Guess?, Inc.GES posted second-quarter fiscal 2019 results, with adjusted earnings beating the Zacks Consensus Estimate and revenues missing the same. The top and the bottom line improved year on year. Performance in the quarter was driven by strong revenue growth in the European and Asian regions. Further, the company raised outlook for fiscal 2019 and provided a positive view for the third quarter. These factors raised investors' optimism, evident from the stock's rise of 10.4% in the after-hours trading session on Aug 29.
Quarter in Detail
Adjusted earnings of 36 cents per share, surpassed the Zacks Consensus Estimate of 33 cents and surged 89.5% from the year-ago quarter's level. The bottom line mainly gained from strong growth in revenues.
Net revenues amounted to $645.9 million, missing the consensus mark of $651 million. Nevertheless, the top line improved 13.7% year over year. This marks the eighth straight quarter of year-on-year revenue improvement. On a constant-currency (cc) basis, revenues grew 12.2%. The upside can be attributed to solid sales in the Europe and Asia segments. These were partly offset by soft revenues in the Americas Retail.
Guess?, Inc. Price, Consensus and EPS Surprise
Notably, the company's European and Asian businesses have been delivering superb results for quite some time, which boosted the top line. This has been raising investors' optimism in the Zacks Rank #3 (Hold) stock that surged 43.5% in the past six months compared with the industry 's rise of 24.6%.
Gross profit improved 20.9% from the prior-year quarter's tally to $239.4 million on the back of higher revenues. The company's gross margin also expanded 230 basis points (bps) to 37.1%, owing to lower markdowns and rents as well as increased IMU's. These upsides were partially offset by occupancy deleverage stemming from increased European logistics costs. Well, the quarter also marks the fifth consecutive period of gross margin growth.
Adjusted operating earnings in the quarter were $36.9 million, up 47.4% from the prior-year quarter's level, courtesy of higher revenues and gross margin. This was offset by higher SG&A expenses. Also, adjusted operating margin rose 130 bps to 5.7%, including a 10-bps positive impact of currency. This marks the company's third-consecutive quarter of adjusted operating margin expansion.
Revenues of $197.1 million in the Americas Retail segment fell 2% year over year in U.S. dollar and at cc. However, Retail comp sales, including e-commerce, increased 3% in U.S. dollar and at cc. Operating margin in the segment improved 460 bps to negative 2.8%, driven by the positive impacts of lower markdowns and rent reductions, partially countered by higher store selling costs.
Net revenues of $34.3 million in the Americas Wholesale segment increased 4.9% (up 6.8% at cc). However, operating margin in the segment declined 50 bps to 15.5%, primarily due to lower gross margins.
The Europe segment's revenues of $312 million rose 22.2% (up 19.4% at cc). Store openings, enhanced wholesale revenues and comps growth boosted the region's performance, which was backed by efficient sales-driving initiatives. Retail comp sales, including e-commerce, improved 5% in U.S. dollar and 2% at cc. However, operating margin declined 200 bps to reach 9.8%, thanks to higher distribution costs from the repositioning of the European distribution center as well as increased retail promotions. These were somewhat compensated by expenses leverage from enhanced wholesale shipments.
Revenues of $82.8 million from Asia increased 32% (up 29% at cc) on the back of improved comps and store openings. Retail comp sales, including e-commerce, grew 17% (up 14% at cc). Operating margin in the segment surged 190 bps to 2%, owing to increased expenses stemming from expansions in Australia.
Net revenues of $19.7 million in the Licensing segment increased 19.5% in U.S. dollar and at cc. Operating margin in the segment improved 130 bps to 88.5%.
Guess? exited the second quarter with cash and cash equivalents of $219.1 million as well as long-term debt and capital lease obligations of $36.9 million. Further, the stockholders' equity was $851.9 million. Net cash used for operating activities during the period amounted to $21.7 million.
Additionally, the company's board has approved a quarterly cash dividend of 22.5 cents per share payable on Sep 28, 2018, to shareholders of record as of Sep 12, 2018.
As on Aug 4, 2018 the company's directedly-operated stores were 1,061, which are located across Asia, Europe and the Americas. Its distributors and licensees operated additional 601 stores.
Management is impressed with consistent growth in Europe and Asia. It continues to make capital investments in these regions to improve sales and margins. Additionally, the company has been striving to improve performance in the Americas and has undertaken several initiatives to reduce costs and enhance profits. Further, the company is on track with digital first initiative and has been investing in brand building through social media platforms such as Instagram and YouTube. The company is also optimistic about its recent partnership with video sharing application TikTok
That said, management raised outlook for fiscal 2019. It now expects net revenue growth in the range of 9-9.5% compared with the previous range of 8.5-9.5%. At cc, consolidated net revenues are expected to grow 8-8.5%, up from the previous projection of 6.5-7.5%. Further, adjusted earnings per share for fiscal 2019 are estimated between 94 cents to $1.03, up from the prior view of 88-99 cents.
Additionally, for the third quarter of fiscal 2019, management expects consolidated net revenues to improve in the range of 9-10%. At cc, consolidated net revenues are projected to grow 10.5-11.5%. The company anticipates adjusted earnings for the quarter in the range of 12-15 cents. The bottom line is projected to gain from a positive currency impact of 2 cents.
Stocks to Consider
Columbia Sportswear Company COLM , sporting a Zacks Rank #1 (Strong Buy), came up with an average positive earnings surprise of 79.3% in the trailing four quarters. It has a long-term earnings growth rate of 10.8%. You can see the complete list of today's Zacks #1 Rank stocks here .
Ralph Lauren Corporation RL , sporting a Zacks Rank #1, has a solid earnings surprise history and a long-term earnings growth rate of 9.6%.
Michael Kors Holdings Limited KORS , with a Zacks Rank #2 (Buy), has an impressive earnings surprise history and a long-term growth rate of 6.8%.
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