Is Guess Stock A Buy At $21?

[Note: Guess
GES
’ FY’23 ended on Jan 28, 2023]

Guess Stock (NYSE: GES), a retailer that designs, markets, distributes, and licenses apparel and accessories for men, women, and children, grew roughly 4% year-to-date – rising from about $20 to around $21 currently, underperforming the S&P500, which grew about 13%. Guess is cheap relative to its historical performance, which currently reflects the near-term outlook. However, we expect the stock to perform well in the long term. As a general protective move to shore up inventory, the retailer ordered products earlier than normal to deal with supply chain headwinds. The strategy seems to have worked in FY2023 (year ended Jan 2023), as the company has been able to deliver more products to wholesalers due to its accurate acquisition of enough products. Still, the foreign currency fluctuations are definitely a drag on the company and we expect the FX headwinds to continue in FY 2024 as well.

GES stock has seen a decline of 20% from levels of $25 in early January 2021 to around current levels, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in GES stock has been far from consistent. Returns for the stock were 5% in 2021, -13% in 2022, and 4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 – indicating an underperformance for the ticker in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GES face a similar situation as it did in 2021 and 2023 and lose value over the next 12 months – or will it see a recovery?

Guess’ sales increased a modest 3% year-over-year (y-o-y) to around $665 million. American retail sales were down 11%, while wholesale sales was down 20% y-o-y in Q2, likely due to softening demand relative to the prior period. To counter the weak sales trends, management limited its promotions and discounts that could have harmed the margins. However, it should be noted that the standout performances in Asia and Europe offset these declines. The biggest achievement in the quarter was the company’s profitability. Its operating margin improved to 9.7% in Q2 2024 from 8.3% in Q2 2023, which resulted in the retailer’s adjusted earnings growing a large 85% y-o-y to 72 cents in Q2 2024. That said, the company’s Americas region accounts for almost 35% of the total revenues and any further weakening in this region could be a warning sign in the upcoming holiday season.

We forecast Guess Revenues to be $2.8 billion for the fiscal year 2024, up 3% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $2.95. Given our revenues and EPS forecast changes, we have revised Guess Valuation to $23 per share, based on a $2.95 expected EPS and a 7.8x P/E multiple for the fiscal year 2024. That said, the company’s stock appears appropriately priced at the current levels, with our valuation at only a 7% premium from the current market price. For fiscal 2024, management narrowed its revenue guidance. The company previously expected a 2.5% to 4.5% growth whereas it now expects 2.5% to 4% growth. However, it raised its guidance for its operating margin from 7.5%-8.3% to 8.9%-9.3%, which is meaningful.

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