Guess? Beats, Raises Dividend - Analyst Blog

Guess? Inc. (GES) delivered record earnings per share (EPS) of 75 cents in its third quarter ended October 30, 2010, beating the Zacks Consensus Estimate of 59 cents. Earnings were also 8.7% above 69 cents reported in the year-ago quarter and was also well ahead of the company's guided range of 55 cents to 58 cents.

The company's expansion in Europe and Asia has paid off, with the regions contributing more than half the quarter's revenue growth. This is commendable considering the headwinds caused by the stronger U.S. dollar as well as the increasing promotional competition in U.S. retail.

Total revenue increased 17.4% year over year to create another record of $613.9 million, surpassing the Zacks Consensus Estimate of $579.5 million. The revenue, however, surpassed the company's guided range of $565 to $580 million. Revenue growth was positive across all segments, particularly led by the Asia segment, which posted 35.1% growth followed by a 28% and 22% increase in the Europe and North American wholesale segments.

Cost & Margin Performance

Expenses increased in the quarter with cost of product sales climbing 21.5% to $347.5 million, and selling, general and administrative expenses hiking 20.6% to $173.6 million. Based on revenue, cost of products sold increased 190 basis points to 56.6% and selling general and administrative expenses also upped 190 basis points to 28.3%.

Gross profit spiked 12.5% to $266.4 million but gross margin dipped 183 basis points to 43.4%. Operating income contracted 6.3% to $92.7 million. Operating margin of 15.1% suffered a contraction of 380 basis points due to the effect of currency on product purchases, higher markdowns, higher store selling and infrastructure costs to support the global retail expansion, store impairment charges in North America and Europe and higher performance-based compensation.

Segment Performance

The North American retail segment revenues increased 5.9% to $253.7 million. Comparable store sales rose 0.6% in local currency and 1.5% in U.S. dollars in the quarter compared with the year-ago period. The segment's operating profit, however, dropped 42% to $19.3 million, with operating margin contracting 620 basis points to 7.6%.

The North American wholesale segment's revenues climbed 22.0% year over year to $56.3 million, and its operating profit jumped 36% to $16.7 million. The segment's margin of 29.7% expanded 320 basis-points.

Europe segment's revenues went up 28.0% to $216.2 million driven by the company's international expansion initiatives. The segment's operating income dipped 4% to $42.6 million, and its operating margin plunged 450 basis points to 19.7%.

The Asia segment's revenues surged 35.1% to $54.8 million in the quarter as the company's expansion efforts paid off. The segment's operating profit increased a whopping 52% to $8.3 million in the quarter with operating margin rising an impressive 160 basis points to 15.1%.

The licensing segment delivered a growth of 18.6% to $33.0 million. Operating profit climbed 28% to $30.9 million and operating margin expanded 690 basis points to 93.8%.

Financial Position and Dividend

As of October 30, 2010, Guess had cash and cash equivalents of $469.0 million, down from $502.0 million as of January 30, 2010. Concurrent with the earnings release, the Board raised its quarterly dividend by 25% to 20 cents a share. The Board has also approved a special dividend of $2.00 per share to be paid with the regular quarterly dividend. The company intends to pay both the dividends on December 23, 2010 to shareholders on record as of December 8, 2010.

Outlook

For the fourth quarter of fiscal 2011, Guess expects net revenue to range within $710 million to $730 million, and operating margin of approximately 19.5%. This culminates into an EPS range of $1.02 to $1.06 per share.

For fiscal 2011, Guess raised its revenue guidance to a range of $2.44 billion to 2.46 billion. Previous guidance was in the range of $2.35 billion to $2.40 billion. Operating margin is expected to be about 16.0%, down from its previous projection of 16.5%. Earnings per share guidance range is now expected between $3.02 to $3.06 per share compared to $2.80 to $2.85 stated earlier.