Guess’ Profit Warning Unravels Its Stock, Snags Other Clothing Firms
Investors wiped out half of Guess Inc.’s stock market value in a single session Tuesday after the maker of trendy clothes and accessories warned of unexpectedly low third-quarter earnings and said its fourth-quarter results might trail forecasts as well.
Shares of other specialty apparel makers and retailers were hammered, as Guess’ disclosure heightened fears that consumers’ spending on apparel--especially fashionable, trendy clothes--is slowing.
The sell-off occurred after Guess’ announcement late Monday, in which Guess blamed fierce competition and “the generally difficult retail environment” for its shortfall. The worst casualties were the Marciano brothers--Maurice, Paul and Armand--who control and run Los Angeles-based Guess.
Collectively, they controlled 35.5 million, or 82%, of Guess’ common shares outstanding as of the company’s most recent proxy statement, and Tuesday’s rout erased $353 million from their combined holdings. Their stake is now valued at about $351 million.
The brothers’ overwhelming control of the stock means there are relatively few shares trading publicly, which tends to exacerbate a price swing either way. The stock plunged $9.94 a share to close at $9.88 in heavy composite trading Tuesday on the New York Stock Exchange. Guess peaked March 31 at $32 a share.
Indeed, the shares--which rallied strongly in 1999 and early this year on the strength of Guess’ improved results--already had come under pressure this summer because of investors’ growing concern that there might be a drop in consumers’ purchases of jeans and other apparel sold by the likes of Guess.
That’s apparently what happened, because Guess said it had excess inventory that it struggled to reduce by selling through discount chains at marked-down prices. Its ability to sell the merchandise “at cost or better was impacted by wide and, in my memory, unprecedented quantities of apparel from competing brands,” Maurice Marciano, co-chief executive, said in a statement.
Guess, which had 1999 sales of $600 million, managed to “improve” its bulging stockpiles but “did so at lower-than-expected” prices, which eroded its profit, he said.
Hence, for the quarter ending Sunday, Guess said it now expects to report earnings of 35 cents to 38 cents per diluted share, compared with its analysts’ consensus estimate of 44 cents a share and Guess’ 33-cent showing in the year-earlier quarter.
The company also expects that its “same-store” sales--a key retailing measure that compares sales of stores open at least a year--would drop slightly from a year ago, the first decline in 27 months, Paul Marciano, the other co-chief executive, said in the announcement.
Guess added that “based on current trends,” it believes that the analysts’ consensus forecast that Guess would earn 44 cents a share in its fourth quarter “is at risk.”
“They were overly aggressive in planning their sales and inventory levels for the spring, summer and fall seasons,” said analyst John Rouleau of Gruntal & Co. in Chicago. “They’ve got too much stuff.”
It’s not alone, analysts said. Guess is one in a series of specialty apparel retailers that issued warnings and had earnings disappointments over the last year, said analyst Todd Slater of Lazard Freres & Co. in New York.
That’s why investors battered the stocks of other specialty clothing makers and retailers Tuesday. Abercrombie & Fitch Co. plunged $3.75 a share to $22.19; Ann Taylor Stores Corp. skidded $3.50 to $39.31; Limited Inc. lost $1 to $22.25; Gap Inc. fell $1.25 to $20.75; and Pacific Sunwear of California Inc. tumbled $1.19 to $18 a share.
Analyst Joe Teklits of Ferris Baker Watts, who downgraded Guess’ stock to “outperform” from “strong buy” Tuesday, said about 6 cents of Guess’ third-quarter profit shortfall would come from selling products below cost to discount stores.
“The bulk of the shortfall will be a one-time issue,” Teklits said. Next year, Guess will keep less clothing in stock and risk slower sales if inventory can’t meet demand, he said.
The company also blamed the profit shortfall on lower sales of basic merchandise, such as jeans, denim jackets and simple cotton tops, which Rouleau said made up more than half of the company’s sales.
Consumers “will go to Guess to buy that special item that they can’t find anywhere else,” Rouleau said. “In terms of the basic jean jacket, or a basic cotton shirt, they could be buying those items elsewhere” at a much lower price, he added.
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Failed Rebound
Shares of Guess (ticker: GES) had been rebounding in recent weeks, but the company’s earnings warning put an end to that rally.
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Guess shares, weekly closes and latest on NYSE
Tuesday: $9.88, down $9.94
Source: Bloomberg News
