Why Guess’ Stock Has Traded Sideways The Last Four Years

December 18th, 2019 by Trefis Team
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Guess’ (NYSE: GES) stock price has remained flat around $20 since January 2016 mainly due to the contraction of the P/E multiple, partially mitigated by growth in revenue and lower share count. Moreover, asset impairment and other one-time charges have weighed on the company’s margins, adversely impacting the company’s stock price. Additional details about factors impacting the company’s stock price movement are available in our interactive dashboard Why Guess’ Stock Has Stayed Around $20 Since Early 2016, parts of which are summarized below.

 

#1. Revenues Grew 20% From $2.2 Billion In Fiscal 2016 to $2.6 Billion In Fiscal 2019 And Are Expected To Grow Nearly 4% In FY 2020 (ending January 2020). The Biggest Change Has Been Driven By The Company’s Europe Segment, Which Is Expected To Add Nearly $500 Million From Its 2016 Levels

  • Guess has added more than $425 million to total revenue since 2016 at an average annual rate of 6.1% thanks to rising comparable-store sales and e-commerce sales in both Europe and Asia (especially China), growth through digital initiatives, its well-positioned customer-centric strategies, as well as by building its omni-channel capabilities.
  • Europe has been the company’s fastest-growing segment, adding roughly $420 million to total revenues since 2016 at an average annual rate of 16.5%. This growth can be primarily attributed to an increase in store count, higher shipments in the wholesale business, and comparable sales growth.
  • However, Guess’ Americas retail segment has been a drag on the company’s performance, losing more than $150 million in total revenues over the last three years, with the segment’s revenue declining at an average annual rate of 5.7%.
  • Going forward, we expect Guess to achieve steady revenue growth, with the company’s revenue increasing by 3.7% (y-o-y) to $2.7 billion in FY 2020, primarily driven by the growth of its Europe segment which is expected to cross $1.2 billion mark.
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#2. Net Income Margin Has Steeply Decline Over The Years Due To Rising SG&A Expenses, As Well As Asset Impairment And Other One-Time Charges. However, This Metric Is Expected To Expand By More Than 330 Basis Points In 2020 And Reach Its 2016 Levels

  • Guess’ net income has declined more than 80% over 2016-19, falling from $82 million in fiscal 2016 to $14 million in fiscal 2019 driven by an increase in the selling, general & administrative expenses.
  • Moreover, asset impairment and other one-time charges incurred over FY 2016-19, have impacted the company’s net income figure. As a result, the company’s net income margin has contracted by 320 basis points, falling from 3.7% in fiscal 2016 to just 0.5% in fiscal 2019.
  • We expect Guess’ net income margin to rapidly expand and touch 3.8% in FY 2020 led by a combination of lower expenses (as % of revenue) and a lower effective tax rate. Additionally, steady growth in revenues will further aid the company’s net margin expansion.

#2.1 Total Expenses Increased From $2.1 Billion In Fiscal 2016 To $2.6 Billion In Fiscal 2019. Total Costs As A Percentage of Revenue Have Increased From Around 96% In 2016 to 99.3% In 2019. However, This metric is expected to decline to 96.2% in 2020

#2.2 EPS Has Also Tracked The Company’s Net Income, Falling In Excess Of 80% Over 2016-2019

  • Guess’ EPS has gone down from $0.97 in fiscal 2016 to $0.17 in fiscal 2019 mainly due to higher expenses (as % of total revenue), partially offset by steady revenue growth and lower share count.
  • No. of shares declined from 84.5 million in fiscal 2016 to 81.6 million in fiscal 2019, amid the company’s authorized employee share purchase plan to buy $500 million worth of common shares.
  • We expect Guess’ adjusted EPS to reach $1.25 in 2020 and shares outstanding to further decline to 81 million.

 

#3. Price To Earnings Multiple for Guess Has Been Highly Volatile, Ranging From 22x in 2016 to Almost 130x in 2019. Per Trefis estimates, Guess’ Estimated Forward P/E Multiple Is Around 16.7x

  • Guess’ P/E multiple has been highly volatile, ranging from 22x in 2016 to 130x in 2019. Moreover, the company’s multiple in 2018 was not meaningful due to losses.
  • This compares with Abercrombie & Fitch, which saw it’s P/E multiple trade in the range of 20x to 333x during the same period. Notably, Abercrombie’s share price has lost nearly 40% of its value over the same time frame, falling up from around $29 levels in January 2016 to around $17 in December 2019.
  • Details about our forecast for Abercrombie & Fitch’s P/E multiple are available in our interactive dashboard.

To summarize, the reasons behind Guess’ relatively flat stock price between early 2016 and now can be broken down to the following changes in key operating metrics:

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