Guess?.: Wait For Further Weakness

| About: Guess? Inc. (GES)

Summary

The poor retail environment has hurt Guess’ stock and raised its Dividend Yield to nearly 6%.

Despite its recent revenue and earnings hiccups, Guess’ financial fundamentals remain strong and it is likely to continue paying dividends.

Investors seeking to maximize their Dividend Yield could opt to wait for further weakness in the stock before taking a position.

ANALYSIS

Poor Q1 Results

Guess, Inc. (NYSE:GES) had a rough May, dropping nearly 14%. The jeans maker released disappointing fiscal 2017 1st quarter numbers, with revenue dipping by 6% compared to a year ago -- double the decline that analysts had been expecting and at the low end of Guess management's own forecasts. Even worse, after reporting a modest profit in the 1st quarter of Fiscal 2016 (i.e. the 3-month period ended April 2015), it announced an adjusted loss of 23-cents per share, which was wider than expected.

The decline in Guess's fortunes is par for the course for its sector. Like sector leader Gap (NYSE:GPS), whose dividend we recently discussed here as well, Guess was the victim of slower store traffic as well. Consumers spending on clothes grew a slower rate than it did on other goods, resulting in a 5% dip in Guess' U.S. retail stores. It did not do much better overseas, with European and Asia sales dropping by nearly 6% as the global economy waned.

Dividend Impact

Despite its poor 1st quarter, Guess will pay a dividend of 22.5-cents in late June. The company has continuously paid investors a dividend each year over the past decade. Moreover, with the recent drop in its stock price, Guess has among the highest yields in the apparel industry at 5.9%. An investor who purchases 100 shares of Guess for $1,523 today can expect at least $90 of passive income each year.

Is there any reason to think that Guess will stop paying dividends anytime soon? Probably not, although it's also unlikely to raise them anytime soon - the last time Guess increased its dividend was two years ago when it raised its dividend from 20-cents to its current level.

To start, Guess still has the capacity to keep paying dividends regularly. Based on its latest filings, Guess' Working Capital Ratio is currently 3.21-to- 1, so it should have no trouble covering the payment of a 22.5-cent per share quarterly dividend (roughly $20 million) for the foreseeable future. Indeed, Guess has close to $430 million in cash alone - enough for roughly 20 quarters' worth of dividends.

Guess also has very little financial debt: its gearing is an almost-negligible 0.03x or just 3 cents of borrowings for every dollar of equity. Investors need not worry about interest payments diminishing its cash flow.

Meanwhile, Guess' Gross Margin fell to 32% in its fiscal 2017 1st quarter from 35% in the same period a year earlier. Subsequently, the company lowered its forward guidance for the rest of fiscal 2017 (i.e. May 2016 to January 2017); the company now expecting adjusted net profits of 55-to-75 cents per share compared to 65-to-85 cents per share previously.

The high end of its expected profit range is now around 21-cents per share lower than the 96-cents per share it earned in Fiscal 2016, though this includes a 12-cent per share allowance for currency effects. Nonetheless, a profit is a profit and this only strengthens the case for Guess to continue making dividend payments.

Outlook

Looking ahead, one positive sign for investors is that Guess management appears relatively sanguine about Fiscal 2018 and beyond - during a recent conference call with investors, management did not update its guidance for the years beyond Fiscal 2017. Instead, the company emphasized that it remains committed to opening 65 new stores in Asia and another 45 stores in Europe.

That Guess is continuing with its international expansion is unsurprising since it generates roughly 60% of its revenues from outside the United States - it would have been a very troubling sign for investors if Guess had put its global expansion plans on hold.

Still, the expansion is not expected to move the needle much for Guess in the medium-term. Over the next five years, its revenues are predicted to rise by only 4.4% per annum - less than the 13% expansion anticipated for its industry.

Given this outlook, we believe it is very unlikely that Guess will commit to paying a higher dividend - meaning that investors looking for a better dividend yield are better off buying the stock on further weakness than waiting for the company to announce higher payments.

CONCLUSION

Investors who are happy with a nearly 6% dividend yield could buy Guess stock today and book it -- but they risk losing money if the stock is subject to further weakness. It's worth pointing out that the expectation for the Global Economy this year is for flat growth overall with a very slight slowdown in both Europe and Asia.

Considering that these regions are two of Guess' three major geographic markets and that consumer spending on apparel is highly sensitive to economic expectations, Guess' profits for fiscal 2017 could hew to the lower end of its revised revenue and earnings forecasts. Such a scenario could drive the stock to below $13/share. In this scenario, Guess' Dividend Yield could rise to 7% or even more.

The balance of risks suggests that this is a distinct possibility. Therefore, waiting for further weakness is the best strategy for investors seeking to maximize their dividend yield on Guess.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.