Fashion retailer Guess?, Inc. (NYSE:GES) just reported first quarter numbers, and they weren’t that great. Revenues came in above expectations, but earnings simply met expectations. The fiscal 2019 guide was also light, coming up short of expectations on both next quarter and full-year earnings.
In response to those numbers, GES stock is down 10% as of this writing.
In the bigger picture, though, Guess is in the middle of a huge, multi-quarter rebound which is powered by improving results in the Americas segment, red-hot growth in Asia and vastly improving profitability. Even with this recent selloff, GES stock is still up 30% year-to-date and 85% over the past year.
Clearly, this is a retail winner in the bigger picture. When a retail winner hits a near-term snag and the stock sells off, that is usually a good time to buy the dip.
Is that the case with GES stock?
I think so. I don’t think shares are terribly undervalued after this post-earnings selloff. But further weakness should be viewed as a buying opportunity. The big picture is still positive for GES, supported by improving top- and bottom-line results.
Here’s a deeper look.
The Quarter Wasn’t Great
Overall, the first quarter numbers for Guess weren’t that great.
Sales rose 8%, which is less than the 10% rise they posted in the fourth quarter. While Asia reported a robust retail comparable sales increase of 15% versus 8% last quarter and 2% one year ago, the Americas and Europe segments were much weaker. Retail comparable sales rose just 1% in both of those segments.
The 1% comp in Europe isn’t a red flag. It is slower than last quarter’s 6% comp, but it builds on an 11% comp in the year-ago quarter. Thus, on a two-year basis, comparable sales are up 12% in Europe.
But the 1% comp in Americas is a red flag. In the year-ago quarter, comparable sales in the Americas fell 15%. Thus, on a two-year basis, comparable sales are down 14% in the Americas.
Moreover, although operating margins continued to expand in the quarter and are expected to keep expanding through the balance of the year, the earnings guides for both next quarter and the full year missed expectations. On top of weak Americas results, that led investors to hit the sell button following the quarterly numbers.
But the Big Picture Is Still Good
Although the two-year stack comp in Americas of -14% is ugly, that struggling segment is rebounding, albeit at a snail’s pace. Retail comps were up 1% in the quarter, and that is a sign that Americas sales might have bottomed.
Elsewhere, the rest of the Guess growth narrative is quite strong.
Asia growth is red-hot, mostly due to increased brand awareness and a healthy partnership with Alibaba Group Holding Ltd (NYSE:BABA). Europe growth is healthy.
Operating margins continue on their rebound trajectory, as lower markdowns, higher product margins, rent reductions and SG&A leverage are driving consistent year-over-year margin increases in the ~80 basis points range. This is expected to continue, with operating margins guided to rise another 80 basis points this year.
Overall, then, the Guess rebound narrative is still intact. Sales growth is positive. Asia remains red-hot. Europe is healthy. Americas is climbing back, albeit at a slow space. And operating margins continue to normalize higher.
10% Upside to Fair Value
Robust strength in Asia will cool down thanks to tougher laps but should remain strong thanks to the partnership with BABA. Europe growth should remain healthy in the low single-digit range. Americas growth should come back into the picture and match Europe growth in the low single-digit range.
Meanwhile, operating margins should keep normalizing higher. A few years back, they were in the 10%-plus range. Now, they are rebounding from 3.6% in fiscal 2018 at a ~80 basis point per year pace.
Altogether, it is reasonable to assume that Guess is a 4-5% revenue growth story with healthy margin drivers that should be able to drive operating margins to 7.5% in five years. Under those assumptions, I think it is likely Guess reports somewhere around $2.10 in earnings per share in five years.
A market-average 16-times forward multiple on $2.10 implies a four-year forward price target of $33-34. Discounted back by 10% per year, that equates to a present value of roughly $23 for GES stock (~15% upside from current levels).
Bottom Line on GES Stock
The Guess rebound narrative hit a snag with middle-of-the-road first quarter numbers. But the overarching growth narrative still features positive revenue growth alongside healthy margin expansion, and that should be enough to send GES stock higher from today’s post-earnings levels.
As of this writing, Luke Lango was long BABA.