Guess Inc. weathered declines in its second-quarter sales and earnings while beating analysts’ estimates as it cut expenses and lifted gross margin.
Noting that quarterly results surpassed internal expectations, Paul Marciano, chairman and chief creative officer, said, “In our Americas Retail business, comp sales ended flat for the quarter in constant currency, mainly driven by continued improvement in the performance of the women’s category.”
His successor as chief executive officer, Victor Herrero, spelled out five objectives for his tenure, including a reorganization of the sales organization involving the leverage of field and store structure and “unlock[ing] the potential of the Guess brand in Asia by working to build a major business in this region.”
Herrero, a former executive of Zara and its parent Inditex, was named to the company’s top post in July. Guess’ business in Asia is the smallest of the three geographies in which it operates.
In the three months ended Aug. 1, net income fell 16.7 percent to $18.3 million, or 21 cents a diluted share, from the 2014 bottom line of $22 million, or 26 cents. The consensus for the just-concluded quarter was for earnings per share of 15 cents. The company said currency headwinds subtracted about 38 percent from earnings.
But Guess kept a tight rein on expenses in the quarter, reducing cost of goods sold 11.1 percent to $348.1 million and pressuring selling, general and administrative costs down 8 percent to $171.9 million.
Revenues dropped at a double-digit pace but still surpassed analysts’ estimates. Including royalties, they declined 10.2 percent, to $546.3 million from $608.6 million and, excluding currency fluctuation, were off about 1 percent. The expectation among analysts, on average, was for revenues of $537.6 million.
Still, with cost of goods sold down more than revenues, gross margin picked up to 36.3 percent of sales from 35.6 percent a year ago.
Marciano took particular pride in Guess’s continuing progress in the e-commerce arena, as digital revenues in its Americas region grew 20.1 percent to $18.2 million versus a 6.4 percent decline, to $214.2 million, in its Americas stores. Same-store sales in the Americas fell 2.8 percent, with stores down 4.6 percent and e-commerce up 1.8 percent.
“So far in the third quarter, comp sales in the Americas are roughly flat in constant currency,” Marciano said.
Guess changed the name of its two operating units in the Americas, with North American retail becoming Americas Retail, Guess’ largest business by far, and North American wholesale changing to Americas Wholesale.
While Americas Retail saw sales drop 4.7 percent to $232.5 million, the company turned an operating loss of $4.7 million in last year’s quarter into an operating profit of $5.2 million.
Europe’s revenues dropped 15.3 percent to $199.4 million while its operating profit dropped just over a quarter to $18.2 million. But revenues excluding currency impact rose 3.7 percent. Asia’s revenues were down 11.7 percent to $56.7 million, with sales off 6 percent excluding currency’s effects. However, operating profit dropped 60.8 percent $887,000.
Writing before the release of results, Wunderlich Securities analyst Eric Beder, who has a “buy” rating and $24 price target on the stock, said he is focusing on third-quarter results, when he expects to “see the rollout of new, more traditional Guess sexy items with a key denim focus” in the U.S.
“When combined with a material fashion shift to denim bottoms in key technologically driven fabrics, we believe Guess is ideally positioned to reverse a three-year-plus trend of declining domestic same-store sales,” he said.
Shares, up 7.3 percent to $21.30 during the trading day, fell nearly 5 percent in early after-hours trading. Guess said that, at constant currency, it expected a drop of 3 to 4.5 percent in third-quarter revenues.