Morningstar | Guess' Shares Plunge as Inventory Liquidations in International Markets Weigh on Profitability
Shares of no-moat Guess tumbled after it reported fourth-quarter results and provided lackluster guidance for fiscal 2020. While the firm's top-line performance came in ahead of our expectation (with 5.7% reported revenue growth 110 basis points above our estimate), profitability faltered, with adjusted operating margin of 9.2% (up 10 basis points over the prior-year period) and adjusted EPS of $0.70 falling short of our expectations for 9.5% and $0.75, respectively. This shortfall in profitability was primarily driven by the Europe segment (44% of sales), where operating margin fell 480 basis points to 11%, as the firm liquidated older inventory and faced increased distribution costs in both its retail and wholesale businesses. Inventory liquidation also weighed on the Asia segment (15% of sales), where operating margin contracted 480 basis points to 3.6% due to this factor, as well as higher markdowns. However, sales performance in the region remained robust, increasing 26% in constant currency (versus our high-teens estimate, and lapping a 33% increase in the prior-year period) on 17% comps, thanks to strong e-commerce performance in China.Still, we posit it may take the firm longer to meet our near-term profitability targets given these headwinds. Management's outlook for fiscal 2020 calls for GAAP operating margin between 4.8% and 5.3% and EPS between $1.09 and $1.21, below our expectations for 5.5% and $1.37, respectively. We expect to lower our near-term margin assumptions as a result, which should lower our $21.50 fair value estimate by a mid-single-digit percentage. However, we're holding the line on our longer-term outlook, which calls for low-single-digit sales growth and operating margin hovering around 7% in the out-years of our 10-year forecast. Even with a low-teens percentage decline in after-hours trading, we'd suggest investors wait for a wider margin of safety to build a position in the name.
GUESS? designs, markets, distributes and licenses collections of apparel and accessories for men, women and children. The lines include collections of clothing, including jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel. In addition, the company selectively grants licenses to design, manufacture and distribute a range of products that complement its apparel lines, including eyewear, watches, handbags, footwear, kids' and infants' apparel, outerwear, fragrance, jewelry and other fashion accessories. The company's businesses are grouped into five reportable segments: Americas Retail, Americas Wholesale, Europe, Asia and Licensing.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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