ANF Abercrombie and Fitch Co

Guess? Inc.’s (GES) second quarter 2012 adjusted EPS surpassed the Zacks estimate by 3 pennies and stood at 84 cents. It also exceeded the year-ago estimate of 72 cents by 16.7%. Reported EPS came down year over year by 9.72% to 65 cents from 72 cents in the previous year.

Management credited the booming international business with consistent ly good performance in Europe and Asia for strong results in the quarter.

The Way Forward

Guess? inspires confidence owing to the continuing strong business momentum in the challenging environment of weak consumer and category growth as well as significant input cost inflation. Management also feels that with strong cash position and solid capital structure, the company would easily carry out its long-term strategies and meet its vision, focusing on measured growth.

Based on the results posted in the quarter, the company estimates the third quarter diluted earnings to be in the range of 71 cents to 74 cents. For the fiscal 2012 the company sets an outlook of earnings in the range of $3.25 to $3.35 and GAAP diluted earnings per share between $3.06 and $3.16.

Revenues and Margins

Revenues in the quarter soared 17.3% year over year to $677.2 million. In constant dollar terms net revenue went up 9.5% from the previous year.

Retail stores in North American segment generated revenue of $261.1 million, up 8% from the year ago period. As of the second quarter 2012, Guess? directly operated 490 retail stores in the United States and Canada versus 448 stores a year earlier. However, comparable store sales came down 1.9% from the previous year mainly on account of the challenging macroeconomic conditions and diminishing real income of consumers.

Revenues grew in both Europe and Asia with the Asian markets leading the charge with an increase in revenue of 31.1%. It was followed by an increase of 29.9% in the European markets. However, North American Wholesale segment posted a decline of 0.9% to $43.9 million in the second quarter of fiscal 2012, from $44.3 million in the prior-year period.

Operating income grew 17.3% to $113.0 million reflecting favorable currency, volume/mix gains and lower overheads.

Operating Income margin remained flat at 16.7% from the prior year quarter, product margin climbed up owing to higher relative occupancy, distribution and selling expenses.

As on July 30, 2011, Guess? had $430.23 million of cash and cash equivalents compared with $427.03 million in the prior year quarter. Long-term liabilities amounted to $169.8 million with stockholder’s equity of $1,171.14 million in the quarter.

Operating activities provided $88.33 million of cash of which $62.15 million was used in investing activities.

New Credit Facility

On July 2011, Guess? managed a five-year $200 million secured revolving credit facility from a global and strategic syndicate of banks led jointly by J.P. Morgan Securities LLC  (JPM)and Bank of America Merrill Lynch (BAC). This credit will be used as a platform to access over $1 billion of potential capital to pursue the company’s global expansion efforts and explore other opportunities.

Conclusion

We are encouraged by the company's focus on cost-control efforts, balance sheet management, and growth opportunities and global expansion.

However, commodity-price inflation, global recession and competition in the highly fragmented apparel industry coupled with stiff competition from rivals like Abercrombie & Fitch Co. (ANF) and Gap Inc. (GAP) are matters of concern.

Currently, Guess? holds a Zacks #3 Rank. On a long-term basis, we maintain a ‘Neutral’ rating on the stock with a short-term ‘Hold’ rating.

 
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