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Time to Pick Up a Cheap Stock

June 18, 2014 | About:
ovenerio

ovenerio

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Apparel brands are increasing their focus on new product lines, e-commerce, investments in company-owned retail, as well as international expansion. In this article, let's take a look at one apparel retailer in a better consumer spending environment in most major markets.

A Worldwide Fashionable Brand

Guess? (GES) is one of the most popular brands in the U.S. apparel sub-industry. The company’s products are sold via retail, wholesale, e-commerce and licensing distribution channels. The company directly operated 491 retail stores in the U.S. and Canada at the end of the first quarter of fiscal 2015 versus 511 retail stores a year earlier. Other stores include countries in Europe, Asia, Mexico and Brazil.

GES operates in multiple distribution channels, with North American retail accounting for 42% of revenues in FY14, North American wholesale for 7%, European wholesale and retail for 35%, and Asia wholesale and retail for 11%.

New Store Openings

The company´s plan is to expand outside the U.S. It intends to enter a strategic partnership in Greater China and to continue expansion into developed countries like Germany and emerging markets like Russia, Japan and India. As well as developing businesses on those key markets, Guess will expand G by GUESS? concept both domestically and internationally during FY 2014. Furthermore, the firm is seeking a joint venture in Brazil, considered as an attractive growth opportunity. Guess is planning to extend its reach in South Korea in order to increase its Asian market share.

Strong Online Business

Last year, the firm has launched its official e-commerce site in countries like Malta, the Czech Republic, Greece, Cyprus, Slovakia and Latvia, expanding the strong e-Commerce business. The e-commerce store, which is available through computers, tablets or smart phones let customers have access to a wide range of products. Paul Marciano, Chief Executive Officer, commented, " We are very pleased by the strong momentum in our e-commerce business this quarter which delivered top-line growth of almost 50% in North America. E-commerce remains a key initiative for us as more and more consumer demand shifts to this channel".

Guess intends to continue to expand its fan base on the social media platform. Social networking sites, where the company advertises and markets its products, have boosted sales over the past several quarters. Guess? launched its website – Global World of Guess – a year ago. The site has reported strong customer visits throughout fiscal 2013 and I expect this trend to continue in the next years as new digital platforms become more available to young people.

Revenues, Margins and Profitability

Guess? posted better-than-expected results in previous quarters last year, but posted disappointing results in the fiscal year that ended Feb. 28. Moreover, in the first quarter Fiscal Year 2015 Guess? reported revenue of $522.5 million representing a 4.8% drop compared to the same quarter last year, missing analyst expectations of $526.4 million. As if this were not enough, it recorded a net loss of $2.1 million. According to the company's release, a 4.2% reduction in store count (the company's retail stores and e-commerce sites in North America generated revenue of $228.3 million from $238.3 million in the same period a year ago) and a 3.8% in U.S. dollars (and 2.3% in constant currency) drop in comparable store sales cause this negative result.

The gross profit margin has decreased from the same quarter the previous year (33.73% vs 35.97%) and the net profit margin was not the exception (from 1.81% to -0.42%).

Looking at profitability, weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share. The retailer reported earnings per share of -$0.03 for the quarter from $0.12 in the same time frame the past year. Few days ago, after reporting first-quarter earnings below analysts' estimates, shares traded lower and many investors are wondering if it is the appropriate time to buy it now.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

GES

Guess

13.3

ANF

Abercrombie&Fitch Co.

3.16

GPS

The Gap, Inc.

41.8

RL

Ralph Lauren Corporation

19.24

The company has a current ratio of 13.3% which is higher than the one exhibit by Abercrombie & Fitch Co. (ANF), but lower than Ralph Lauren Corporation (RL). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so the ROE of The Gap, Inc. (GPS) looks very attractive. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

 

ROE (%)

IndAvg

S&P 500

Q1 2014

12.21

23.94

14.48

Q1 2013

15.57

20.29

13.11

Q1 2012

21.01

17.82

14.55

Strong Cash

Guess announced that its Board of Directors has approved a quarterly cash dividend of $0.225 per share. The current dividend yield is 3.3% which is quite good to protect the purchasing power.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 14.2x, trading at a discount compared to an average of 22.6x for the industry. To use another metric, its price-to-book ratio of 1.9x indicates a discount versus the industry average of 2.29x while the price-to-sales ratio of 0.86x is above the industry average of 0.8x. The first two metrics indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price fell in the last quarter with even a greater fall on news that the firm has missed revenue expectations.

1402540787111.png

Final Comment

Although it is difficult to predict the future performance of the stock in the future, I think with shares trading at a 26.2% discount to their 52-week high of $34.94, it seems like the right time to add the stock to your long-term portfolio. When considering other aspects such as the opportunities in new categories and new geographies, I feel more confident on my bullish sentiment.

Hedge fund guru Joel Greenblatt (Trades, Portfolio) added this stock to his portfolio company in the first quarter of 2014, and I would advise fundamental investors to consider adding this stock to theirs as well.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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