Stock Picks: GES Up; OVTI Down

Shares of trendy retailer Guess (GES) were up 13.7% on Tuesday as third-quarter earnings and fourth-quarter guidance beat analyst estimates by wide margins.

The company, which released its third-quarter earnings after the market close on Nov. 30, reported net income of $64.1 million for the quarter, up from $64 million from a year ago. It earned 69 cents a share, up 3% from 67 cents a share in the same quarter last year, and far surpassing analyst estimates of 50 cents a share, according to Thomson Reuters.

As of the end of its third quarter, Guess operates 433 retail stores in the U.S. and Canada, up from 422 stores a year earlier. Its retail stores in North America generated net revenue of $239.5 million, a 1.9% increase from $235.1 million in the same period a year ago. While total net revenue for the quarter decreased 1% to $522.8 million and comparable store sales decreased 3.4% for the same period, the declines are relatively small; other retailers that target young crowds are seeing double-digit declines in sales. Guess’s better-than-expected earnings suggest that more consumers are returning to its stores.

Guess Chief Executive Officer Paul Marciano was upbeat about the third-quarter results. “Each of our businesses performed better than expected in both revenues and earnings, as our customer continued to respond well to our product assortment in all markets around the world. In addition, we managed well, controlling our costs and inventories tightly to protect our profitability,” he said in a company statement.

The stores' revenues were led by women’s clothing with better performers including denim, leggings, woven tops, jackets and tees, according to a Dec. 1 report by Betty Chen, a vice president of equity research at Wedbush Securities, an investor services firm.

“We continue to recommend investors build positions in shares of GES as we anticipate strengthening business momentum in North America retail, expansion in Europe, and increased penetration in Asia coupled with solid expense and inventory control to continue to deliver above consensus earning power,” wrote Chen.

She writes that additional upside exists for the company considering its “increased confidence in new concepts, with plans to open 150 G by Guess locations in [the] next two to three years and at least another 250 Guess Accessories stores in [the] next three to five years. Further, management also recently indicated plans to resume store growth in North America beginning in 2010.”

Going forward, Guess expects fourth-quarter earnings at 77 to 80 cents per share vs. the consensus of 69 cents per share and consolidated net revenues of $585 to $605 million, compared to the market estimate of $563.79 million in the fourth quarter.

Bottom line: With tighter inventory and increased consumer interest, Guess is poised to continue beating analyst estimates going into 2010. Also, its solid performance through November could be setting the tone for an improved holiday selling season.

Shares of OmniVision Technologies (OVTI), which manufactures semiconductor image sensor devices, were down 11.2% on Tuesday following weak third-quarter forecasts.

The chipmaker reported its second quarter earnings yesterday, citing better-than-expected quarterly results but forecasting third-quarter revenue between $145 million to $160 million, significantly lower than analysts’ expectations of $168.6 million, according to Thomson Reuters.

For its second quarter, net income was $8.1 million, or 16 cents a share, compared to a net loss of $5.3 million, or 10 cents a share in year-ago quarter. Revenues rose about 12% to $183.3 million higher than analysts’ expectations of $163.9 million.

“Our dramatic increase in revenues underscores both the scope of our product line and the rapid scalability of our entire supply chain,” said Shaw Hong, chief executive officer of OmniVision Technologies, Inc, in a company statement.

Still, several factors are contributing to the company’s weaker-than-normal guidance, says Harsh Kumar, an analyst at Morgan Keegan, a financial services firm. Omnivision, which sells chips to Dell, HP and Apple, “simply sold too much product and took too much revenue in the last quarter, and it came at the expense of the January quarter,” he says. “You’re supposed to manage a business consistently and if you book too much in the one quarter it comes out of the next quarter.”

Most of this demand came from tech manufacturers that were building up inventory for the holiday shopping season, he says. Those orders have been filled and it’s unlikely that the company will get another surge of orders immediately after post-holiday season. “The build-up is done and there’s little pause that happens after Christmas,” says Kumar, who expects the pause to last for two to three months before Omnvision receives massive reordering.

Bottom line: Despite a forecasted drop in earnings for the third quarter that’s much larger than normal for the company, there are still several bright spots. “On a long-term outlook, we think Omnivision is still very favorable because they have new product cycles and there is growing demand for higher-end phones, which include the image-sensor chips that the company manufacturers,” says Clyde Montevirgen, an equity analyst at Standard & Poor's.