Guess Inc. managed to beat Wall Street’s first-quarter estimates despite earnings and sales that were depleted by steep drops in its European business.

This story first appeared in the May 23, 2012 issue of WWD. Subscribe Today.

Net income dropped 37.6 percent to $26.6 million, or 30 cents a diluted share, from $42.7 million, or 46 cents, in the 2011 period. Revenues receded 2.2 percent to $579.3 million from $592.2 million in last year’s quarter, while gross margin backtracked to 40.6 percent of sales from 41.9 percent a year ago.

With analysts estimating earnings per share of 26 cents on revenues of $569.9 million, investors took the earnings report as better-than-expected news and sent shares up more than 7 percent in the beginning of after-hours trading. Earlier, they’d closed down 3 cents, or 0.1 percent, at $24.44 before moving up past $26 in the evening.

Guess weathered drops in operating income in all five of its business units during the quarter ended April 28, but none was more costly than the 62.4 percent decline in European profits, to $12.5 million from $33.2 million, while sales on the continent pulled back 9.7 percent to $189.8 million from $210.2 million.

Speaking of Europe, Michael Prince, chief operating officer, said during a late afternoon conference call with analysts, “We experienced declines in our more mature markets given the economic challenges in the south, while we grew our business in newer growth markets like Germany and Russia, both of which…posted double-digit top-line increases. We grew our owned retail business in Europe where our top-line performance was stronger than we had anticipated as comp-store headwinds were less severe than we had planned.”

Neither in Guess’ financial statements for the quarter nor on its conference call was there any mention of the $4.7 million judgment in favor of Gucci handed down in federal court Monday against Guess and its footwear licensee, Marc Fisher Footwear, at the conclusion of their three-year-long trademark battle. (Gucci had sought more than $221 million in damages.) Paul Marciano, chief executive officer of Guess, who testified in the case, had said previously he wouldn’t be on the first-quarter call because of a global conference of Guess and its licensees taking place in Los Angeles this week.

Investors took heart that Guess maintained its earnings guidance of between $2.50 and $2.65 a diluted share for the full year despite projections for a second quarter in which EPS is expected to land between 48 and 52 cents versus analysts’ earlier expectations of a 62-cent profit.

Guess has invested in marketing as it’s celebrated its 30th anniversary this year. Dennis Secor, chief financial officer, said it “will take some time to realize the benefits from those investments….Also, the improvements we are driving at our men’s and accessories businesses are expected to yield results but later in the year.” He added that same-store sales in Europe aren’t expected to turn positive during the balance of the year but that conditions in Europe were showing signs of stabilizing.

Guess’ North American retail operations registered a 1.8 percent sales increase, to $251.8 million, on a 5.5 percent decline in comparable-store sales, and operating profit fell 8.8 percent to $17 million. Sales were up 7.9 percent in Asia, to $64.8 million, while operating income dropped 17.3 percent to $5.9 million. Strength in China helped offset weakness in South Korea, although conditions improved in April, according to Prince.

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