WWD.com/globe-news/financial/youth-specialists-prep-for-holiday-struggle-7299895/
government-trade
government-trade

Youth Specialists Prep for Holiday Struggle

Guess, Aeropostale, Express and Wet Seal provide downbeat holiday forecasts as they report Q3 results.

Humbug.

That seems to be the buzzword among teens these days judging from the results of a quartet of youth-oriented specialty store retailers Wednesday. Guess Inc., Aéropostale Inc., Express Inc. and The Wet Seal Inc. each recorded tales of third-quarter struggles as their young customers reined in spending. They also provided fourth-quarter guidance that fell short of what Wall Street analysts expected when they began the day.

The projections are further evidence that holiday 2013 could be a downer for many stores. During a morning conference call held just after Express reported results, Richard Jaffe, softlines analyst at Stifel Nicolaus, referred to “a very slow start to the holiday season.…Promotions are aggressive and will likely become more aggressive as inventories back up and competition becomes more heated.”

With a disappointing Thanksgiving week already in the books and the lull before the final weeks prior to Christmas under way, he noted that “Christmas week will be even more important this year.”

Even if consumers loosen their grip on discretionary dollars and surrender en masse to promotional enticements certain to be on their way, the specialty stores reporting results set the expectations bar for earnings and sales at a low level:

• Guess said it expects adjusted earnings per share of between 74 cents and 84 cents a diluted share, below Wall Street’s estimates of 83 cents, and revenues of between $750 million and $770 million, versus the consensus estimate of $778.2 million.

• Aéropostale estimated it would record a fourth-quarter loss of between 24 cents and 32 cents, three to four times the 8-cent loss estimated by analysts.

• Express expects EPS to fall to between 66 cents and 71 cents, versus Wall Street’s earlier 78-cent estimate, with comparable sales, bolstered by e-commerce, up in the low-single digits.

• Wet Seal foresees a loss of between 14 cents and 17 cents a share, versus analysts’ projections of a 1-cent profit, and revenues of $134 million to $137 million, well below the Wall Street view of $154.5 million. Comps are expected to fall at a high-single to low-double-digit rate.

“We had been planning a promotional holiday season,” said Michael Weiss, chairman and chief executive officer of Express, “but we now expect the intensity of those promotions to reach heightened levels.”

The disappointment was palpable for Express as the company had worked to improve its merchandising and felt it had made progress, particularly in strengthening its women’s assortment. “Sales over the Thanksgiving week were higher than last year,” Weiss said, “but based upon the way we look, we expected it would have been better.”

Express was the only one of the retailers to report third-quarter results prior to the opening of the markets Wednesday and also the only one to report improvements on both the top and bottom line.

Net income for the three months ended Oct. 27 fell short of consensus estimates, but grew 11.1 percent to $19.3 million, or 23 cents a diluted share, from $17.4 million, or 20 cents, in the prior-year period. Sales advanced 7.4 percent, to $503 million from $468.5 million, and rose 5 percent on a comparable basis, including a 21 percent increase in e-commerce to $55 million.

But investors focused on the outlook rather than the outcome and sent the company’s shares down $5.67, or 23 percent, to $19. The percentage decline was the largest among U.S. retail equities tracked by WWD.

“Management’s cautious outlook for holiday is not the result of a merchandise miss, which would take time to fix,” wrote Stifel’s Jaffe, citing the promotional environment as the culprit. He called the sell-off of the stock “overdone” and stuck with his “buy” rating.

In addition to the anemic selling environment, Weiss cited a resurgence among department stores for the difficulties of breaking through to the consumer.

“We are looking at them again,” he told analysts on a morning conference call, “because in fact they have returned to a strong, for want of a better word, young contemporary customer. They are trying to get that customer, as we try to get a younger customer as the entry point to our brand…and I think they’re succeeding.”

In the quarter ended Nov. 2, Guess registered net income of $34 million, or 40 cents a diluted share, 7.2 percent below the $36.6 million, or 43 cents, recorded in the third quarter of 2012. Adjusted EPS, eliminating restructuring charges, was 42 cents, 4 cents above the consensus estimate of analysts.

Revenues declined 2.4 percent to $613.5 million from $628.8 million with revenues and operating income down for the company’s four biggest divisions — North American retail, Europe, Asia and North American wholesale. The licensing unit registered improvement in both revenues and profitability.

North American retail revenues eroded 3.1 percent to $253.8 million and were down 5 percent on a comparable basis. But company officials reported progress in realigning the product assortment, including its emphasis on jeans at price points under $100.

Declines in Europe moderated, with revenues down 0.8 percent to $200.9 million.

“As we enter into the fourth quarter, we are pleased with the trends we are seeing in North America, reflecting the impact of our focus on delivering a better product assortment,” said Paul Marciano, ceo of Guess. “However, the economic climate in southern Europe remains challenging. Therefore, although we are encouraged by our overall results in the first nine months of fiscal 2014, we will continue to plan our business cautiously given the uncertain environment.”

Like Aéropostale and Wet Seal, Guess reported after the markets closed Wednesday. Guess shares pulled back slightly in after-hours trading, sacrificing 0.4 percent to drop to $33.20 after falling 1.6 percent during the day to $33.34. Aéropostale shares backed off 3.9 percent to $9 after hours following a 3.9 percent pullback during the day to $9.36.

Wet Seal, delivering the weakest fourth-quarter guidance, saw its shares recede 15.7 percent, to $2.69, after hours following a 0.3 percent drop to $3.19 earlier.

Aéropostale’s net loss in the third quarter amounted to $25.6 million, or 33 cents a share, versus net income of $24.9 million, or 31 cents, in the prior-year period. Adding back in 4 cents for asset impairment, the loss was 29 cents, beyond the 24-cent loss expected. Sales fell 15.1 percent to $514.6 million, also falling short of modest estimates, and e-commerce, including GoJane.com, acquired in November 2012, was flat.

“We’ve made progress this year in executing our key initiatives,” said Thomas Johnson, ceo. “However, it takes time for customers to recognize the changes that we’ve made in our brand. This delay in customer adoption is particularly magnified by weak mall traffic in a higher, really promotional retail environment.”

Wet Seal’s loss widened to $14.9 million, or 18 cents a diluted share, from a loss of $14.8 million, or 17 cents, a year ago. Sales were off 5.8 percent to $127.7 million, from $135.5 million a year ago. Comps rose 0.8 percent as a 1.7 percent gain at Wet Seal offset a drop of 6.7 percent at Arden B.

A “disciplined approach” to inventory management and lower markdown levels helped raise gross margins 350 basis points, according to ceo John Goodman.