Bargain hunting is all about finding business models that work. In the clothing retail space, one category that appears to be immune to the weakness in the economy is on the high end. The rich continue to spend money, boding well for companies like Guess (NYSE:GES) to grow profits no matter what transpires in the future.
On Aug. 24, Guess reported profits for the quarter ending July 31. For the period, the company generated earnings of 84 cents per share. That beat the average Wall Street estimate by three cents per share. That makes several quarters in a row of such outperformance. Of course, investors shrugged as guidance for the future was a bit less than expected.
Does the lowered guidance really matter? I don’t think so. For the full year ending Jan. 31, 2012, Guess expects a profit range of $3.25 to $3.35 per share. The Wall Street estimate had been for annual profits of $3.43 per share. For the following year, the Wall Street estimate is for profits of $3.82 per share.
Using the midpoint of company guidance, or $3.30 per share, Guess trades for just nine times current fiscal year profit expectations. With Wall Street profit growth estimates of 16%, the stock is extremely cheap even if earnings miss by a few cents per share. I would use any selling in the stock as an opportunity to buy.
In a volatile market, the tide can change quickly. One of the best-performing clothing retailers in 2010 was teen retailer Zumiez (NASDAQ:ZUMZ). Shares doubled in value as the company’s profits exploded. 2011 has been entirely different. Shares are down 33% this year.
I know trends can change quickly in the fashion business, but has anything really changed for Zumiez? I don’t think so. The company’s line of clothing, and snowboarding and skateboarding gear, is as desirable as before. The problem for investors is earnings growth momentum has slowed. Add in the prospects of a double-dip recession and you have a stock that is now cheaply priced.
At the end of August, Zumiez reported earnings for the quarter ending July 31. Once again the company beat earnings estimates, as it has done for multiple quarters now. As it was for Guess, the current-quarter outlook for Zumiez was light. That weak guidance was all it took to take the luster off an otherwise strong report.
After the report, Wall Street estimates were ratcheted lower. Still, the company is expected to make $1.05 per share for the current fiscal year ending Jan. 31, 2012. For the following year, Wall Street has earnings growing at a 20% clip, to $1.26 per share. With shares trading for 17 times current-year estimates, Zumiez is a bargain. I would buy the stock at these prices.
Jamie Dlugosch does not hold positions in any of the stocks mentioned.