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Guess Inc. (NYSE:GES) shares declined ~18% YTD and ~31% in the recent 3 months on concerns primarily because of its business exposure to European countries. As the stock price is already at its 52-week low and its price multiples are way below its competitors' level, investors should start considering adding position for the global apparel retailer.

In this article, I will run you through the firm's financial performance and my DCF valuation, as well as provide you the recent corporate development to help you formulate insights on this potential value investment.

Financial Performance


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Comments:

  • Revenue enjoyed solid growth in the past years. It is expected to grow slower in FY2013 and resume momentum in FY2014 due to GES's aggressive expansion plan for Continental Europe, where struggles with austerity and economic uncertainty.
  • Operating income margin is in modestly declining trend. It is estimated to bottom in FY2013 as the company has been aggressive spending on opening new stores in international markets over the past years (especially in FY2013) and the benefits from those investments materialize over time beyond FY2013.
  • EPS has strong growth over the last few years and is projected to decrease moderately in FY2013 and resume growth in FY2014 due to the store expansion plan.
  • Free cash flow margin has grown from 4.3% in FY2008 to 9.0% in FY2012.
  • ROE was consistently above 20% level.
  • Current ratios suggest GES is financially safe in terms of liquidity.

DCF Valuation

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Comments: Baseline assumptions give a stock value of ~$34, which is ~40% above the current stock price of ~$24.


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Comments: The highlighted assumptions are changed to reflect a stress case, and they yield a stock value of ~$24 - in line with the current stock price. It appears that the market price has factored in the very pessimistic assumptions, which I believe are extremely unrealistic given GES's fundamentals.

Valuation Comparison

Comments: GES's price multiples indicate that the stock is much cheaper compared to the industry peers despite the company's historically higher profitability and earnings growth. The price multiples are also lower than their respective historical averages.

Additional Facts

  • In FY2012, GES derived ~49% of its revenues from North America, ~38% from Europe, and ~9% from Asia.
  • As of January 2011, the company has ~1,559 stores worldwide with an expansion goal to achieve ~2,380 stores in 5 years by focusing on opening new stores in Southern Europe and Asia, especially Korea and China. It is noted that Asian revenue increased 25% in FY2012.
  • To mitigate the negative impact from economic woe in Southern Europe, GES continues its expansion in Northern Europe region, where economy is in a better shape.
  • By the end of FY2012, GES has ~$496M cash versus the total assets of ~$1,844M and has no debt.
  • Current dividend yield is ~3.2% with a ~28% payout ratio.

I believe that the current downbeat sentiment weighing on GES stock is overreacted as better growth prospect from Asia and Northern Europe should allow top-line growth and profitability to recover. In the US, consumer spending is again driving the economy growth. With the ability to identify and capitalize on the fashion trends as well as ample financial flexibility, GES should be able to leverage that favorable economic trend in North American market to drive up top line. Dividend payout is expected to be sustained as GES has demonstrated its ability in generating stable free cash flow. While the stock is trading at a deep discount to its peers, I am definitely considering buying on this dip.

Note 1: Charts and exhibits are created by the author.

Note 2: Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, and Morningstar.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GES over the next 72 hours.