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Guess? Gains More Than 30% in 3 Months: More Room to Run?

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Strength in the European segment, solid digital operations and margin improvement efforts have kept Guess?, Inc. (GES - Free Report) on firm grounds. Notably, this renowned designer, marketer and distributor of casual apparel and accessories has seen its shares surge 31.2% in the past three months compared with the industry’s growth of 12.7%.

Although Guess? is struggling with rising costs and hurdles in Americas Retail and Asia, we expect the aforementioned upsides to help this Zacks Rank #3 (Hold) stock maintain its impressive momentum. Further, the company’s long-term earnings per share growth rate of 17.5% reflects its inherent strength.

Solid European Unit & Digital Strength

Strength in the Europe business has long been driving Guess?’s top line. During the third quarter of fiscal 2020, revenues in the European region advanced 9.1% (up 13.2% at constant currency), owing to store openings, rise in wholesale revenues and comparable sales (comps) growth. Markedly, comps improved for the 17th straight quarter in Europe. The company is hopeful of reporting high-single-digit net revenue growth in Europe for fiscal 2020.

Guess? is progressing well with its digital-first initiative and has been investing in brand building through social media platforms. Additionally, the company is focusing on better data capturing, improved customer profiling, personalized marketing and relationship management to enhance e-commerce operations. Also, it has been concentrating on linking brick-and-mortar stores, e-commerce and mobile sales to improve online operations. This has enabled customers to reserve merchandise online and pick them up in stores. In fact, e-commerce drove the company’s comps in the fiscal third quarter.

Soft Asia & Americas Retail & Cost Woes

Guess? has been witnessing sluggishness in Asia for the last few quarters, owing to broad-based softness in significant markets like China, Korea and Japan. Traffic remained sluggish across these regions during the third quarter of fiscal 2020, wherein Asia revenues declined 8% (up 4.6% at cc). Moreover, its Americas Retail segment has long been battling sluggishness due to macroeconomic factors.

Apart from this, Guess?’s adjusted SG&A expenses, as a percentage of sales, have been rising for a while. Management expects adjusted SG&A expenses to increase in fiscal 2020 due to higher performance-based compensation.

Margin Enhancement Efforts Bode Well

The company is progressing well with improving cost structures. Further, it is on track with boosting gross margin through initial markups or IMU improvement and realignment of prices. The impact of these endeavors reflected well in the first, second and third-quarter performance, wherein the gross margin expanded nearly 50 basis points (bps), 180 bps and 90 bps to 33.9%, 38.9% and 37.3%, respectively.

Encouragingly, management expects gross margin to expand in fiscal 2020, backed by continued gains from IMUs as well as lower markdowns. This, along with the abovementioned upsides, is likely to help Guess? keep its robust show on.

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