Week to date, shares of Guess? (GES 1.86%) were up 15% through Thursday’s market close, according to data provided by S&P Global Market Intelligence.
The apparel brand reported better-than-expected earnings results for the second quarter. Healthy sales and margin performance surprised investors, who have been digesting mixed results from other retailers this earnings season.
The stock entered the quarter trading at a low forward price-to-earnings ratio of just over 6, which is cheap even for a company that hasn’t reported much growth over the last decade. But investors shouldn’t get too hopeful about further gains just yet.
Guess? is far from out of the woods. Other retail companies have noted weakening demand trends as consumers trade down to value-priced items. Guess? reported the same, with retail and wholesale revenue in the Americas region slumping in the second quarter. Year to date, Americas retail sales are down 11%, while wholesale is down 20%.
Stronger sales in Europe and Asia have offset the softness in the Americas. To counter the weak sales trends, management is limiting promotions and discounts that could harm margins. But investors should be cautious with the stock, because further weakening in the Americas region could come back to haunt the company this holiday season.
The macroeconomic headwinds are out of the business‘s control. But Guess? stock could hold up well if management continues to execute its brand elevation strategy. This involves pricing products to customers’ perceived value level and buying inventory strictly based on customer demand, which should keep earnings per share up to support the stock’s low valuation.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.