1 Retailer Selling Less and Making More
Tomorrow, Guess? is going to release its third-quarter results. So far this year, the market has been happy with the company's focus on cost management, which has helped it increase margins even as sales have declined. The second quarter was a perfect example of this half-success, with Guess? increasing earnings per share while revenue dropped. Given the economic environment plaguing retailers the world over, the third quarter looks set to deliver more of the same, at best. For investors, the question is how long can Guess? make more from less?
Where have all the good sales gone?
For the six months through the end of July, Guess? was staring down a 2.2% decline in revenue compared to the same period last year. The bulk of that shortfall came from a drop in the company's European segment, where revenue declined 7.1% in local currencies.
In its discussion of the segment, the Guess? management team cited the continued drag of weak sales in Italy and France. Those regions have been hard all year long, and traffic isn't expected to push up anytime soon. That's bad news for investors and management, as European sales make up about 40% of total revenue. It could also be a warning sign for the future, with European style sentiment still trickling across the pond, affecting American's buying decisions -- they were doing leggings as pants in 2007.
NB: The author does not condone wearing leggings as pants.
The upside of cost management
Even with its falls, Guess? has managed to expand its earnings. Last quarter, the company increased earnings per share by 6.1% over the same period in 2012. Looking again to Europe, Guess? benefited from some favorable comparisons to help it grow that income. For instance, in the second quarter last year, the company took a $0.04-per-share hit on some bad Greek debt -- who didn't? -- making this year's comparison that much easier.
In addition to its previous bad luck, the company is also making actual changes. Shifts in distribution have added some new savings to the business, and it's been shutting down underperforming locations left and right. This fiscal year, the company is expecting to see a decline in overall store count in North America, as it shuts down around 20 locations.
The value of cost management over brand success
From a purely consumer-level perspective, Guess? is struggling. Competitors like Fifth & Pacific's Kate Spade have proven too strong for Guess?, and the company is losing its key market. Guess? is searching for the "aspirational girl" who's willing to spend more than $100 on a pair of jeans. So far, no dice.
Kate Spade, on the other hand, is growing comparable sales by double digits, and doing so by hitting a $130 average ticket. That helps explain why Guess? is seeing a drop in sales per square foot, while Kate Spade is hitting unexpected highs.
Tomorrow, Guess? is likely going to report fine earnings and lackluster sales. As an investor, that's not enough for me. Guess? is showing some sort of strength by weathering the storm, but it's not showing that it has the kind of consumer demand that makes a company great. Analysts are looking for $0.39 per share tomorrow, which is just above the company's own estimate. Surpassing that isn't enough to make Guess? a good buy -- it needs to rebuild its image, too.
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Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends 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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