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Guess?, Inc. (NYSE:GES) designs, markets, distributes, and licenses one of the world's leading lifestyle collections of apparel and accessories under different brands such as Guess? and Marciano. Products are sold through different distribution channels including retail, wholesale, e-commerce, and licensing. Around 41%-46% of the total revenue comes from North America retail, 35%-38% from Europe, and the rest is from Asia and North America wholesale.

In August, GES announced weak Q2 earnings results. The company's profit dropped 29% as revenue fell 6%, mostly due to lower sales in North America and in Europe, although growth did continue in the Asian segment. Right after that, the share price declined more than 18%, from $32.5 to $26.50.

Should investors stay away from the business, or it is the opportunity to buy GES at an undervalued price? Let's look at its historical numbers. In the last 10 years, GES experienced the consistent growth in revenue, operating income, net income, cash flow from operations, and free cash flow. Nine out of 10 years GES was profitable.

USD million

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Revenue

583

637

729

936

1,185

1,750

2,093

2,128

2,487

2,688

Operating Income

-9

21

55

102

193

309

329

359

405

397

Net Income

-11

7

30

59

123

186

214

243

290

266

Operating CF

30

62

82

144

138

175

229

358

346

364

FCF

7

44

47

95

88

75

139

276

223

240

Revenue has achieved 16.4% annualized growth for the last 10 years, and since 2003 net income has had an annualized growth of nearly 50%. In addition, GES has delivered more than 20% return on invested capital since 2006.

For the last five years, GES has been paying an increasing dividend. In 2008 it paid $0.28 per share, and in 2011 it paid $0.8 per share. At the current price, the dividend yield is 2.88%.

As of July 2012, GES has around $280 million in cash and no interest-bearing debt. Shareholders' equity is more than $1 billion. With a current market capitalization of $2.37 billion, the enterprise value is $2.1 billion.

In 2011, GES generated $266 million in net income, $364 million in operating cash flow, and $240 million in free cash flow. So the company is currently valued at 8.9 times P/E, 6.5 times P/CF, 2.3 times P/B, and 8.75 times EV/FCF. These valuations are significantly lower than the industry average of 22 times P/E, 5 times book value, and 12.2 times cash flow. These are also lower than its five-year historical average valuations of 13.2 times P/E, 3.6 times P/B, and 11.3 times P/CF.

Furthermore, in June 2012 GES said that the board of directors had authorized a new program to repurchase up to $500 million of its common shares. This plan is in addition to the existing $250 million stock buyback authorization announced in March 2011, under which approximately $231 million has been used to repurchase approximately 8.2 million shares to date.

My Take

I would consider GES as a buy because of the following points:

  • Strong growth in any key metrics historically, including revenue, operating income, net income, operating cash flow, and free cash flow.
  • The company keeps repurchasing its own common stock, reducing the number of shares outstanding to further deliver shareholders' return.
  • Significant low valuation compared to the industry average and its historical valuation.
  • Consistent growing dividend.
Source: A Fast-Growing And Profitable Retailer Is Undervalued By The Market