GAP Great Atlantic & Pacific Tea Company (The) Common Stock

Guess? Inc.’s (GES) first quarter 2013 adjusted earnings per share (EPS) of 30 cents came in ahead of the Zacks Consensus Estimate of 26 cents, but it fell significantly short of the year-ago EPS of 54 cents. Prior-year earnings excluded 8 cents in net non-operating charges, primarily unrealized mark-to-market charges related to foreign currency contracts and balances.

A slight improvement in conditions in North America was offset by lower spending in Europe, as the region adhered to austerity measures undertaken by governments to combat the debt crisis. Lower sales and margins in all the segments of the company also contributed to lower earnings in the period.

Revenues and Margins

Revenues in the quarter dropped 2.2% to $579.3 million from $592.2 million in the prior-year quarter. Total number of stores in the first quarter 2013 was 1,595, out of which 767 were directly operated stores compared to 1,421 stores in the year-ago quarter out of which 686 stores were directly operated stores.

Operating income declined 44.8% to $39.1 million from $70.9 million in the year-ago quarter.

Operating income margin shrank 520 basis points to 6.8% year over year, reflecting higher selling, general and administrative expenses and investment in advertising and marketing coupled with negative same-store sales.

Segment Results

Retail stores in the North American segment generated revenues of $251.8 million in the first quarter, up 1.8% from $247.5 million in the same period last year. Comparable store sales shrank 5.5% from the year-ago quarter. Operating income decreased 9% to $17.0 million from $18.6 million in the year-ago quarter.

Revenue in the European segment slipped 9.7 % to $189.8 from $210.2 million in the year-ago quarter. Operating earnings plunged 62% to $12.5 million from $33.2 million in the prior-year quarter.

The Asian segment’s revenue increased 7.9% to $64.8 million from $60.1 million in the year-ago quarter. Operating income slipped 17% to $5.9 million compared with $7.1 million in the year-ago quarter.

Net revenue in the North American Wholesale segment slipped 3.8% to $43.9 million in the quarter from $45.6 million in the year-ago quarter. Operating income went down 16% to $9.3 million from $11.1 million in the year-ago quarter.

Licensing segment net revenue inched up to $28.9 million in the first quarter from $28.8 million reported in the year-ago quarter. Operating income came down 3% to $24.6 million from $25.3 million in the year-ago quarter.

Other Financial Update

As on April 28, 2012, Guess? had $480.3 million of cash and cash equivalents compared with $491.8 million in the prior quarter. Stockholder’s equity stood at $1.18 billion compared with $1.17 billion in the prior quarter.

Operating activities provided $36.6 million of cash, of which $31.4 million was used in investing activities.

The Way Forward

The company’s continuing expects to continue strong business momentum, even in the face of the challenging weak consumer and category growth environment and inflating input cost, is a strong catalyst to drive its performance going forward. Management expects new marketing campaigns aimed at increasing consumer reach and the launch of innovative products to help boost the top line in the coming quarters. The company is also focusing on unexplored growing markets such as China, Germany and Russia.

The company expects second quarter 2013 earnings in the range of 48 cents to 52 cents. For fiscal 2013, the company expects EPS in the range of $2.50 to $2.65. The Zacks Consensus estimate is pegged at 61 cents for the second quarter and at $2.62 for fiscal 2013.

While operating margin is expected to be between 12.5% and 13.0% for the second quarter 2013, it is expected to between 10.0% and 10.5% for fiscal 2013.

Net revenue is expected to be in the range of $625 million and $635 million in the second quarter and between $2.70 billion and $2.74 billion for fiscal 2013.

Conclusion

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 #4 Rank, implying a short-term Sell rating. On a long-term basis, we maintain an ‘Underperform’ rating on the stock.

 
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