Market Overview

Guess? Discusses Its Poor Second Quarter And Outlook During Conference Call

Following Guess? (NYSE: GES) second quarter results on Wednesday, CEO Paul Marciano hosted a conference call to discuss its performance in the quarter and future outlook.

The quarter in review

Guess reported that it earned $0.26 in the quarter, in range with the company's expectations, but below a consensus estimate of $0.29. Revenue of $608.60 million came in below the company's expectations and below a consensus estimate of $617.91 million. However, Marciano made sure to point out that all of the company's segments performed in-line with internal projections, except for North America Retail.

Total company gross profit was below expectations at $217 million, while gross margin declined 330 basis points to 35.6 percent. The company's CFO Sandeep Reddy stated that the lower gross margin was due to occupancy deleverage, lower European wholesale shipments and negative comparable store sales and markdowns throughout North America and Europe.

SG&A expenses rose three percent from a year ago to $187 million due to higher general and administrative costs, partially offset by lower advertising and marketing costs and lower selling and merchandising costs in Europe.

Marciano explained that the overall retail environment remained “challenging” due to soft traffic and a need to remain promotional throughout the quarter. Despite the challenging retail environment, the company saw very good progress in e-commerce business, which grew by 48 percent in the quarter.

While improvements in e-commerce continues to create a better omni-channel shopping experience, North America Retail business saw its comp sales decline by five percent in the quarter.

Marciano said that the company saw strength in its men's business, which “significantly” outperformed all other categories over the last four quarters. In particular, sales of men knits top performed well. At the same time, the company saw weakness in women and accessories. As such, Marciano said that the company will restructure the women design priorities immediately.

In Southern Europe, Italian comps were flat for the quarter while West Spain comps fell by a low single digit. As expected, the company's wholesale business in Europe was weak with flat same-store buys. However, Marciano does see rising orders for Spring and Summer 2015 compared to a year ago.

In Asia, the company saw challenges due to a “soft” South Korean economy and in certain stores in mainland China. On the other hand, stores in Hong Kong and Macau posted positive comps for the quarter.

Looking forward

Marciano said that the company is a month into the standing of its fall product line, and so far, the response is “below what we had expected.” Consistent with what many of the company's peers are seeing, demand for denim is “light.” As such, the company was forced to lower its guidance.

COO Michael Relich stated that so far in the third quarter, comp sales are down in the mid-single digits, and this trend is expected to continue for the remainder of the quarter. For the full year, Relich projected comp sales to decline in the mid-single digits and for revenue to be down in the low to mid-single digit range.

Relich also stated that the company will realize a higher SG&A rate for the third quarter and that the rate will increase for the full fiscal year.

Relich offered a specific guidance, and the company expects its third quarter revenue to be $590 million to $600 million, with an operating margin between 3.5 percent and 4.5 percent. Additionally, the company now expects its earnings per share to be $0.15 to $0.20.

For the full fiscal year, Relich stated that the company expects its revenue to be $2.44 billion to $2.48 billion, with an operating margin of 5.5 percent to six percent. Earnings per share is expected to be $1.05 to $1.20. The company also plans to invest $70 million to $80 million in capital expenditures.

Marciano stated that the company plans to close 50 stores before the end of fiscal 2016. In addition these 50 stores, 50 percent of its North American store base will come up for renewal in the next three and a half years, giving the company further flexibility to optimize its real estate portfolio.

In addition to real estate closures, Marciano expects to see an annualized savings of $20 million or more through a streamlining of its North American Retail organization.

Notable quotes

Paul Marciano on why the quarter saw poor sales: “The positive momentum we saw in April and May was impacted as we saw a sudden slowdown in traffic in the middle of June to middle of July, which coincided with the World Cup and particularly affected our tourist doors.”

Paul Marciano on what didn't resonate with the customers: “The performance and styling has not been exactly what the customers wanted. So we want to refocus where we were before, dress assortment with a balanced offering, capture back what we have just a year ago with club dresses, glamor dresses. Outerwear also has been not exactly what we wanted. So we're going to -- we are focusing on that right now. And definitely, I think that denim, we brought, for example, the high waist that maybe went too far having too many choices and too many styles on high waist [indiscernible] and woven top, I believe that the woven top, we could have done better.”

Michael Relich on advertising expectations: “We have a comprehensive marketing program that includes magazines, direct mail, social media, digital advertising. And I think that our marketing efforts are materializing because we're seeing a slowing of traffic decline so far in Q3. So, so far in this quarter, traffic is down in the low-single digits, and so the trend is increasing. And keep in mind that most of our marketing spend occurs in Q3, and this year, we still expect to spend more than we did last year. However, in light of the current trend and the current performance, we're actually analyzing what our projected marketing spend is on the back half of the year, and we're going to adjust accordingly.”

Sandeep Reddy on the company's dividends: “From a dividend perspective, we have $467 million on the balance sheet, so we have a very strong position, as Paul mentioned. We feel pretty confident that we'll be able to maintain the dividend program. But we have a conversation with our board every quarter, and they keep on improving it on a quarterly basis.”

Michael Relich on denims: “One of the initiatives that we had in the fall was to relaunch our denim, our denim walls, which is our basic core denim. So with that, we actually were liquidating a lot of the old stock. So with that liquidation, the average price points came down. But the denim business, I mean, you've seen from other retailers, it's -- actually it's not very strong. Any -- no one's denim business is very strong. What we find, though, is actually we do have strength in our fashion denim, which actually is doing well, and we see very little price resistance there.”

Paul Marciano on improving the product assortments: “But there are too many of -- too many wash and too many styles. We are correcting that. It's easy. If you don't know what the illness is, that's a problem. If you know what is your problem, you know that you have a cure. You correct it, and you do it. That is somehow where we always look at the half glass full and not the half glass empty. We know, we identify, we act on it. We adapt and we move on.”

Posted-In: Denim Guess Paul Marciano Sandeep ReddyNews

 

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