Evercore Upgrades Guess On Improvements In Europe

In a report published Wednesday, Evercore analyst Omar Saad upgraded the rating on Guess?, Inc. GES from Sell to Hold, while raising the target price to $22, following the announcement that CEO Pail Marciano is to step down in August and will be succeeded by Victor Herrero, currently Head of Asia Pacific for Inditex.

"We think the announcement, which provides much needed visibility into Guess's future leadership structure, coupled with improving sales trends in Europe and stabilizing operating margins positively shifts the riskreward for GES shares to a more balanced level," Saad elaborated.

The analyst believes that a clear CEO succession plan would help establish higher consistency for the brand. Paul Marciano is one of the founders of the company and has been the CEO since 2007. Before that, Marciano was the co-CEO since 1999. The recent executive turnover at Guess led to a disruption in the continuity of the brand message.

"In our opinion, providing Mr. Herrero autonomy at this pivotal juncture of the Guess brand is a big step for the Marciano brothers, but one that we believe is necessary to implement a coherent strategy to help Guess find the right place in a rapidly shifting apparel consumer landscape," the Evercore report stated.

In addition, the analyst expressed confidence that the company was finally reaching an inflection point in Europe, following several years of sales declines and wholesale business closures. European sales grew more than 7.5 percent in constant currency term during 1Q, representing the first growth quarter in more than two years.

"Moreover, Italy, GES's largest market in Europe, appears to be inflecting with QTD trends moving positive as well with broad based strength across most major categories," Saad added.

On the other hand, in the U.S., Guess' licensing revenue is expected to offer downside margin protection to some degree, while the company executes its turnaround plan. The analyst expects licensing to contribute $100 million or about 80 percent of the company's operating profit in 2015.