Guess? Inc.’s Stock Should Be Worth +40% More

GES: Guess? logo

Specialty retailer Guess? Inc.’s (NYSE:GES) stock has declined by roughly 15% over the past three months. The primary reason behind this decline is the company’s significant exposure to southern Europe, a region where the impact of the sovereign debt crisis has been the most severe. Additionally, last quarter’s disappointing performance in its North American business, particularly in the accessories segment, has added to investor concerns.

We, however, believe that the decline is an overreaction and that the company is undervalued based on its fundamentals. Here are a few reasons why we believe that Guess is worth at least 40% more than what its current market price suggests.

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Initiatives in North America to increase productivity

The challenging North American business was one of the major concern for investors after its Q2 fiscal ’13 earnings release. Though the company performed relatively well in its core categories, a lack of balance in its accessories merchandise and lower traffic in its tourist locations hurt the company’s top line growth.

While Guess was clearly disappointing with its Q2 top line growth, we see this as a near-term factor. Guess is working hard on improving its accessories merchandise for the upcoming holiday season, and the continued strength in its women’s apparel lines and handbags category should help the company improve its North American comps going forward.

Additionally, G by GUESS concept stores represents a big opportunity for Guess in North America. G by Guess brand has been comping positively since 2007, and had a double digit growth during the last quarter. Guess plans to open approximately 32 retail stores in the U.S. and Canada during fiscal 2013, with the majority of these under the G by GUESS brand. Continued growth in the G by Guess brand should drive North American revenues going forward.

Opportunities in Northern Europe

While Guess continues to face significant headwinds in the southern Europe region, the company is expanding its store base in northern and eastern Europe to drive its European growth. Germany and Russia have also emerged as important new markets for Guess, with sales in both countries growing by double digits in the Q2 fiscal 13.

Going forward, we expect the company’s European revenues and comps to improve as growth in newer northern European markets such as Germany and Russia is expected to offset the declines in southern Europe.

Growth in Asia can be a big catalyst

Asia represent another big opportunity for Guess in the long-term. In Q2, Guess’ South Korean revenues registered a double digit growth driven by the addition of new stores and an increase in comps. As the brand gains more recognition along with opening of new G by GUESS and concession stores, we expect South Korea to be a major growth area for Guess.

Additionally, China has also been one of the major contributors to Guess’ growth in Asia. The company registered a 41% growth in its Chinese sales primarily due to an increase in comparable sales. Guess currently operates in China through the concession stores channel, with the latest store count standing at 161 stores. The company plans to add another 45 concession stores in China by the end of this year, which should improve Guess’ Asian revenues going forward.

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