Shareholders in luxury goods manufacturer Guess (NASDAQ: GES) have likely not been too pleased with the company's stock price trajectory in 2014, down more than 30%. The company has been hurt by generally weak customer traffic volumes in FY2014, as well as a promotional pricing environment, which have combined to help produce a sizable decline in its adjusted operating margin, down roughly 410 basis points.
On the upside, though, management continues to try to improve the company's fortunes through an ongoing restructuring program that has included the elimination of under-performing stores in its North American and European markets, providing hope for a return to profit growth in the future. So, at its discounted price, is Guess a good bet for investors?
What's the value?
Guess is a major player in the luxury goods sector, with a network of more than 1,600 stores around the world that sell a variety of upscale apparel and accessories items. The company has anecdotally taken advantage of fairly consistent popularity for its brand, a trend that has allowed it to charge premium prices for its products and generate a solid level of operating profitability, with an average margin of 13.4% over the past five fiscal years. The net result for Guess has been strong operating cash flow during that time period, funding a steady expansion of its overall store base.
However, while Guess has been consistently profitable, its operating profitability has been on the slide lately, down roughly 160 basis points in its latest fiscal year. During the period, the company was negatively impacted by weak sales volumes, evidenced by comparable store sales declines in its retail operations, which led it to increase its overall level of discounting activity. Consequently, Guess posted an 18.9% decrease in operating income, an unfavorable performance that showed the necessity of the aforementioned restructuring program.
Looking into the crystal ball
The question for investors is whether Guess can find its way back to profit growth in the future, thereby providing a foundation for a higher market valuation. On that score, things aren't looking so promising, judging by the company's 59.6% drop in adjusted operating income during FY2014. As previously mentioned, Guess has been hurt by a need to engage in promotional marketing schemes in order to move merchandise. More importantly, management doesn't seem to be expecting much relief from margin pressure in the near term, a trend that makes profit growth a difficult goal to achieve.
Of course, Guess isn't the only luxury goods manufacturer struggling to find growth in the current operating environment. Competitor Coach (NASDAQ: COH) has reported a strikingly similar performance lately, evidenced by a 9.7% decrease in total sales during its latest fiscal quarter that was negatively impacted by lower sales volumes in its North American retail segment, approximately 40% of its total sales. Not surprisingly, the company defaulted to the product discounting playbook in order to help move merchandise during the period, a strategy that produced a lower gross margin, down roughly 250 basis points. The net result for Coach was a 32.6% decline in its adjusted operating income, a performance that has led to a downward trajectory for its stock price in 2014.
The bottom line
Guess is certainly cheaper than it was at the start of the year, after a double-digit stock price decline to-date in 2014. That being said, the company is not exactly cheap with a forward P/E multiple of roughly 19, given its operating profit decline in the current fiscal year. More importantly, with future profit growth looking like an uncertain proposition in the near term, there seems to be little momentum to drive a higher market valuation and investors should probably avoid the story.
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