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Guess Reports Fines From Violating EU Competition Rules, Along With Q3 Loss

Guess saw its shares fall momentarily on Wednesday after releasing a Q3 earnings report for FY2019 that reported greater-than-expected losses and the announcement of an expected 37 million euro fine ($42.4 million) for violating competition laws in the European Union.

The European Commission announced in June last year that it was investigating Guess for allegedly banning cross-border sales for its e-commerce retailers in the region, which violates rules set up to guard the EU’s Single Market policy.

“The Commission has information indicating that Guess, in its distribution agreements, may ban cross-border sales to consumers. One of the key benefits of the EU’s Single Market is that consumers can shop around for a better deal,” commissioner Margrethe Vestager said at the time. “We are going to investigate Guess’ practices further to ensure that it’s playing by the rules and not preventing consumers from buying products across borders.”

The result of that investigation, Guess estimates, will lead to the fine and a negative impact of $0.52 per share. The retailer acknowledged that the investigation led to “certain changes in its business practices” that “have not had, and will not have, a material impact on its ongoing business operations with the European Union.”

This comes after Guess co-founder, Paul Marciano, announced in June that he would resign from his role at the end of the year due to sexual assault allegations.

In a Nutshell: Stock markets initially reacted very strongly to Guess’ net loss of $13.4 million, with some outlets reporting decreases of up to 10 percent of its total stock value. The loss was a 370 percent increase compared to the $2.9 million lost in the third quarter of FY2018.

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However, Guess shares recovered soon after, thanks to positive revenue and comparable sales in every market the American clothing company participated in for the quarter. Shares were up 1.9 percent by the end of the trading day.

Guess stock has risen steadily throughout the year, up around 25 percent to date. At publication time, Guess shares were up 6 percent to $23.77.

Sales: Q3 revenue was up 10 percent in the quarter (13 percent on a constant currency basis), to $605.4 million, compared to $549 million in the same period last year. Comparable sales were up in each sector for the company, with American wholesale revenue leading the way at 15.5 percent. Comp sales in Asia and Europe, including e-commerce, increased by 8 percent for Q3, while American retail decreased by 0.1 percent in U.S. dollars—but showed a net increase of 1.1 percent when viewed in constant currency. Licensing revenue was also up 7.4 percent for the quarter.

Earnings: Guess recorded adjusted net earnings of $10.6 million in the quarter, up 1.6 percent from the $10.4 million recorded in Q3 of FY2018. Adjusted diluted earnings per share were up 8.3 percent to $0.13, from $0.12 in the prior-year quarter. However, the reason for the stock market shock was a reported GAAP net loss per share of $0.17 compared to a loss of just $0.04 in the previous third quarter report.

A significant portion of the loss occurred due to an increase of 5,119.7 percent in operating loss to $21.5 million, from just $0.4 million in Q3 of FY2018. Additionally, operating margin decreased 350 basis points to negative 3.6 percent. This was a result of the European Commission fine and higher distribution costs related to the relocation of its European distribution center, Guess said.

However, the company’s updated prediction of earnings at 69 cents per share to 76 cents per share was in line with investor predictions, according to Marketwatch.

CEO’s Take: “I am very pleased to report another quarter of strong operating performance…despite unexpected currency headwinds.” Guess CEO Victor Herrero, said. “I am very encouraged by the overall sales momentum we are experiencing with positive comps in all regions in the third quarter, which speaks to the global strength and relevancy of the Guess brand.”

“This is truly an exciting time for our company as we continue to execute our turnaround. For this fiscal year, we are planning for positive comps in all regions and expecting every business segment to be profitable; beyond the current year, we still have a lot of growth opportunities in Europe and Asia; the results in the Americas retail business have continued to show improvement; and we see more opportunities to reduce costs, particularly in logistics,” Herrero continued. “More than ever, we remain focused on executing our strategic initiatives which are the pillars of our revenue and profit growth and our 7.5% operating margin goal.”