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.
Global Reach
Guess? Inc. (GES, Financial) 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 494 retail stores in the U.S. and Canada at of February 1, 2014 versus more than 500 retail stores a year earlier. Other stores include countries in Europe (267 stores), Asia (286), Mexico (36) and Brazil (36). Licensees and distributors operated another 868 stores in Europe, the Middle East, Asia, and Central and South America, plus 253 smaller-sized licensee operated concessions in Asia.
GES operates in multiple distribution channels, with North American retail accounting for 42% of revenues in FY 14, North American wholesale for 7%, European wholesale and retail for 35%, and Asia wholesale and retail for 11%.
Restructuring Costs
The company faces intense competition from well-known brands such as Gap, Calvin Klein, Diesel. As a result, Guess lost some of its strength as it became less relevant to younger customers.
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.
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. But expansion doesn’t mean that management have planned to make restructuring plans, it will close 50 stores within 18 months as well as making improvement in the North American retail organization, which could drive annual savings of $20 million.
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 second quarter FY 2015 Guess? reported a 4.93% drop in revenues compared to the same quarter last years. The gross profit margin has remained flat from previous quarter (36.31% vs 36.73%) but the net profit margin has increased from -0.42% to 3.77%.
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 $0.26 for the quarter from $0.47 in the same time frame the past year. After reporting second-quarter earnings, shares continued to trade 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 | 10.95 |
| ANF | Abercrombie & Fitch Co. | 2.44 |
| GPS | The Gap, Inc. | 39.98 |
| RL | Ralph Lauren Corporation | 19.12 |
| Industry Median | 8.97 |
The company has a current ratio of 10.95% which is higher than the one exhibit by Abercrombie & Fitch Co. (ANF, Financial) and the industry median, but lower than Ralph Lauren Corporation (RL, Financial). 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, Financial) 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 (%) | Industry Average | S&P 500 | |
| Q2 2014 | 10.76 | 26.32 | 14.28 |
| Q2 2013 | 14.8 | 21.85 | 13.75 |
| Q2 2012 | 22.04 | 19.19 | 13.93 |
Attractive Dividend Policy
Guess has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 4.31%, which is good to protect the purchasing power. Dividends have been paid since 2007.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 14.0x, trading at a discount compared to an average of 21.7x for the industry. To use another metric, its price-to-book ratio of 1.51x indicates a discount versus the industry average of 1.97x while the price-to-sales ratio of 0.68x is below the industry average of 0.79x. The 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 has a downward trend. If you had invested $10.000 five years ago, today you could have $7.074, which represents a negative 6.7% compound annual growth rate (CAGR).
Final Comment
Although it is difficult to predict the future performance of the stock in the future, I think with shares trading at a 40.2% 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 closing underperforming stores and reorganization, I feel more confident on my bullish sentiment.
Hedge fund guru Joel Greenblatt (Trades, Portfolio) added this stock to his portfolio company in the second 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.
