On Tuesday Guess (NYSE: GES) slumped to nearly a three-year low. The designer/retailer was valued at almost 3.5 times earnings before interest, taxes, depreciation, and amortization. That is the lowest of any apparel retailer in the U.S. and less than half of the median. This is Guess' first consecutive drop in profit in eight years. The global economic slump has done little to help in this area. Also, stiff competition is eroding the profit margins. Guess has sank 41% in the past year as the eurozone crisis undercut consumer demand and lower-priced brands pushed its operating margins to a six year low. This does not bode well for the company.
Guess does, however, have one pretty large positive. Cash. And lots of it. For this reason the retailer may still entice buyout firms. Guess maintains a higher free cash flow yield than 97% of its rivals. It also holds approximately $500 million in cash, has virtually no debt, and is a globally recognized brand name that is driving growth in markets such as China. This could be enough to lure in offers from leveraged buyout firms.
Guess is still a strong value. The retailer ranked higher than its closest rivals on Interbrand's list of most valuable U.S. retail brands this year. This was based on Guess' ability to adapt to revenue changes across regions, which makes the brand more protected than most. Guess is one of the few global brands out there that is trading at such a deeply discounted rate. Most investors are not giving Guess enough credit for its true brand value. Asian demand for the brand is growing and Europe is slowly recovering. The brand will continue to grow in strength and value.
Of course, if anyone wants to buyout this brand they will have to persuade the owners to let go of the company they started. Tough luck. However, Guess is still an incredible value for the individual investor. Actually, it is a deeply discounted value. If only they were willing to provide their shareholders with store discounts we could all dress a little better, too. The eurozone crisis is temporary. The brand is global. Guess will hold out in the end.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.