A Dividend Stock Trading at Bargain Basement Prices

By Elise Ralph - September 3, 2012 | Tickers: AEO, FNP, GES, TLYS, URBN | 0 Comments

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Is it Tme to Buy GUESS?

After its ugly Q2 earnings report, shares of GUESS (NYSE: GES) are now trading with a PE ratio near 10. That appears to be a bargain basement valuation compared to hip competitors like Urban Outfitters (NASDAQ: URBN) or Tilly’s (NYSE: TLYS). It’s even lower than the embattled Fifth & Pacific (NYSE: FNP), (formerly Liz Claiborne) despite the fact that GES is in excellent financial health (no long-term debt with $3/share in cash) and pays a dividend.   

Is it time to buy? It's an attractive stock but after reading the transcript from their most recent earnings report conference call, I’d say you’re better to put this one back on the shelf and to keep looking elsewhere for a better fit.


What happened?
The 2nd quarter was tough on GUESS.  EPS dropped to 49 cents compared to 84 cents last year during the same period. They claim they were hit by the European crisis twice.  Europe makes up almost 40% of the company's revenue stream and this quarter it dropped by 15%.  In North America traffic was down by 10% and, since as much as a third of their summer traffic comes from tourists, the company faulted the weakened Euro again. The CEO even talked about how few of their own employees in Italy were traveling abroad this year.  Anecdotes aside, only a few days after the conference call the US Department of Commerce announced that tourists are spending at a record-breaking pace this year.

Something else is going on. 

“Brand supercedes everything”
GUESS is in a tough business: dressing customers with no real need for loyalty beyond what the cool kids are wearing today. Consequently, as CEO Paul Marciano said, as the call closed,  “brand supersedes everything.”  How is the GUESS brand faring compared to its competitors? Not well. Recently, competitors reported very attractive earnings as investors flocked to buy their shares. Urban Outfitters had its second quarter in a row with a positive earnings surprise, aggressively growing by 20% Year over Year as net sales jumped up by 11%. Tilly's revenue was up a whopping 20% YOY while its adjusted net income lept by an astonishing 49%.

Marketing

If brand supersedes everything, then marketing matters. GES celebrated their 30th anniversary this year with a campaign featuring the original GUESS girl, the incomparable Claudia Schiffer. Her beauty aside, I can’t help but ask the question, is it smart to remind teenagers that this is the brand of their parents’ generation?  Although they saw a bump in traffic while the campaign ran in May, it still wasn’t enough to offset the overall decline in numbers.

The other marketing surprise to me was how heavily they still rely on mailers; digital advertising was barely mentioned as an afterthought. I don’t know about you, but I don’t even bother to pick up my mail every day and when I do, I stand over the garbage and throw out all the mailers. According to the Direct Marketing Association,  responses to mailings have dropped by 25% in the past nine years and, with the rise in machine-learning based digital advertising customized to the individual, that trend is only going to continue.

Strategic Thinking?
The call raised a few other questions about how well they're strategizing in today’s marketplace. GUESS's slow quarterly sales mean that inventory levels are high and products will be sold at outlet stores rather than at retail.  There are business solutions to this: American Eagle Outfitters (NYSE: AEO)  is implementing new inventory principals to match supply and demand better with the goal of reducing markdowns. They, like Tilly's and Urban Outfitter's have relatively short cash conversion cycles compared to GUESS and Fifth & Pacific.

While GUESS acknowledged the need for some parts of their supply chain to rapidly respond to trends, the CEO (who is also the Creative Director) spoke several times about his excitement for the new handbag line because he had just finished a shoot for the spring line. It’s August. While I appreciate that he defines trends and does not follow them, this still seems pretty far into the future to seal the fate of spring shoppers. It may be the way of fashion’s past but any company that can be more nimble will better survive.

Speaking of staying up to date and aware of trends, Marciano said, “It used to be just malls. Now the factory malls are becoming extremely aggressive. In my view this is new. Maybe I am not aware about the whole market, but it's new for me.” Umm, really?

Shelve It
If you’re over 40, then you may remember how important the red and white triangular GUESS logo once was on a pair of jeans. Too many of us happily spent far too much on a pair of jeans rather than considering their real worth. If you believe that GUESS still can have this pull on the marketplace, then it could well be a buy for you. There are new opportunities on the horizon: their drive for the holidays, expansion in the Asian market, a soon-to-be-announced joint venture in Brazil, and those spring handbags.  

I’m still shopping.

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