We are upgrading our rating on Guess? Inc. (GES) to Outperform from Neutral.
The rating upgrade is based on third quarter 2010 earnings, which surpassed the Zacks Consensus Estimate on the heels of strong top-line growth, buoyed by the company’s expansion in Europe and Asia which has paid off well, with the regions contributing more than half the quarter’s revenue growth.The company also raised its fiscal 2011 outlook for revenue and earnings.
We also remain positive as Guess? has efficient cost control measures, strong balance sheet and tremendous growth opportunities.
Moreover, despite the recent economic conditions, global expansion continues to be the cornerstone of the company’s growth strategy. Its combined revenues outside the U.S. and Canada currently represent approximately 45% of the total revenues, compared with 21% in 2005. Management expects this trend to continue as the company plans to expand both in Europe and Asia.
Another important part of the company’s growth strategy is expanding its retail business across the globe. With newer store concepts, management sees opportunities to increase the number of Guess? branded retail stores in Europe and also in North America. During fiscal 2011, the company plans to open 52 retail stores.
Third Quarter Results Ahead of Estimates
Guess’ third quarter 2011 earnings of 75 cents per share surpassed the Zacks Consensus Estimate of 59 cents and the year-ago quarter’s 69 cents.
Revenues in the quarter rose 17.4% to $613.9 million, driven by 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.
Outlook for 2010
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.
Zacks Consensus Estimate Increased
Based on strong third quarter results, the analysts raised their estimates. The Zacks Consensus Estimates for earnings, in the last 60 days, for fiscal 2011 jumped to $3.12 per share, from $2.90 a share, reflecting a 7.6% increase.
Further, with respect to earnings surprises, Guess has reported well above the Zacks Consensus Estimate over the last four quarters with an average of 15.6%. This suggests that Guess has outperformed the Zacks Consensus Estimate by an average of 15.6% in the last four quarters.
The company primarily competes with Warnaco Group Inc. (WRC) and Quicksilver (ZQK) and currently has Zacks Rank, which translates into short term ‘Buy’ recommendation.