin is now envisioned to be 4.5-4.8%, including nearly 10 bps adverse impact from currency movements. Earlier, adjusted operating margin was expected to be 4.4-4.7%. Further, adjusted earnings per share for fiscal 2019 are now estimated between 96 cents and $1.03 compared with the prior view of 94 cents to $1.03. Currency is anticipated to have a one cent favorable impact on fiscal 2019 bottom line.

Q4 View

For the fourth quarter of fiscal 2019, management expects consolidated net revenues to improve 4-6%. At cc, consolidated net revenues are projected to grow 7.5-9.5%. The company anticipates adjusted earnings for the quarter to be 69-76 cents. The bottom line is projected to gain from a positive currency impact of one cent.

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