Morningstar | Strong Comps in Asia and Europe Continue to Fuel Guess' Top Line in 3Q; Shares Not a Bargain
No-moat Guess posted third-quarter results that largely aligned with our expectations, including 10% revenue growth (a touch above our 9% estimate), driven by ongoing strength in international markets, and adjusted earnings per share of $0.13 (a penny below our estimate). We were encouraged by strengthening profitability, with adjusted operating margin expanding 130 basis points to 3.7%. This improvement was primarily due to lower markdowns, positive comparable sales trends, and negotiated rent reductions in its Americas retail business (which contributes nearly a third of sales), which achieved segment operating margin of 2% (marking 330 basis points of improvement and matching our expectation). We aren't expecting a material change to our $20.50 fair value estimate as we incorporate these results, and plan to maintain our longer-term outlook, which calls for mid-single digit sales growth and adjusted operating margin slightly below 6% on average over the next five years.The firm was able to deliver positive retail comps (which include e-commerce) in each of its regions, which we view as evidence that it is making progress on its strategic initiatives. Retail comp sales were up 12% in Europe (42% of revenue) and 9% in Asia (15% of revenue) in constant currency, supporting our view that Guess' brand image should resonate with international consumers as it expands its presence abroad. However, we contend the retail landscape remains more challenging in the U.S., where the firm faces the challenging task of repositioning its brand amid substantial competition. In this context, we've long appreciated its plans to reduce the size of its domestic store base and focus on improving its merchandising and sales organizations. We view stabilizing performance in this business (with revenue increasing 1% in constant currency, including 3% retail comp growth) as evidence that the firm's turnaround efforts are taking hold.
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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