Saturday, November 24, 2012

Guess ? (GES); a Story of Executive Exodus and Brand Erosion

Retail players like Abercrombie and Fitch (ANF), Michael Kors (KORS) and Fossil (FOSL) are fiercely competing on price. Guess's conference call (CC) tone over the past two quarters has worsened as margins search for a bottom. Two senior executives have resigned and we expect the stock to fall as the GES brand is too expensive with the targeted 30-somethings.
CFO Dennis R. Secor announced his resignation after six years on November 1, and FOSL announced his hire and promotion to CFO on November 8. Yet Secor's official departure date from GES will be  December 7, this corporate business psychology signals desperation in our opinion as FOSL is a direct competitor. As a matter of fact, the last CC was filled with excuses of weakening fashion accessory sales, exactly where FOSL has a strong foothold with growth and a lot less inventory / days sales outstanding (DSO) problems. 

FOSL's long-term fundamentals look intact as GES struggles; CFO Secor's resignation and quick hire by FOSL hints at deeper brand problems in our opinion. Operating margins at GES have declined from 17% in 2009 to 15.5% in 2012.  Sales fell 6% y/y last Q versus FOSL's  sales growth of 15% y/y.
COO J. Michael Prince announced his resignation on November 1 as well and his official departure date is this Monday, November 26, just 2-days ahead of the Q3 earnings release and CC. If a retail competitor hires Prince, that will be another nail in GES's eroding brand and balance sheet position.
On the May, 22, 2013, Q1 CC (click) at the 11minute:25second mark, co stated it had a cash and cash equivalents balance of $490M. That $490M has fallen by 44% to $271.9M in just 6-months; part of the reason for this cash depletion is as an ill-timed share buyback program. Please click here and scroll down to Q1, 2013 to see the precipitous drop in cash and cash equivalents.
The founding Marciano bros pictured above, Maurice 63 and Paul 60, are still in control as Co-CEOs. But the resignation of Carlos Alberini, who served as President and COO from 2000 - 2010, and now Prince and Secor gives us serious pause about the near-term future of the Guess brand. Every investor that bought and held the shares since mid-2009 has lost, that is a damningly negative fact since we have experienced massive global stimulus and  dead-catting stock markets.  
GES has and is misfiring from many fundamental perspectives; the Point & Figure chart confirms our thesis that lower prices are ahead. A double-bottom breakdown poses a serious danger for longs:

A hard economic downturn in this Q4 continues as uncertainty looms about the U.S. fiscal cliff and health of southern Europe. Though GES is doing better than average in Germany, Russia, and South Korea as mentioned on the last CC, about 38% and 14% of sales come from the fiscally fickle and unemployed countries of the U.S.A. and Italy.  
The co does not break down sales in Europe by country except for Italy, but execs did mention excitement around Spain as a future growth driver; this to us is laughable as southern Europe struggles with Goliath socioeconomic crises.
The following metrics are from the last 10-K (click), dated March 19, 2012:

Net Sales:

Other foreign countries


GES reports Q3, 2013 earnings this Wednesday, (click) November 28, 2012, after market close and we expect fireworks.

Maybe the mass exodus of executives reflects the lack of pricing power and brand erosion, while the Buy & Hold investor refuses to admit the ride with Guess is heading lower. 

Thanks for Reading, Educating, and sometimes Trading with Us,

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