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Guess Continues to Struggle with North American Sales

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Guess saw international growth in the third quarter of fiscal year 2018, but experienced a few hiccups in North American sales.

The company reported GAAP net loss of $2.9 million, compared to net earnings of $9.1 million during the same period last year. GAAP diluted loss per share was $0.04 for the third quarter, compared to $0.11 during the same period last year. However, the company believes currency had little impact on diluted loss per share during the period.

Guess saw adjusted net earnings of $10.4 million, an 8.1% increase compared to $9.6 million during the third quarter of FY2017. Adjusted diluted earnings per share grew 9.1% to $0.12, marginally up compared to $0.11 during the same time last year.

“Overall, our third quarter adjusted operating profit finished within our expectations, and adjusted earnings per share ended above the high-end of our guidance,” said CEO Victor Herrero. “We continue to see good momentum in Europe and Asia… mainly driven by new store openings, wholesale growth and positive comp sales.”

Net revenue grew 3.3% for the third quarter of FY2018 to $554.1 million, up compared to $536.3 million during the same time last year. In constant currency, net revenue grew 0.6%.

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GAAP operating loss for the third quarter was $1 million, compared to GAAP operating earnings of $15.1 million during the same quarter last year. GAAP operating margin during the third quarter fell 300 basis points to negative 0.2%, from 2.8% in the previous quarter, driven mainly due to net losses on lease terminations during the current year-quarter and higher performance-based compensation costs. The negative impact on currency on operating margin for the quarter was around 10 basis points.

For the period, adjusted operating earnings fell 21.1% to $12.6 million, from $15.9 million during the same time last year. Adjusted operating margin was 2.3%, a fall of 70 basis points compared to last year’s third quarter.

Around the world:
“We were also thrilled with the operating margin expansion in the Americas Retail despite a sales decline,” said Herrero. “This is the result of our profit improvement plan which included tight markdown management, higher IMUs, negotiated rent reductions and unprofitable store closures.”

Americas retail revenue dropped 13.4% in U.S. dollars and 14.3% in constant currency. Retail comp sales including e-commerce also fell 10 percent in U.S. dollars and 11 percent in constant currency. Americas’ wholesale revenues also fell, with a 2.5% drop in U.S. dollars and 4.5% in constant currency. Operating margin for the Americas wholesale segment grew 70 basis points to 18.1%, compared to 17.4% during the same period last year. Operating margin for the third quarter improved in the Americas Retail segment 240 basis points to a negative 2.5%, compared to negative 4.9% during the same period last year. This improvement was due mostly to the positive impact from lower markdowns, rent reductions, higher initial markups and store closures, somewhat offset by the negative impact on the fixed cost structure resulting from negative comparable sales.

Europe saw a revenue increase of 18.8% in U.S. dollars and 11.9% on a constant currency. Retail comp sales, including e-commerce, grew 10 percent in U.S. dollars and 4 percent in constant currency. Operating margin for the European segment dropped 320 basis points to 3 percent in the third quarter, from 6.2% the year before. Guess attributes this to higher distribution costs due to the moving of the company’s European distribution center, partially offset by higher initial markups.

Asia saw a sales increase of 16.8% in U.S. dollars and 18.5% in constant currency. Retail comp sales including e-commerce increased 3 percent in U.S. dollars and 5 percent in constant currency. Asia saw a positive operating margin, increasing 680 basis points to 3.7% in the third quarter of FY2018, compared to an operating margin of negative 3.1% in the third quarter of last year.

Licensing revenues grew 9.1% in U.S. dollars and constant currency, while the operating margin for the segment grew 620 basis points to 90.8%, compared to 84.6% during the same period last year.

“Overall, as I peek into the future of our Company, I believe that Europe and Asia still offer a lot of opportunity and should continue to grow double-digits next year. I expect the profitability in the Americas to continue to benefit from our cost reduction and margin improvement initiatives,” said Herrero. “Finally, we remain committed to our long-term goal of 7.5% operating margin that we expect to achieve through revenue growth and disciplined cost control.”

Updated Outlook
Guess now expects a consolidated net revenue in U.S. dollars for FY2018 to increase between 6 percent and 6.5%, with a constant currency increase between 4 percent and 4.5%. The company anticipates a GAAP operating margin of 2.5% to 2.8%, and an adjusted operating margin of 3.2% to 3.5%. Adjusted EPS is expected to be between $0.56 to $0.63.