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Guess? (NYSE:GES) is a mid cap apparel store whose stock has fallen in bad times. After reporting same-store sales were down 8.5% in North America, shares of this stock have dropped precipitously and they now trade at attractive valuation multiples, both on an absolute basis and also relative to other mid cap apparel stocks. Investors should consider buying stock in Guess? because its growth trends in the medium term are attractive and its valuations are compelling.

Guess? Operations: Modest Decline

The most recent quarterly filing from Guess? reveals that net sales were down for developed markets and that the Asia segment is still experiencing growth:

Net revenue:

Q2 2012

Q2 2011

% Change

Europe

246,917

288,818

-14.5%

North American Retail

253,012

261,053

-3.1%

Asia

66,826

55,283

20.9%

North American Wholesale

41,628

43,868

-5.1%

Licensing

27,010

28,137

-4.0%

Total Net Revenues

635,393

677,159

-6.2%

This would bother me if GES shares were trading at high valuations that imply growth. But they don't trade at high valuations. Instead, they trade at attractively low valuations. A year-over-year drop of 6.2% in net sales with pockets of growth should not scare away value investors. There is no secular change here unless clothes are becoming obsolete.

Computing Future Valuations from Growth Projections

Investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Low valuations for Guess? make it attractive. Its metrics are provided with other mid cap apparel store stocks:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

GES

Guess?

10.5

11.6%

0.9

17.8%

BKE

Buckle

13.8

8.5%

2.0

14.9%

CHS

Chico's FAS

20.4

15.1%

1.3

6.0%

AEO

American Eagle Outfitters

23.1

10.8%

1.3

2.5%

URBN

Urban Outfitters

30.4

17.4%

2.1

15.1%

ANF

Abercrombie & Fitch

32.2

18.4%

0.6

4.6%

These data inspire an investigation of whether this stock's lower valuations can somehow be justified by lower earnings growth projections and sales growth trends. Put another way, do the higher growth estimates of its competitors justify their higher valuation multiples? Future valuation multiples of Guess? and its peer stocks were modeled by combining expected growth and trailing valuation multiples for sales and earnings. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:

These projections illustrate how Guess? lower valuations more than compensate for lukewarm growth. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for other apparel store shares which imply they can see earnings at least 16 years ahead.

Estimated convergence years were calculated below for Guess? and its competitors:

Guess? Peer Stock

P/E Equivalence

P/S Equivalence

Buckle

NA

NA

Chico's FAS

2032

NA

American Eagle Outfitters

NA

NA

Urban Outfitters

2032

NA

Abercrombie & Fitch

2029

2013

The projected crossover dates either never happen or span well into the distant future for the price-to-earnings multiple, demonstrating how Guess? is a bargain relative to its peers. Investors should consider GES shares at current prices over peers since the only valuation multiple that crosses in the near future is the price-to-sales ratio of Abercrombie & Fitch.

Conclusion

It's clear that Guess? shares are more attractively priced than its peers, making it the optimal way to play this industry.

Please read the article disclaimer.

Source: Guess - If The Valuation Fits, Wear It