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Guess Shares Lifted by Q2 Results

Earnings for the period fell far less than expected; company lifts full-year guidance.

Guess Inc. bounced back into the good graces of the investment community with second-quarter earnings that fell far less than expected.

This story first appeared in the August 29, 2013 issue of WWD.  Subscribe Today.

Digesting the positive news about the quarter, which was highlighted by improvement in the company’s North American retail operations and in Europe, shares jumped more than 18 percent in the early stages of after-hours trading.

Net income for the three months ended Aug. 3 dropped 7.1 percent to $39.9 million, or 47 cents a diluted share, from $42.9 million, or 47 cents, in the second quarter of 2012. Excluding restructuring charges principally related to European operations, earnings per share were 52 cents, fully 16 cents above the 36 cents expected, on average, by analysts.

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Revenues also strongly exceeded consensus estimates, finishing the quarter ahead 0.6 percent at $639 million versus the year-ago result of $635.4 million and Wall Street’s median estimate of a decline to $622.9 million. Gross margin retracted to 38.9 percent of revenues from 39.6 percent a year ago.

“Our biggest priority this year has been to improve sales trends in North American retail,” Paul Marciano, chief executive officer of the Los Angeles-based denim and sportswear marketer, said on late-afternoon conference call. “We are encouraged with our accomplishments over the past three months. We saw a sharp improvement in the [comparable-store sales] trend compared to the first quarter — our comp sales were down 2 percent compared to minus 10 percent in the first quarter.”

Guess began to see positive results from its decision to lower opening price points in its core denim assortment. “Some of the business has moved from some of the higher [price] categories,” acknowledged Russell Bowers, chief financial officer of North American retail. “Last year, we started at $89 and $98. So some of that business last year that was at $98 has now moved to the opening price point [of $79] but because of that we’ve also sold more units and as a result of it we’ve seen our overall sales trends better.”

Overall, North American retail, Guess’ largest segment, had 0.5 percent increase in revenues, to $254.3 million, although operating profit, pressured by both the promotional climate on the continent and investments in the business, declined 38 percent to $10.4 million from $16.8 million.

Growth in emerging markets and the northern tier produced a 1.4 percent increase in European sales, to $250.4 million, as operating income rebounded 59.5 percent to $39.4 million.

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Sales in Asia and North American wholesale both declined about 1 percent while operating income rose 25 percent and 10 percent in those businesses, respectively.

G by Guess, the more youth-oriented retail chain, had “a really strong quarter,” according to Bowers. “The comps were up in G by Guess and we also had product margins up in G by Guess during the second quarter. We did a really, really good job of converting the customers that came into our stores.”

Guess raised full-year earnings guidance to a range of $1.78 to $1.92, from earlier guidance of $1.70 to $1.90. Marciano noted that the firm is currently realizing benefits from a greater consistency in marketing — from its stores and advertising to its e-commerce and social media activities — and a greater emphasis on its denim heritage in its marketing messages.

His optimism was tempered by concerns about slowing economic conditions in China, although those were balanced by improvements in South Korea, a troubled market in recent quarters.

The conference call was the first for Guess’ new chief financial officer, Sandeep Reddy, and came just days after the company promoted Michael Relich, its chief information officer since 2004, to chief operating officer, completing an executive realignment begun last year.