Guess (GES) is soaring higher this morning on heavy volume after blowing analyst earnings estimates out of the water. While the Street was prepared for profits of 36 cents per share, Guess earnings smoked that by 44% with profits of 52 cents in its fiscal second quarter.
That was thanks to a slight improvement in revenue in the company’s two largest segments, coupled with slightly thicker margins. In North America and Europe, sales (in U.S. dollars) improved by 1% year-over-year — not too bad considering those regions suffered declines of 5% and 13% respectively during the first quarter.
Still, I wouldn’t break out the party hats just yet. To start, the company’s numbers were, objectively, anything but impressive. Overall, net income took a 7% year-over-year tumble, while revenue ticked up fractionally. And comparable-store sales still ended in the red — although the 2% slide was admittedly better than the double-digit one GES stores suffered in Q1.
On top of that, while Guess touted cost controls as part of the reason for the earnings beat — and while the company’s adjusted operating margin in the second quarter did increase 150 basis points to 10.5% — they company’s margins still lag behind its competitors.
Guess’ current trailing 12-month margin operating margin sits just under 10%, while Ralph Lauren’s (RL) operating margin is north of 16%, Gap’s (GPS) is 13% and Buckle (BKE) more than doubles the company with an operating margin of nearly 23%. Unless Guess can bulk up those numbers, it’s going to need much more impressive revenue growth to get earnings growing again.
And I wouldn’t hold my breath for that considering the fact that retail names from Walmart (WMT) to Macy’s (M) have expressed concerns about consumer spending in the U.S. during the coming months, while Guess management itself expressed concerns about spending in southern Europe and China.
No wonder Guess’ third-quarter forecast came in below expectations. GES predicts it will earn between 34 and 38 cents per share — below analyst EPS expectations for 40 cents that even then would translate into a 7% drop.
The cherry on top of my hesitancy about Guess is this: Today’s big pop hasn’t made up for the huge chunk of ground lost heading into the report. Guess stock was sitting pretty with year-to-date gains north of 41% in early August, but then investors — likely sensing the stock was getting frothy — began fleeing. GES lost almost 20% of its value in the month leading up to the report, and it still remains well off its early-August high of $34.
For Guess stock to make it through that looming point of resistance, it’s going to need far better results that what we just saw.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.