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Cost Woes Likely to Hinder Guess?'s (GES) Earnings in Q2

Zacks Equity Research

Guess?, Inc. ( GES ) is scheduled to release second-quarter fiscal 2020 results on Aug 28. This renowned apparel and accessories company has a mixed record of earnings surprises in the trailing four quarters. Earnings surpassed estimates in the last reported quarter by nearly 3.9%.

Let’s see what’s in store for the company this time around.

Strong European Business & Other Upsides

Expanding operations in Europe have been boosting Guess?’s top line for a while. Business in this region is gaining from constant store openings and e-commerce advancements. The company expects to sustain its impressive performance in the region, which will likely drive revenues in the second quarter.

Moreover, revenues from the Americas region have been improving, backed by strong comparable store sales (comps) and rise in e-commerce operations. Speaking of e-commerce, Guess?’s online business is yielding across most regions and driving comps. The company is on track with digital-first initiative and investing toward brand building through various social media platforms. Further, it focuses on linking brick-and-mortar stores, e-commerce and mobile sales to improve online operations. This is aiding easy merchandise delivery. We expect that growth in the digital realm will aid performance in the quarter to be reported.

Apart from these factors, the company is striving to improve margins through initial markups or IMU improvement and realignment of prices. Further, the company is progressing well with cost-structure improvement. Other key priorities include efficient capital allocation, product development, distribution optimization and customer-centric focus. These efforts are likely to support performance in the to-be-reported quarter.

Guess?, Inc. Price, Consensus and EPS Surprise

Guess?, Inc. Price, Consensus and EPS Surprise

Guess?, Inc. price-consensus-eps-surprise-chart | Guess?, Inc. Quote

Rising Costs & Other Hurdles

Higher costs across different business units, especially in China, are headwinds for the company. These along with rising SG&A expenses are exerting pressure on the company’s performance, as witnessed during the first quarter of fiscal 2020.

Management expects SG&A expenses to keep rising in fiscal 2020 due to higher advertising costs and compensation. This mars expectations for the to-be-reported quarter as well. In fact, management expects adjusted operating margin to decline 4.5-5% in the second quarter due to rising costs. Such deterrents are likely to put pressure on the bottom line in the second quarter.

Additionally, the company is witnessing soft traffic in certain regions in Asia, such as in Japan, China and Korea. Persistence of weak comps along with cost deleverage in the region is likely to affect the upcoming quarterly results.

What do Estimates Reveal?

The Zacks Consensus Estimate for fiscal second-quarter earnings is currently pegged at 29 cents per share, which indicates a decline of 19.4% from the year-ago quarter’s figure. Nevertheless, the consensus mark for revenues is at $673 million, which suggests a rise of 4.2% from the figure recorded in the year-ago quarter.

What the Zacks Model Unveils

Our proven model doesn’t show a beat for Guess? in the quarter to be reported. For this to happen, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Guess? carries a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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