Good Quarter for Guess But Near-Term Headwinds Cause Concern

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Guess’ fiscal fourth-quarter sales results reflected ongoing weakness in its North American retail operations, though margins came in at the upper end of management’s range. Sales in the fourth quarter rose 5% to $815 million, as Asia growth increased 19% and Europe ticked up 3%, partially offsetting further weakness in North American comparable store sales (which were down 6.3%, despite lapping a negative 5% in the prior-year period). Reported operating margins slipped 280 basis points to 15%; this is still healthy, but the continued fixed-cost de-leverage is unsettling. Adjusted diluted EPS came in at $0.95, down from $1.05 in the year-ago period.

The shares could remain range-bound and relatively volatile given the current macro uncertainties, but analysts think Guess can ultimately weather the storm. The European outlook might dim further, and initiatives at North American retail will take time to turn around, but the company still generates $175 million in normalized free cash flow, and management maintains an extremely conservative balance sheet with no debt and more than $3.50 per share in net cash.

The company pays a $0.20 per share quarterly dividend (3% yield at the current share price), and its ongoing share-repurchase program should pacify some investors. The firm can still deliver low-singledigit comparable sales over time, and management should continue to execute and deliver on its international growth plan.

 

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