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

Guess? Inc.’s (GES) second quarter of fiscal 2013 adjusted earnings per share (EPS) of 49 cents missed the Zacks Consensus Estimate of 50 cents and declined 41.7% from last year's 84 cents. The earnings declined due to lower traffic in North American stores.

Revenues and Margins

Revenues in the quarter dropped 6.2% to $635.4 million from $677.2 million in the prior-year quarter.

Operating margin shrank 770 basis points year over year to 9.0%, reflecting higher investment in advertising & marketing along with negative same-store sales and higher occupancy & selling costs in Europe.

As of July 28, 2012, the company operated operated 511 retail stores in the United States and Canada and 300 retail stores in Europe, Asia and Latin America.

Segment Results

Retail stores in the North American generated revenues of $253.0 million in the second quarter, down 3.1% from $261.1 million in the same period last year. The decline was due to the ongoing macroeconomic headwinds, which resulted in lower store traffic. Comparable store sales shrank 8.5% (7.5% in local currency) from the year-ago quarter. Operating income decreased 49% to $16.8 million from $32.9 million.

The European segment’s revenue slipped 15.0% to $246.9 million from $288.8 million in the year-ago quarter, due to weakness in Southern Europe. Currency headwinds also hurt revenues significantly. Operating earnings slipped 61.0% to $24.6 million from $63.7 million in the year-ago quarter.

The Asian segment’s revenue increased 21.0% to $66.8 million from $55.3 million in the year-ago quarter. Operating income slipped 17% to $4.0 million compared with $4.8 million.

Net revenue in the North American Wholesale segment slipped 5.0% to $41.6 million in the quarter from $43.8 million last year. Operating income plunged 27% to $7.7 million from $10.5 million.

Other Financial Update

As on July 28, 2012, Guess? had $271.9 million of cash and cash equivalents compared with $430.2 million in the prior-year quarter.

Operating activities provided $44.6 million of cash, compared with $88.4 million a year ago. During the second quarter, the company spent $140.1 million to repurchase 5.0 million shares of its common stock.

The Way Forward

Management is planning measures to generate stronger results in North America.

Net revenue is expected to be in the range of $620 million and $630 million in the third quarter and between $2.62 billion and $2.65 billion for fiscal 2013.

The company expects third quarter fiscal 2013 earnings at 42 cents to 46 cents. For fiscal 2013, the company expects EPS in the range of $2.15 to $2.30. The guidance was much lower than the Zacks Consensus estimate of 64 cents for the third quarter and at $2.59 for fiscal 2013.

While operating margin is expected to be between 9.0% and 9.5% for the third quarter, it is expected to between 10.5% and 11.0% for fiscal 2013.

Conclusion

Currently, Guess? which competes with companies like Abercrombie & Fitch Co. (ANF) and Gap Inc. (GAP) holds a Zacks #3 Rank, implying a short-term Hold rating. On a long-term basis, we maintain a ‘Neutral’ recommendation on the stock

 
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