Although the fashion industry is considered highly competitive and, for most firms, low margin in nature, the fact of the matter is that some companies in this space generate attractive cash flows and are trading at prices that look quite cheap. One example of this can be seen when looking at Guess? (NYSE:GES). Historically speaking, the financial performance of the company has been somewhat mixed. But despite this, the overall trend has been positive. Shares of the company are trading at levels that would be considered comparable to what other similar companies can be purchased for. But on an absolute basis, the company's stock does look affordable. All of this combined has led me to rate the enterprise a 'buy' at this time. Though that comes with the caveat that investors should continue to watch the company's performance closely, especially as the economy heads into uncharted territory.
Operationally speaking, Guess? focuses on designing, marketing, distributing, and licensing a sizable portfolio of lifestyle apparel and accessories, as well as other fashion-oriented products. Under the apparel category, the company owns a number of well-known brands such as GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, MARCIANO, YES, G by GUESS, and more. Particular products sold under these brands include clothing such as jeans, pants, skirts, dresses, activewear, shorts, blouses, shirts, jackets, knitwear, and even intimate apparel. On top of this, the company also grants licenses to other companies to produce eyewear, watches, handbags, footwear, youth apparel, outerwear, fragrance products, jewelry, and other related fashion accessories under its own brand names. Another source of revenue for the company includes the licensing of the right to operate and sell its products through licensed retail stores to various wholesale partners the company has connected with over its long history.
For the most part, the company's offerings focus on catering to the desires of a wide swath of the population. This includes those aged 40 and older, as well as Millennials and members of Generation Z. In addition to having wholesale distribution and e-commerce operations set up in various markets, the company also has its own directly operated retail stores and concessions. As of the end of its latest fiscal year, the business had 1,068 stores that it operates, combined with 178 concessions. Under the store category, the largest exposure for the business was the European and Middle Eastern markets. 556 of its stores are located in those areas. This compares to 388 across all of the Americas and only 124 in the Asia and Pacific regions. The company also has licensed stores and concessions. As of the end of its latest fiscal year, the number of licensed stores stood at 563. Meanwhile, the number of concessions was 159.
In the years leading up to the COVID-19 pandemic, Guess? had been generating consistent growth on its top line. Revenue rose from $2.36 billion in 2018 to $2.68 billion in 2020. As was the case for so many other companies across almost every industry, the COVID-19 pandemic proved to be painful for the enterprise. Revenue for 2021 came in at just $1.88 billion. Fortunately, this decline was short-lived. In 2022, revenue rebounded to $2.59 billion. That growth continues into the current fiscal year. According to management, revenue in the first quarter of 2023 came in at $593.5 million. That's 14.1% higher than the $520 million generated just one year earlier. While the improvement from 2021 to 2022 can be largely chalked up to a reopening of the broader economy, we should briefly discuss the causes behind the increase so far this year. Under the Americas Retail segment of the company, retail comparable sales helped to push revenue up by 3%. Even more impressive was the 50% increase in the Americas Wholesale segment, while licensing revenues jumped by 23%. Beyond that, management has not provided much detail yet. However, they did say that they expect revenue for the entirety of 2023 to be up about 4% compared to what it was in 2022.
From a profitability perspective, the picture has been a bit mixed. From 2018 through 2020, the company's bottom line improved, with net profits rising from a negative $8.7 million to a positive $95.1 million. In 2021, the company booked a loss of $81.4 million. However, in 2022, profits surged, climbing to $169.5 million. Other profitability metrics have been interesting. Operating cash flow has been all over the map with no clear trend. In 2021, it came in at just $131.6 million. That's down from the $209.1 million reported one year earlier. If, however, we adjust for changes in working capital, we do start to see a clearer picture. This metric would have risen from $104.5 million in 2018 to $216.8 million in 2020. Cash flow then dropped to $107 million in 2021 before rebounding to $194.3 million in fiscal year 2022. Meanwhile, EBITDA has followed a similar trajectory. But what's notable here is the fact that, in 2022, this metric hit a high of $347.1 million.
For the 2023 fiscal year, the picture is shaping up to be somewhat mixed. Net profits in the latest quarter totaled just $8 million. That compares to the $12 million profit seen one year earlier. Operating cash flow also worsened modestly, declining from negative $53.6 million in the first quarter of 2021 to negative $54.6 million the same time this year. I would have liked to have conducted an assessment that would look at this without the working capital factored in. But unfortunately, because the company has yet to file its 10-Q, that is currently impossible. On the positive side, we did see EBITDA rise year over year, climbing from $39 million to $51.5 million.
To value the company, I decided to look at it through the lens of its 2020, 2021, and 2022 fiscal years. Using our 2022 fiscal year data, the firm is trading at a price to adjusted operating cash flow multiple of 6.4. This compares to the 5.8 we get if we rely on 2020 results. Meanwhile, using the EV to EBITDA approach, these multiples would be 4.5 and 7.1, respectively. Given the broader economic uncertainty, it wouldn't be a bad idea for investors to wonder what the picture might look like if fundamental performance takes a step back. I have a difficult time imagining that the situation would look worse in that scenario than what we saw in the company's 2021 fiscal year. Even in that case, with a price to adjusted operating cash flow multiple of 11.7, the picture does not look awful. However, the significant decline the company saw in EBITDA did push that multiple up to 33.2. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 4.9 to a high of 12.8. Using our 2022 results, we see that two of the five firms were cheaper than Guess?. Using the EV to EBITDA approach, the range was from 2.5 to 4.6. In this scenario, three of the five companies were cheaper than our target.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Designer Brands (DBI)||7.1||4.6|
|Abercrombie & Fitch (ANF)||6.3||2.5|
|American Eagle Outfitters (AEO)||12.8||3.5|
On the positive side, I will say that the overall fundamental condition of Guess? is quite favorable. Shares look cheap on an absolute basis, even though they look closer to fair value relative to similar players. The company rebounded from the COVID-19 pandemic nicely and looks set to continue growing near term. In addition, in the company's latest earnings release, management announced an accelerated $175 million share buyback plan. That is another way for the company to reward its shareholders. And with how cheap shares look, this may not be a bad idea. All things considered, while I do believe the company is subject to heightened volatility, I would still rate it a 'buy' at this time.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.