Despite a 85% rise since the March 23 lows of this year, at the current price near $12 per share we believe Guess Stock (NYSE: GES) has more room to go. Guess stock has increased from $6.30 to $12 off the recent bottom compared to the S&P which moved 47% over the same time period. Gradual store openings, as well as a rebound in demand for discretionary (luxury) products, has led to the stock beating the overall markets. However, the stock is down 26% from levels seen in early 2018, over two years ago, and is well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the steady rise since the March 23 lows, we feel that the company’s stock still has potential as it will see an upswing in demand as the situation normalizes, and its valuation implies it still has further to go. Our dashboard, ‘Why Guess Stock Moved -26%?‘ provides the key numbers behind our thinking, and we explain more below.
Some of the stock price rise over the last 2 years is justified by the roughly 13% growth seen in Guess’ revenues from $2.4 billion in FY2018 (ending January) to $2.7 billion in FY2020, which was further aided by a 14.3% decline in shares outstanding due to stock repurchases worth $367 million made over this time period. Taken together, this has helped revenue per share surge by 32% from $29 in FY2018 to $38 in FY2020.
Finally, Guess’ P/S multiple grew from 0.5x at the end of 2017 to 0.6x by the end of 2019. While the company’s P/S has now decreased to 0.3x, it seems to be undervalued, when the current P/S is compared to levels seen in the past years: P/S of 0.6x at the end of 2019 and 0.5x as late as 2017. We believe the stock is likely to see a decent upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.
How Is Coronavirus Impacting Guess’ Stock?
The Coronavirus crisis has hit the apparel industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. Guess faced the brunt of the outbreak of coronavirus with the company’s revenues shrinking by nearly 52% in Q1 2021 (ending April). However, Guess has a well-diversified business, with the company deriving nearly 60% of its revenues from outside the North American region. Furthermore, the company has started re-opening its stores which should provide a boost to the company’s revenues as mall traffic returns to normal. Moreover, a resurgence in demand for discretionary products should also provide a boost to the company’s revenues. Despite the recent store openings, Guess’ revenues are likely to remain suppressed for at least a couple more quarters. To sum things up, although Guess’ revenues are likely to be lower in FY’21, Guess’ stock currently seems undervalued due to its strong underlying fundamentals and brand appeal.
Moreover, over the coming weeks, we expect improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.
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