Guess? is Still Lookin' Good!

Guess? (GES), a holding of mine, reported second-quarter earnings after the close yesterday, and I couldn't be happier with the results. Wall Street seems to agree, as analysts are bumping up their earnings numbers, and the stock is up 5% to $40.32 as I'm writing this.

Earnings came in at 57 cents a share (+43% year-over-year), beating analysts' estimates by an impressive 8 cents a share, while revenues came in a full 12% ahead of consensus. North American same-store-sales rose an impressive 8.1%, a simply astounding performance in a pretty foul apparel retail environment.

Guess? also raised its full-year earnings guidance to a new range of $2.47 to $2.53 a share, a nice increase from the prior range of $2.40 to $2.48 a share. We haven't seen many retailers maintaining let along increasing guidance so again, Guess? doing amazingly well considering the macro backdrop.

The balance sheet remains in good shape with cash of $294 million. Inventories grew significantly less than sales and roughly in line with square footage growth. I'm very happy so see inventories at these levels as in the past the stock was held down by concerns about overstocking.

Also, let's take a quick look at this exchange from the conference call:

Todd Slater - Lazard Capital Markets

I have a question and a follow up. Carlos, so currency helped by $0.08 in the first half and you expect it to be neutral in the second half. Backing out let’s say $0.08 for forex in 08 and $0.09 even in 07 just to look at those growth rates 08 to 07, to me it looks like about 28%, 29%. I’m wondering if you can help just in terms of how we should be thinking about the growth rate for 09. Is it fair to back out let’s say the $0.08 and look at that on sort of a non-forex basis and maybe look at a 20% type of growth rate on an operating basis, which gets you to about $2.94? Is that sort of a good way, a conservative way of looking at the business model including forex?

Carlos E. Alberini

I think that is a very good way and I think that will be conservative but really in a very prudent way to look at next year, yes.

Essentially, Mr. Slater was asking for preliminary guidance for next year, and now we know that Mr. Alberini believes that $2.94 a share in earnings is doable. That implies a pretty cheap valuation, even on today's pop. However, we really need to keep our eyes on that EUR/USD relationship. If the Euro keeps falling against the Dollar, it will turn into a headwind. The underlying business at Guess? is in fact pretty healthy, but it is an issue worth monitoring.

Outside of the numbers, it's pretty impressive that Guess? remains a powerful brand after all these years. I remember being in 7th grade and feeling the unmistakable status of having that triangle Guess? logo on back of my jeans. In fact, it almost counteracted my acne and propensity for clamming up in front of foxy chicks.

For now I'm holding on to my Guess? position and might look to add on weakness. Even with oil well off its highs at $109, this market is still pretty foul so I'm staying conservative.