Guess? Inc. (GES) has transformed itself from a U.S. company based to a worldwide fashionable brand. The company´s plan is to expand outside the U.S. For fiscal 2014 it intends to enter a strategic partnership in Greater China and to continue expansion in Europe and Asia as well as developing key markets like Germany, Russia and Japan with the money generated in the past. Also, the business of licensing, which contributed 4% of sales but 37% of operating profits in 2013, is a key factor where opportunities in new categories and new geographies will be the focus. The Denim business also is a key part of the company´s sales for the last two years. Also, the company improved it sales through the advertisement via Facebook and Twitter.
In terms of valuation, the stock sells at a trailing P/E of 16.2x, trading at a discount compared to the industry average of 18.6x, representing a discount of 12.9%. Analysts’ expectations imply a forward P/E of 14.41. At that P/E it seems cheaper compared to the industry average.
Talking about well-known brands, another giant is Ralph Lauren Corp. (RL). The company has also put its focus on international markets and the development of the e-commerce business. Although it somehow resembles Guess?, multiples and ratios are not similar.
Its P/E multiple, on a trailing-12 month basis, is 20.9 compared with the 17.1x industry average and 16.9x for the S&P 500. The forward P/E multiple is 16.6. The company has been performing better than its peers with a debt-free balance sheet and a strong cash flow. Nine out of 10 times, the company beats Zacks Consensus Estimate, so we believe it could over perform it again.
Finally, I always like to see the evolution of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ROE has improved when compared to the past years: It stood at 19.8% and is higher than 92% of the companies in the industry. It is very important to understand this metric before investing in a high-growing company.
Amid the weak macroeconomic conditions in the international markets, the intense competition in the industry and the increased in raw material prices (fuel and energy costs) we see in Ralph Lauren a buying opportunity. Not so in the case of Guess?, where we see risks regarding the slowdown in revenues which were reduced to a range of $2.56 billion to $2.59 billion instead of the earlier expectation of $2.57 billion to $2.61 billion due to a lower consumer expending in China for example.
In my point of view, the strong brand, the strategic expansion and the healthy balance sheet that Ralph Lauren offers makes it the most attractive choice.
Hedge fund gurus like Joel Greenblatt, Jim Simons and Jeremy Grantham added this stock to their portfolios, and I would advise fundamental investors should consider adding this stock to their portfolios as it seems to be an attractive option for investors in the near future.
Disclosure: Damian Illia holds no position in any stocks mentioned.
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