Guess slips in Europe, Aeropostale in America

U.S. stocks were trading higher Wednesday, as the Dow

Jones Industrial Average recently rose 80 points to 14754, the Standard & Poor's added 10 points to 1579, and the Nasdaq Composite climbed 34 points to 3272. Big movers in American soil were Aeropostale and American Eagle Outfitters, although for completely different reasons.

Aeropostale Inc. (ARO) got cut to ‘sell’ from ‘neutral’ at Goldman Sachs. The investment bank said in a note to clients, "A shift in the competitive landscape has left [ARO] facing challenges, and we see downside risk to shares as major turnaround initiatives are implemented." As such, Goldman slashed its 2014 earnings per-share view on Aeropostale, while arguing that second-half "merchandise changes could make things worse."

Piper Jaffray upgraded teen retailer American Eagle Outfitters Inc. (AEO) to overweight from neutral. A recent Piper survey showed "resiliency in the AE brand across gender, age and income profiles, which is evidence of a solid demand trajectory into 2013."

In the corporate news, Levi Strauss & Co. said its first-quarter net income more than doubled despite a 2 percent drop in revenue. The denim apparel retailer said its profit margins were expanded in the latest quarter by the lower cost of cotton, boosted sales at its retail stores and favourable currency exchange rates.

For the quarter ended Feb. 24, the privately held company earned 107 million dollars, up from 49 million in the same quarter the year before. Revenue slipped to 1.15 billion dollars from the previous 1.17 billion.

Elsewhere, analysts at Trefis highlighted in a research note issued Wednesday that “Guess is facing problems in Europe mainly due to the unfavourable economic environment and its high concentration in the worst hit southern Europe. The retailer operates more than 600 stores in the region. [1] As a result, it earns more than 60 percent of its revenues from this region and has high exposure to countries such as Spain, Italy and Greece, where economy remains weak. In addition to this, the retailer runs the risk of self-cannibalisation due to its high concentration in these markets.”

“Since the European business accounts for about 40 percent of Guess’ revenues, the weakness has impacted its overall performance. In 2012, Guess’ revenues from Europe decreased by 7 percent, dragging its overall revenues down by 1 percent,” they highlighted. That said, it´s true that other fashion peers including Nike (NYSE:NKE), Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS) have also struggled in sustaining their growth in Europe.

"If Guess’ efforts revive its growth in Europe and its revenues from the region reach 1.25 billion dollars instead of our current forecast of 1 billion dollars within the next 5-6 years, there can be 5 percent-10 percent upside to our price estimate. However, this will not be easy due to fierce competition from retailers such as Ralph Lauren (NYSE:RL), Burberry, Gap and J Crew. Also due to difference in preferences between northern and southern Europeans, Guess is likely to face problems in getting the right product design and mix," Trefis analysis team concluded.