Is The Market Pricing Guess Appropriately?

by Trefis Team
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Guess (NYSE: GES) has seen decent growth in its top-line and steady profits for the past several years.  This growth has been driven by its 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, and the building of its omni-channel capabilities. Despite the decent growth, the company’s stock price has remained flat around $20 since January 2016. Although Guess’ stock is trading north of $21, we believe that the company’s stock is slightly overvalued and estimate Guess’ valuation to be around $21, which is roughly 5% below the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current fiscal year.

Below we provide a detailed explanation of the key factors that could impact the company’s valuation.

Europe Is Guess’ Most Valuable Business

  • Europe has been the company’s fastest-growing geographical segment. Europe has added roughly $420 million to total revenues since 2016 at an average annual rate of 16.5%.
  • As a result, Europe’s contribution to Guess’ revenues has increased from 33% in 2016 to roughly 45% in 2019-helping the division in becoming the company’s largest division.
  • This growth can be primarily attributed to an increase in store count, higher shipments in the wholesale business, and comparable sales growth.
  • We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 5.5% to $1.2 billion in FY ’20, likely to be driven by very strong performance across all channels.

Americas Retail Business Is Expected To Return To Growth

  • Americas retail has lost more than $155 million in total revenues over the last three years, with the segment’s revenue declining at an average annual rate of 5.7%.
  • The adverse impact of the closure of a number of stores over recent years, due to lower customer traffic in brick-and-mortar stores, has been the primary reason for the fall in revenues. However, this decline has been partially offset by an upswing in online retail sales.
  • We expect this declining trend to reverse, with the segment’s revenues growing by 2% to $841 million in FY’20. However, the segment’s contribution is expected to slide to 31% due to the faster growth of other segments.

FY 2020 Is Likely To Be Guess’ Most Profitable Year Since 2014

  • Guess’ net profit was just $14 million in FY 2019, with the company reporting a net margin of just 0.5%. The company’s net profit is likely to witness a jump in FY’20, with the company’s profits growing to more than $100 million, with a net margin of 3.8%.
  • This is likely to be driven by strong revenue growth, as well as the absence of a $45.6 million fine imposed by the European Commission on Guess in fiscal 2019.
  • Moreover, Guess’ total operating expenses are expected to decline by 6% in 2020 due to a reduction in SG&A as well as restructuring and impairment charges.

Per Trefis estimates, Guess’ adjusted EPS for 2020 is likely to be $1.25. Taken together with a P/E multiple of 16.7x, this works to a fair value of $21 for Guess’ stock, which is roughly 5% behind the current market price.

We highlight how Guess’ P/E multiple has trended over the years, and compare this key metric with that for its peers Gap, L Brands, and Urban Outfitters in our interactive dashboard.

 

See all Trefis Price Estimates and Download Trefis Data here

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