Guess? Inc. (GES) delivered record earnings per share (EPS) of $1.11 in its fourth quarter, beating the Zacks Consensus Estimate of $1.06. Earnings were up 19.4% from 93 cents reported in the year-ago quarter. For full-year 2011, earnings increased 19.2% to $3.11 per share compared to $2.61 per share a year ago.

The company’s expansion in Europe and Asia has paid off, with these regions contributing nearly two thirds of the annual revenue growth. During the year, the company opened 237 new stores across the world, which helped Guess? brand to gain strong momentum globally.

Total revenue increased 18.0% year over year to create another record of $756.9 million, surpassing the Zacks Consensus Estimate of $724.0 million. Revenue growth was positive across all segments, except North American wholesale, where it inched down 5% from the year-ago level. Europe reported the highest year-over-year growth of 32% in the quarter. However, all segments performed well throughout the year. While revenue growth in Asia surged by 36%, North American retail recorded the lowest year-over-year growth of 9% in the relevant year.

Cost & Margin Performance

Expenses increased in the quarter with cost of product sales climbing 55.6% to $420.6 million and selling, general and administrative expenses surging 25.3% to $192.1 million.

Gross profit spiked 44.4% to $336.3 million, but gross margin dipped 183 basis points to 43.4%. Operating income contracted 6.3% to $92.7 million. Operating margin of 19.1% was 30 basis points higher than the prior-year quarter. The improvement in operating margin was driven by operating expense leverage, mainly due to lower performance based compensation, as well as the loyalty program breakage. However, the positive impacts were partially offset by lower initial markups in Europe, including the negative effect of currency on product costs, along with higher markdowns in North American retail.

Segment Performance

North American retail segment revenue increased 9.0% to $338.6 million. Comparable store sales decreased 2.1% in local currency and 1.1% in U.S. dollars in the quarter compared with the year-ago period. The segment’s operating profit increased 3% to $52.6 million with operating margin contracting 100 basis points to 15.5%.

The North American wholesale segment’s revenue declined 5% year over year to $37.7 million and its operating profit slumped 12% to $8.5 million. The segment’s margin was 22.6%, which was 170 basis points lower from the year-ago period.

Europe segment’s revenue soared 32.0% to $294.9 million driven by the company’s international expansion initiatives. The segment’s operating income climbed 16% to $65.9 million and its operating margin plunged 320 basis points to 22.4%.

The Asia segment’s revenue surged 23% to $55.4 million in the quarter as the company’s expansion efforts paid off. The segment’s operating profit went up by 19% to $7.5 million in the quarter with operating margin declining by 40 basis points to 13.6%.

The licensing segment delivered a growth of 20% to $30.4 million. Operating profit climbed 12% to $27.7 million and operating margin expanded 650 basis points to 91.0%.

Financial Position and Dividend

As of January 29, 2011, Guess had cash and cash equivalents of $427.0 million, down from $502.0 million as of January 30, 2010, reflecting cash usage in investing and financing activities. Concurrent with the earnings release, the Board of Directors approved a quarterly cash dividend of 20 cents a share on the company’s common stock. The dividend will be payable on April 15, 2011 to shareholders on record as at March 30, 2011.

Outlook

For the first quarter of fiscal 2012, Guess expects net revenue to range within $555 million to $570 million and operating margin of approximately 10.0%. This translates to an EPS range of 41 cents to 44 cents per share.

For fiscal 2012, Guess expects revenue to be in the range of $2.72 to $2.82 billion. Operating margin is expected to be between 16.5% to 17.0%. Earnings per share are now expected between $3.30 to $3.50 per share.

Guess?, which faces stiff competition from Abercrombie & Fitch Co. (ANF) and Gap Inc. (GAP), currently holds a Zacks #4 Rank, implying a short-term Sell rating. On a long-term basis, we maintain a Neutral rating on the stock.

 
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