Guess? Inc. (NYSE:GES) has struggled with fashion, but the profitable company continues to reward shareholders with dividends. One-time fashion icon Guess isn't hitting on all cylinders today and it hasn't in a long time. But its 7.5% dividend yield is really enticing and the business appears to be more solid than its fashion sense suggests.
A rough ride
There was a time when Guess? branded jeans were a hot commodity. The company was a clear trendsetter… back in the 1980s. The name might even ring a bell for nostalgia fans. It just makes me feel old because I remember the company's heydays.
That said, it hasn't been a smooth ride for Guess. It's long since lost its trendsetter status and has languished as a brand. That said, revenues have been in decline for four years and, if the holiday season is weak, this year could be number five. Operating margins and earnings have been getting slimmer, too.
One thing that remains fat, however, is Guess' dividend. The dividend has grown from $0.28 a share a year in 2008 to the current $0.90 a share. That leaves the company with an around 7.5% yield. That's a fairly enticing number that deserves a deeper look.
The first problem that pops up for Guess' dividend is dividend coverage. As the company's earnings have fallen its coverage ratio has declined. It might even move beyond 100% this year. That's a big warning sign that the dividend could end up being cut. However, dividends don't come out of earnings. They come out of cash flow.
When you look at the cash flow statement, you see that Guess has been eating into its cash hoard over the last few years. Cash was around $500 million at the end of 2014, $450 at the end of 2015, and was down to around $350 million at the end of October. That number, however, doesn't include the all-important fourth quarter. So it's highly likely that the cash burn in 2016, at around $100 million so far this year, won't be quite as bad as it now looks.
But, so far, Guess isn't looking like a great story. Most investors, particularly conservative types, should stop here and never look back. Investors who like turnaround stories, however, should keep reading.
Things could change
The story at Guess beyond the numbers is a corporate turnaround effort under a new CEO. He's a company outsider at a family controlled business that could breathe new life into the Guess brand. But, here's the interesting part: Maurice and Paul Marciano own roughly 30% of the company's outstanding shares. Since a dividend cut would basically have to get their blessing, the distribution may have more support than the numbers suggest.
Add to that the fact that long-term debt makes up just 2% of the capital structure. Suddenly the dividend looks a little more secure. And while the company's earnings are falling, it's still profitable. Many companies are willing to support a payout ratio of more than 100% for a period if the expectation is for better things in the future.
On that score, the spending that's eating away at cash is in support of a turnaround effort that includes rejiggering the store base with openings and closings. The ultimate goal is to gain more scale in key overseas markets. That's a decent use of cash and there's solid reason to believe that the board won't be tempted to trim the dividend as long as the changes being made see some success.
Only for risk takers
Guess? is not a good option for investors with weak stomachs. This is a turnaround story no matter how hefty the dividend yield is. And, obviously, there's a lot that could go wrong. However, for those willing to take on some risk, that yield could turn out to be a nice paycheck while you wait for the company to get itself back on sounder footing. If it succeeds, you'll get the dividend and share price advances as investors recognize the improving fundamentals. You'll just want to keep a close eye on the progress if you decide to jump aboard.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.