EUR 850.00 For Business Accounts Only

Morningstar | Guess' Investments Abroad Yield Substantial Top-Line Growth in 2Q; Shares Look Rich

No-moat Guess outpaced our top-line expectations in the second quarter, with revenue growing 14% (versus our high-single-digit estimate) on further strength in its international markets. Sales in Europe and Asia were up 22% and 32%, respectively, well above our mid-teens outlook for each geography. Comps in Europe (48% of sales) have now been positive for 12 quarters in a row (standing at 5%, including e-commerce, during the quarter), as the firm's strategic initiatives to improve merchandising and expand its footprint in the region continue to take hold. Retail comp sales in Asia (13% of revenue) were also robust, growing 17%.

While the landscape in the Americas remains more challenging, we view positive retail comps and improving profitability as evidence that the firm is making further progress in its efforts to turn around this business. Comps in the Americas Retail segment (31% of sales) were up 3%, though we note this came on top of a 10% decline in the prior year period. Moreover, operating margin in this segment expanded 460 basis points to 2.8%, thanks to lower markdowns, rent renegotiations, and closures of less profitable stores.

We plan to increase our top-line outlook for the year to reflect further strength in Europe and Asia, but don't foresee a material change in our longer-term outlook, which incorporates low-single-digit sales growth and around 6% adjusted operating margin on average over the next decade. We expect these revisions to lift our $19.50 fair value estimate by a mid-single-digit percentage. However, even at this level, we view shares to be expensive, and suggest investors wait for a more favorable entry point.