This Fashion Retailer Is Ahead of the Pack

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Things haven't been easy on US fashion retailers lately. Consumers have been less willing to spend money on discretionary items. Youth retailers have especially felt the pinch, on the whole reporting slowing sales. A bright spot in the industry was Guess?'s most recent earnings report, which showed some resilience despite tough market conditions. Despite a surge in its share price following the report, the company still trades at a discount to the industry.

Guess? at a glance
Guess?, headquartered in Los Angeles, is a fairly large apparel retailer. The company operates 507 stores in the US and 328 locations abroad. Its main products include apparel items such as jeans, shirts, jackets and dresses, but the company also licenses and distributes a range of accessories including handbags, jewelry and eyewear. The stock is up about 16% in the last year and offers a dividend yield of 2.6%. 

Solid performance in a tough market
Whereas other US fashion retailers, such as American Eagle and Abercrombie & Fitch , have come out with some disappointing numbers recently, Guess? posted a fairly upbeat quarterly report . Guess?'s second-quarter EPS of $0.52 smashed the $0.36 consensus and was up $0.03 from the year-earlier period. Revenue of $639 million also beat the $622.9 million consensus, despite a 2% drop in same-store sales which was still not as bad as analysts had anticipated.

The company's efforts to streamline operations and cut costs seem to be paying off, as it managed to grow its bottom line despite weak sales growth. While there was clearly some improvement in the US market, Southern Europe remained challenging and China was seen slowing down according to management. Nevertheless, the company raised its full-year EPS guidance to $1.78-$1.92, well above the $1.79 consensus .

In any case, the report is a marked improvement over last quarter, when Guess? reported a 10% decline in North American sales. Yet, things are still looking fairly gloomy for the American consumer. Strapped for discretionary income, partly as a result of increased taxes and higher gas prices, many shoppers are reluctant to spend money on non-essential items . Guess? does appear to be performing better than most of its peers in this environment, though.

Peer results
Abercrombie & Fitch has fared badly as a result of the tough retail environment. Recently downgraded by Zacks, the company has been struggling with its comp store sales for the last six quarters, and it is expected that this will continue through fiscal 2013 . The company's latest report was a fairly dramatic miss. Additionally, Abercrombie & Fitch's third-quarter guidance came in well below the consensus. Much of this poor performance was blamed on the company's failure to recognize teens' fashion needs, specifically .

American Eagle, another US competitor, is also struggling as a result of the macro-economic backdrop. While the company met EPS expectations for its most recent quarter, guidance came in well below analyst estimates . Like its peers, American Eagle has been suffering from poor demand, especially from teens, an age group that normally fuels much of the industry's profits. Like Abercrombie & Fitch, the company expects its sales to drop in the third quarter .

Aeropostale was perhaps one of the hardest hit US fashion retailers, diving nearly 40% this year among other things due to a fairly disastrous second-quarter miss. Having now posted a loss for two consecutive quarters, the company expects to lose money again in Q3 with weak traffic and higher costs weighing on the company's margins 

One of the few competitors that actually seem to be doing alright is The Gap . Following a recent earnings beat that showed healthy revenue growth, the company raised its full-year outlook, as Old Navy and Gap Global brands especially have been performing very well. Encouragingly, the company raised its dividend for the second time this year, and furthermore expects to open another 160 stores in fiscal 2013 while closing around 80. 

Valuations and metrics
Guess? currently trades at a bit of a discount to the industry, at 16.52 times trailing earnings versus the 19.1 industry average. Abercrombie & Fitch and American Eagle are even cheaper at 11.91 and 13.18 times trailing earnings respectively, but this is probably largely a result of their poor performance. The most expensive stock mentioned here is Aeropostale, trading at 55 times trailing earnings. Guess?' price-to-sales of 0.99 is quite reasonable, as is its 14.52% return on equity. The company has a fairly solid balance sheet with only $10.23 million in debt and more than $300 million in cash.

The bottom line
It is becoming increasingly clear that the American consumer is not in as good shape as the talk of economic recovery would suggest. As a result of higher taxes and gas prices, many US consumers are hesitant to open up the purse strings for non-essential items, which has clearly been hurting many fashion retailers. Despite this tough environment, Guess? has performed quite well, and additionally isn't too expensive at the moment.

The article This Fashion Retailer Is Ahead of the Pack originally appeared on

Daniel James has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool owns shares of Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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