Guess? Inc. Q1 Results: Revenue Rises on Rag & Bone, But Margins Lag—Is This a Buy?

The first quarter of Guess?, Inc.'s fiscal year 2026 brought a mix of encouraging revenue growth and persistent margin pressures. The company's acquisition of Rag & Bone and strong wholesale momentum in Europe and the Americas propelled top-line expansion, while challenges in Asia, currency headwinds, and inventory costs weighed on profitability. Here's how investors should parse the results and determine if GES is a buy.

Revenue Drivers: Rag & Bone and Wholesale Momentum

Guess? reported Q1 revenue of $648 million, up 9% in U.S. dollars and 12% in constant currency. The standout performer was the Rag & Bone brand, which contributed 9 percentage points to constant currency growth. The brand's wholesale sales surged, particularly in the Americas, where the segment's revenue jumped 63% to $101 million. European wholesale also grew by mid-teens, benefiting from reliable deliveries amid supply chain disruptions.

The Americas wholesale surge reflects the full impact of Rag & Bone's inclusion and strong demand from off-price retailers for Guess U.S. products. Meanwhile, Europe's wholesale growth suggests the brand is capitalizing on its luxury-casual positioning. Management's plan to grow Rag & Bone's annual revenue to over $320 million by 2026—up from $250 million—adds a clear growth runway.

Margin Pressures: A Structural or Temporary Issue?

Despite the top-line success, gross margin contracted by 200 basis points to 39.9%, driven by two main factors:
1. Business mix shifts: Lower-margin wholesale sales now account for a larger share of revenue, displacing higher-margin licensing income.
2. Promotional activity: Markdowns and discounts, particularly in the Americas retail segment, further compressed margins.

Analysts estimate 70% of the margin decline stemmed from the wholesale/licensing mix shift. Licensing revenue fell 14% to $25 million, with fragrances and footwear dragging down results. Gross margin also faced modest currency headwinds, though management expects a reversal in Q4.

The adjusted operating loss of $26 million (a -4% margin) widened from prior-year levels, reflecting higher store costs, markdowns, and performance-based compensation. Inventory rose 15% to $638 million, a deliberate move to stockpile in Europe amid Red Sea supply chain risks. While this could normalize over time, elevated inventory levels pose a drag on cash flow.

Key Challenges: Asia, Tariffs, and Retail Execution

• Asia's Decline: Revenue fell 20% in U.S. dollars and 16% in constant currency, with Greater China as the primary drag. Management plans to slash losses by reducing stores and seeking a third-party partner, but execution risks remain.
• Tariffs: Estimated annual impacts of less than $10 million are manageable, but further escalation could pressure margins.
• Retail Traffic: Americas retail comparable sales dropped 11%, partly due to poor traffic. Europe's retail comps also fell 4%, underscoring the need for initiatives like loyalty programs and better product assortments.

Outlook: Can Growth and Margins Reconcile?

Guess? forecasts FY2026 revenue growth of 5.5%–7.4% and adjusted EPS of $1.32–$1.64. To hit these targets, management must:
1. Accelerate Rag & Bone's expansion: The brand's projected $320 million revenue target hinges on new stores and market penetration.
2. Improve retail execution: The new European loyalty program and pricing adjustments in the Americas could stabilize comparable sales.
3. Mitigate Asia losses: A swift exit or partnership is critical to avoid further drag.

The margin outlook is more uncertain. While currency tailwinds in Q4 could lift results, gross margin recovery depends on reducing reliance on low-margin wholesale. A 10% improvement in retail sales could add $140 million in revenue and $70 million in operating profit, per management.

Valuation and Investment Thesis

As of June 6, 2025, Guess? shares trade at $10.67, with a 1-year forecast of $10.57. The dividend yield is 11.2%, based on the $1.20 annual payout.

Bull Case: If Rag & Bone continues to outperform, Asia's restructuring succeeds, and margins stabilize at 4.4%–5.1% (the guided range), shares could climb toward $12–$13. The dividend adds a meaningful kicker.

Bear Case: Persistent margin pressures, Asia underperformance, or supply chain snarls could keep the stock range-bound or lower. The 1-year forecast already factors in a slight decline.

Verdict: Hold for Now, but Watch for Catalysts

Guess? is a story of uneven growth. The Rag & Bone integration and wholesale strength are undeniable positives, but margin recovery and Asia's turnaround remain critical hurdles. While the dividend offers a compelling yield, the stock's valuation doesn't yet reflect full margin recovery.

Historical performance underscores this caution. A backtest of buying GES on quarters when revenue beat estimates and holding until the next earnings announcement from 2020 to 2025 showed a -54.39% return, far below the benchmark's 32.08% gain. The strategy also faced a sharp 74.25% drop on earnings report reactions, reflecting heightened volatility. This aligns with the cautious stance: past performance indicates that relying solely on revenue beats may expose investors to significant downside without commensurate upside.

Investors should wait for Q2 results to confirm margin stabilization before considering a buy. If management can demonstrate progress in retail execution and Asia, GES could be a bargain. Until then, a cautious hold stance makes sense.

Backtest the performance of Guess? Inc. (GES) when 'buy condition' is a quarterly revenue beat (reported revenue > consensus estimate) and 'hold until next earnings announcement', from 2020 to 2025.