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Guess (GES) Up 0.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Guess (GES - Free Report) . Shares have added about 0.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Guess due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Guess? Q2 Earnings Top Estimates, Rise Y/Y, View Up

Guess? posted robust second-quarter fiscal 2020 results, wherein it posted adjusted earnings of 38 cents per share, which surpassed the Zacks Consensus Estimate of 29 cents and increased 5.6% from the prior-year quarter’s figure.

Net revenues amounted to $683.2 million that surpassed the consensus mark of $673.1 million. Moreover, the top line improved 5.8% year over year. On a constant-currency (cc) basis, revenues grew 8.8%. This upside can be attributed to solid sales in most regions, especially Europe and the Americas.

The company’s gross margin expanded nearly 180 basis points (bps) to 38.9%, owing to occupancy leverage and increased initial markups. Also, adjusted operating profit came in at $47.9 million, up approximately 30% year over year. Adjusted operating margin rose 130 bps to 7%, driven by lower costs, expense leverage in Europe and greater initial markups in Americas Retail and Europe. This was partially offset by wage pressures, increase in advertising expenses and greater markdowns in Americas Retail.

Segment Performance

Revenues in the Americas Retail segment increased 0.9% year over year in U.S. dollar and 1.2% at cc. Further, retail comp sales, including e-commerce, improved 2% each in U.S. dollar and at cc, driven by improved conversions and UPTs. This marks the sixth successive quarter of positive comps.

Net revenues in the Americas Wholesale segment climbed 22.3% (up 22.4% at cc), backed by robust growth in U.S. department store and specialty business.

The Europe segment's revenues advanced 9.1% (up 14.1% at cc). Store openings, improvement in wholesale revenue and comps growth boosted the region’s performance. Retail comp sales, including e-commerce, dipped 3% in U.S. dollar, while it grew 1% at cc.

Asia revenues inched up 0.6% (up 5.2% at cc). Retail comp sales, including e-commerce, lost 13% (down 8% at cc) due to soft traffic in stores. Nonetheless, the company is positive about the long-term potential of this region.

Licensing revenues descended 5.9%, both in U.S. dollar and at cc.

Other Updates

The company exited the quarter with cash and cash equivalents of $131.1 million, and long-term debt and finance lease obligations of $35.5 million. Further, stockholders’ equity was $554.9 million. Net cash used in operating activities during the first six months of fiscal 2020 amounted to $23 million. Additionally, management approved a quarterly cash dividend of 11.25 cents per share, payable on Sep 27, 2019 to shareholders of record as of Sep 11, 2019.

Under the accelerated share repurchase (“ASR”) program, the company delivered 5.2 million shares in the first quarter and the remaining is expected to be delivered by the beginning of September after completion of the program. The company repurchased roughly 0.7 million shares for nearly $11 million during the fiscal second quarter.  

Guidance

Management is impressed with its quarterly outcome, given the solid revenue growth, efficient expense management and improved gross margin. The company is encouraged about its future prospects, courtesy of a robust global network, considerable brand strength and customer growth.

For fiscal 2020, net revenues are now guided to grow 3-3.5% (up 6-6.5% at cc). Earlier, the company projected revenues to increase 3.5-4.5% (up 6-7% at cc). Management expects adjusted operating margin to be in the range of 5.3-5.6% compared with the previous guidance of 4.8-5.2%. Further it envisions adjusted earnings per share of $1.28-$1.36, including adverse currency impacts of around 8 cents. Earlier, management anticipated adjusted earnings per share of $1.19-$1.30 for fiscal 2020.

For third-quarter fiscal 2020, the company anticipates net revenues to rise 2-3% (up 4.5-5.5% at cc). Adjusted operating margin is anticipated in the range of 3-3.5%. Foreign currency translation is projected to adversely impact operating margin by 10 bps. Also, the company expects adjusted earnings of 15-18 cents for the third quarter. Bottom line is likely to be favorably impacted by a penny from currency fluctuations.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -33.96% due to these changes.

VGM Scores

At this time, Guess has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Guess has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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