Founded in the U.S. in 1981, Guess? Inc. (NYSE:GES) grew from being a domestic apparel maker to become a global brand. The company designs, markets, distributes and licenses casual and trendy apparel and accessories for the American and European fashion sensibilities. Its target buyer is a style- conscious consumer between the ages of 18 and 32. In fiscal 2013, the company broadened its market by the acquisition of Marciano, an American designer label aimed to costumers between the ages of 25 to 40.
Guess markets its products through a wide brand portfolio and, through six store concepts, the company operates as much as 512 locations in the US and 1,178 internationally, 858 of which are licensees. Its U.S. wholesale customers are large department stores like Macy’s Inc. (NYSE:M), and Bloomingdale’s.
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- GES 15-Year Financial Data
- The intrinsic value of GES
- Peter Lynch Chart of GES
Over the years GES has developed strong brand recognition and strong adaptability to the changing fashion trends. Consequently, the firm has posted double-digit increases in revenues and profits for the past ten years. A balanced combination of sales enhancement and expansion plans with cuts in operating expenses, has allowed the firm to double its sales and generate returns on invested capital of 24% on average during the last five years.
Nevertheless, GES´ strong performance has been facing several challenges resulting from a tough macroeconomic environment. The company´s international operations account for 50% of its sales, 35% of which are generated in Europe. Hence, economic austerity measures and bad weather conditions in Southern European countries have hurt revenues generated in the region. Reported slowdowns in sales in the US in all four quarters 2013 are also a concern. Moreover, the company´s high exposure to negative foreign currency fluctuations has impacted significantly on its top line growth.
Guess’s expansion in Asia, however, rendered impressive results posting double-digit revenues growth over the past few years. Its online business is strong as well and the advertising and marketing of its products through social networks like Tweeter and Facebook have boosted online sales in the last quarters. Its licensing segment also favors the company enormously. In 2013, it contributed with 4% of total sales, which represented a remarkable 37% of operating profits.
Developing economies will remain a priority for Guess’s expansion over the next years and the firm is investing heavily in retail stores and the wholesale channel. Central and Eastern Europe (heading Russia and Germany) Latin America and Asia are its main targets. Additionally, it will continue to develop its high- profit-licensing segment and it will also expand its online business to Europe.
At a domestic level, GES’ efforts are directed to rising comps. To this aim, the company is enhancing its denim stock and revamping its denim heritage. And most importantly, it is shifting from high -margin products to more affordable clothes, thus appealing a broader audience.
Healthy Balance Sheet and Promising Expansion
The solid management of its business has allowed GES to fund its global expansion mainly with cash generated from its own operations. Hence, the company has a debt free balance sheet and continues to generate strong cash flow from its operations. Its financial flexibility adds to a high return on equity of 16.4, compared to an industry median of 9.1, and a return on capital of 36.90%, compared to its competitors’ 19.10%. GES’ stocks trade at 15.4 times its trailing earnings, which implies a price discount relative to the industry average. Offering shareholders a good dividend yield of 2.8% is also a compelling argument when looking for a smart purchase. In addition, investment guru Joel Greenblatt (Trades, Portfolio) recently increased his holdings by 987.71%, backing my bullish feeling regarding GES’ future growth potential.
Disclosure: Damian Illia holds no position in any stocks mentioned.