The Contrarian Case for this Fashion Retailer
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In case you haven´t heard, my undercover sources are telling me that there may be some economic problems in Europe lately. Really, the European crisis won´t get better anytime soon, and this situation will create some serious troubles and opportunities at the same time. It looks like fashion retailer Guess (NYSE: GES) is getting cheap enough to be considered a long term opportunity surging from this situation.
The company experienced a 2% decline in total revenue in the last quarter, mostly produced by a 10% fall in European sales while other regions performed much better: the North America Retail segment reported a 2% increase in revenue and Asia delivered much better numbers with an 8% growth. Profit margins were lower across the board, and Guess reported a 45% decrease in operating earnings for the quarter.
This was no surprise at all, since Guess had warned about the coming slowdown related to Europe, and the numbers were in fact above analysts’ expectations and the company´s guidance. Management also reiterated its guidance of between $2.5 and $2.65 in earnings per share for the year, which would mean a Price to Earnings ratio in the area of 10, based on the current price around $26 for shares of Guess.
Although volatility is to be expected in the upcoming months due to the company´s European exposure, Guess is in very solid financial shape and has strong cash flows. With nearly half a billion dollars in cash and almost no debt obligations in its balance sheet, Guess is in a strong position to sail through the stormy weather. The company has also delivered positive cash flows in the last quarters, both in terms of cash flows from operations and free cash flows, so financial strength is no concern for investors.
Almost a 20% of current market value is backed by cash and liquid assets, and Guess is cheaper than competitors like Gap (NYSE: GPS), Aeropostale, Inc. (NYSE: ARO), Abercrombie & Fitch (NYSE: ANF) and American Eagle Outfitters (NYSE: AEO) and better in terms of dividend yield, price to earnings ratio and price to earnings growth ratio. You don´t get much cheaper than that.
And it’s not just a matter of valuation, Guess has also delivered higher growth in sales and earnings per share than all the companies in the table for the last five years, and the company is the one with the highest Return on Assets too. Only The Gap has a slightly higher Return on Equity, apart from that, Guess comes ahead of its competitors in each and every one of the valuation and fundamental figures analyzed.
The company is suffering from the effects of macroeconomic headwinds, and this may produce some uncertainty over the middle term, but the numbers look really good in terms of both valuation and financial performance. So I guess (pun intended) there is a good reason to believe this company has what it takes to outperform its peers over the long term.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Aeropostale and Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.