Guess Downgraded to Underperform - Analyst Blog

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We have downgraded the recommendation on Guess? Inc. ( GES ) to Underperform from Neutral, following the weak third-quarter 2012 core earnings of 71 cents per share, which missed both the Zacks Consensus Estimate and the year ago earnings.

The current global economic headwinds and diminishing disposable income of consumers were responsible for pulling down the earnings. Moreover, the potential slowdown in Europe and increasing volatility of the market also has a risk of eroding customer confidence in the company.

Same store sales declined 4.1% in local currency and 3.5% in US dollars during the quarter, while reorders for the fall collections as well as spring/summer orders were not up to the mark in the wholesale segment. Channel mix was also more than offset by accelerating operating expenses to maintain more stores and planned infrastructure expenses.

Though Guess had made good progress in many of its key strategic initiatives and managed to increase sales in the quarter owing to the strong performance in Europe and Asia, we believe that currency fluctuations can adversely impact the financial condition, results of operations and earnings of the company. A major amount of GES' revenues come from its international operations.

Moreover, the company also imports many raw materials from outside the U.S.; the cost of which may fluctuate by the changes in the value of the applicable local currencies.

Furthermore, we have seen that the company's growth strategy is to expand its retail business across the globe with newer store concepts. Management also sees opportunities to increase the number of GUESS? branded retail stores in Europe and also in North America. However, Guess operates in a highly competitive and fragmented industry, and competes with many apparel manufacturers and distributors, both domestically and internationally, which might have substantially greater resources and thus can price their products at a much lower rate than Guess.

Therefore, it gets difficult for the high-priced Guess to sustain in the market, which is impacted by an increase in unemployment levels and where significant volatility in the global financial markets have negatively impacted the level of consumer spending for discretionary items.

Though Guess plans to improve its productivity, expand its long-term profitability and deliver outstanding returns to its shareholders, it is still difficult to predict how long the current economic conditions are likely to persist.

We, therefore, assign the Underperform recommendation to the shares. The quantitative Zacks Rank for Guess is currently "5", which implies a Strong Sell rating over the near term.

GUESS INC ( GES ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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