Throughout the recession, it's become more and more depressing to open up retailer quarterly reports. So it was refreshing to finally see some respectable performance and appropriate strategies being implemented from Guess' (NYSE: GES) most recent quarter this week. IN PICTURES: Seven Ways To Position Yourself For Recovery

Second-Quarter Earnings
For the second quarter, the company's top line inched up just 1.4%, but any sales increases in today's economy for retailers is impressive, as many competitors are dealing with double-digit revenue declines. What's even more remarkable is not only that Guess grew its sales, but did so in a profitable manner without taking a hit to margins, as earnings grew 10.6%.

As CEO Paul Marciano stated in the conference call, Guess' performance is a strong testament to management's ability to effectively adapt to the changing consumer climate and further proves the strength of the Guess brand worldwide. While many retailers like Abercrombie & Fitch (NYSE: ANF) are facing rapidly slimming margins from extensive markdowns and poor expense control, Guess was able to improve its operating margin by 90 basis points to 17.4%. Further, the company's inventory level remained flat, confirming that the company took appropriate actions before the consumer environment worsened.

Advertisement - Article continues below.

A Long-Term Mindset
Perhaps Guess' outperformance against most of its rivals is attributable to its high percentage of insider ownership. With insiders owning nearly 36% of Guess, management has strong incentives to operate the company efficiently and to ensure that it's positioned to thrive in the long run.

Not only is Guess taking the time to recognize long-term opportunities, it also possesses the resources necessary to develop the necessary infrastructure and capabilities to capture those opportunities. The company is able to implement a long-term strategy because it properly adjusted its operations for the downturn and has maintained a healthy balance sheet. Since last year's second quarter, Guess has grown its cash 12% and has whittled its debt down to zero.

Retail Bear
Despite my passion for the retail sector, I'm not very bullish on retailers right now. Too many have made brand-damaging mistakes or operate business models that can't withstand a lengthy recession.

Off the top of my head, there are only two specialty retailers aside from Guess that I like right now: Buckle (NYSE: BKE) and Aeropostale (NYSE: ARO). Coincidentally, both have zero debt and Buckle has very high (43.8%) inside ownership. Personally, I think those are two key characteristics to look for in retailers, and the benefits of companies possessing those traits are evident in their recent performance. (See Can Insiders Help You Make Better Trades? to find out if using insider trading activity can be valuable for you.)


Bottom Line
Retailers across the board have been on a tear lately; the SPDR Retail Index is up about 60% so far this year. Thus, there seems to be some excessive exuberance among investors for the sector and I think we will see a significant portion of these retail stocks retreat. However, if any retailers have what it takes to maintain their recently inflated stock prices, I'm willing to bet Guess is one of them. At 15-times trailing earnings, I peg Guess as a buy. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!