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Guess Looks Like a Compelling Buy on the Dip

Retail stocks have had a rough run in 2020. Guess (NYSE:GES) stock has been no exception to the trend.

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Source: Shutterstock

As the novel coronavirus pandemic has shut down physical shopping locations across the globe and killed consumer discretionary spending, Guess has seen its sales, margins, profits and stock price crumble this year.

In the first quarter of 2020, Guess’ revenues dropped 52% year-over-year. Gross margins plunged from 34% to 13%. What was an adjusted loss of just ~$20 million in the year ago quarter, widened to an adjusted loss of almost $120 million in the first three months of 2020.

GES stock has, in response, dropped more than 50% year-to-date. Shares now trade at their lowest levels since 2005.

Believe it or not, though, I think it’s time to buy the dip. For three big reasons. Here’s why.

GES Stock Is Fundamentally Undervalued

Fundamentally, GES stock is fully priced for all the bad stuff that’s happening today, but not at all priced for all the good stuff that’s going to happen tomorrow.

Yes, no one is buying trendy Guess apparel today. Consumers aren’t leaving their homes, let alone socializing. We don’t need to look good for parties or hangouts or dates.

But the reality we live in right now – the Covid-19 quarantine world – will not last forever.

A Covid-19 vaccine will get approved and administered. When that happens, the threat of Covid-19 will be greatly diminished. The world will gradually normalize. Shops will open back up. Hangouts of people larger than 10 people will be permitted again. Parties. Hangouts. Dates. All of that stuff will happen again.

And when it does, consumer demand for trendy Guess apparel will rebound. Sharply. I’m talking potentially 15%+ sales growth in 2021, and healthy sales growth thereafter. This will be supported by Guess expanding more aggressively in under-penetrated geographies like China and Japan; leaning more heavily into digitization and data to add relevant shopping touch-points like recommended products emails and geo-location push messaging; and pivoting toward a direct retail model for better brand equity control and stronger demand generation.

All in all, then, Guess will get “back to normal” in 2021/22.

When things are normal, GES stock trades around 0.6-times trailing sales. Today, the stock trades at just 0.3-times trailing sales.

Thus, boosted by multiple expansion and better-than-expected numbers over the next few quarters, I think it is quite realistic for GES stock to double.

Catalysts on the Horizon

There are a few upside catalysts on the horizon for GES stock which could meaningfully improve investor sentiment and drive this undervalued stock higher over the next few months.

First, above all else, there’s the Covid-19 vaccine news flow. This news has been overwhelmingly positive in recent months. I suspect it will continue to be over the next few months, too. Each step we get closer and closer to a vaccine, increases the visibility and likelihood of a 2021/22 rebound in Guess’ sales and profits.

Ultimately, then, continued favorable developments on the Covid-19 vaccine front should help improve retail investor sentiment into the end of the year. That’s especially true if, during that time, one of the vaccines scores FDA approval and starts being administered broadly.

Second, it appears that a second round of stimulus checks will go to U.S. consumers in August. That’s good news for Guess, because about 20% of consumers spent their first stimulus checks on clothing. This second round of checks could, then, provide a temporary boost to depressed second-half 2020 sales trends.

Third, Guess is a global company. More than 70% of sales come from outside the U.S. In those geographies (namely, Canada,  Europe, China and Japan), the Covid-19 pandemic is under much better control than it is in the U.S. Those economies are in the process of normalizing. It’s quite likely that retail sales in those geographies significantly recover in the second half of 2020, which will help lift Guess’ overall growth trajectory.

Favorable Technicals

The technical picture for GES stock is actually meaningfully improving.

Specifically, the stock has been on a solid upward trajectory for several months. So much so that the 20- and 50-day moving averages are sloping upward, and the 100- and 200-day moving averages are starting to flatten.

These dynamics imply that GES stock is on a solid albeit gradual upward trend, which started in March.

Assuming the news flow remains favorable, I suspect this uptrend will persist for the foreseeable future.

Bottom Line on GES Stock

I totally understand that GES stock seems like a tough buy here. But it’s also the right buy.

The stock is significantly undervalued. There are favorable catalysts on the horizon which could meaningfully improve the company’s growth trajectory over the next 12+ months. And the technical picture is starting to scream “BUY” signals.

All in all, then, I think it’s time to buy the dip in GES stock.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/guess-looks-like-a-compelling-buy-on-the-dip/.

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