Guess?, Inc. (NYSE:GES) delivered a 4Q miss on both the top- and bottom-line, as weakness in the USA continues to weigh on the business. Jefferies is encourages by mgmt's commitment to store footprint reductions and rent negotiations domestically while diverting capital to Europe/Asia where growth and profitability are more visible and sustainable. Maintain Hold, PT to $12.
Jefferies believes mgmt is taking the necessary steps to right the ship, including increasing investment in geographies with the greatest opportunity (while rightsizing the Americas business) and instilling operational and cost discipline. However, the firm remains Hold rated, given the numerous external headwinds that stand to impede these turnaround efforts, most notably the competitive environment and weak traffic backdrop in the US.
GES reported revenue of $679.3M vs cons. of $688.9M, and EPS of $0.41 vs. cons. of $0.44, both below expectations. Results Jefferies is hampered by weakness in the Americas, where the environment remains tough, and continues to weigh on the business. Americas sales the firm is roughly in-line, although they continue to shrink, decreasing 6.4%, with retail comps of (7.0%). Mgmt cited traffic and AURs Jefferies is down in a highly promotional quarter. Europe (up 11.4%) and Asia (up 26.6%) continue to be bright spots for the business.
Mgmt spoke to reducing their US store footprint and negotiating rent reductions. The faster they can reduce their exposure to the US and prioritize profitability over volume in the region, the better. Additionally, the firm is encourages by mgmt's commitment to capital investment internationally, as this is a large avenue for growth for GES. Mgmt has a renewed focus on product, and an enhanced concentration on digital and online.
Mgmt guided to EPS and revenue growth materially below cons. for both 1Q18 and FY'18, and Jefferies believes this guidance is reflective of lingering headwinds on the business, as their LT op margin goal of 7.5% is likely to take longer than expected to materialize. Mgmt cited an expectation for GM to be up for the year, due to improved IMUs and a mix shift. All in, Americas will take time to fix. Jefferies believes GES is more of a 2H17 story with fundamental improvement really showing in 2018. Jefferies' $12 PT (from $15) is based on 20.5x FY'18 EPS and ~7x EV/EBITDA, a slight premium to the historical average.
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