A little over a month ago, I highlighted Guess (NYSE:GES) as an attractive play on rebounding consumer discretionary spending over the next six to 12-plus months. The rebound, boosted by abating novel coronavirus fears and normalizing consumer behavior, should support GES stock.
Since then, GES stock has rallied more than 20%. The rally is due mostly because the apparel retailer just reported second-quarter numbers. These stats broadly underscore that the company’s growth trends are rebounding.
This recovery is far from over. So is the rebound rally in GES stock which, by my numbers, has fundamentally supported runway to near $15-plus prices over the next few months.
To that end, I say stick with the rally in Guess stock. Here’s a deeper look.
Guess’ Better Than Expected Earnings
Guess’ second-quarter earnings weren’t pretty. But the numbers did come in much better than expected, and broadly illustrated that things are improving for this depressed retailer.
Revenues dropped 42% year-over-year. But that’s better than the first quarter’s 52% drop. Gross margins meaningfully recovered, from 13.2% in Q1, to 36.9% in Q2. Operating loss narrowed from $162 million in Q1, to $14 million in Q2. Inventories fell 13%. The dividend was reinstated.
Overall, Guess’ Q2 numbers were bad, but much better than Q1’s. The implication, of course, is that Guess is beginning its recovery after being slapped in the face by the Covid-19 pandemic in early 2020.
This recovery will persist for the next 6 to 12 months.
The Recovery Will Persist
Consumer spending trends have meaningfully rebounded since April, especially on discretionary items like clothes, since consumers are once again being more social and going out.
This recovery has legs, because:
- Covid-19 hysteria is abating. For better or worse, many consumers – especially young ones – are increasingly fatigued by the virus, and are now embracing risks to quasi-normal social activity. This consumer behavior will continue to promote a rebound in consumer spending.
- Consumers and businesses are mastering the Covid-19 balancing act. Society is learning how to sustain healthy economic activity while keeping virus spread relatively mitigated. Examples are mask-wearing, social-distancing and re-purposing streets and parking lots into restaurant seating. It’s smart prevention. We will only get better at this smart prevention over the next few months. And the better we get at it, the more rapidly consumer spending will rebound to pre-Covid levels.
- A Covid-19 vaccine is coming soon. It increasingly appears that a Covid-19 vaccine will arrive in late 2020 or early 2021. Broad and easy general public access will significantly improve consumer confidence in public healthy safety. This will rapidly accelerate consumer behavior normalization. In turn, it will dramatically increase depressed consumer discretionary spending.
All in all, then, consumer spending trends – especially consumer discretionary spending trends – will continue to recover. As they do, Guess’ numbers will only get better and better, and GES stock will continue to rebound.
GES Stock to $20?
My numbers indicate that GES stock could rally toward $20 over the next few months.
I believe that Guess’ sales trends will continue to improve over the next several quarters, and recover to pre-Covid levels by late 2021. Thereafter, I suspect steady demand for Guess’ trend-forward clothes will enable the company to sustain low single digit revenue growth into 2025.
Profit margins should recover to and potentially even above pre-Covid levels during that stretch because, as Guess’ CEO said himself, “…the crisis inspired our team to think differently, to challenge every aspect of the business and to architect a simpler, more efficient, capital-light and flexible model.”
In other words, emerging from the crisis, Guess will likely operate with a more efficient store base and lean more heavily into omni-channel sales while reducing labor and rent expense. Such moves should improve profit margins.
Assuming so, my modeling suggests that $1.50 in earnings per share is totally doable for Guess by 2025.
Based on a 17-times forward earnings multiple – which is typically average for apparel retail stocks – that implies a 2024 price target for GES stock of $25.50. Discounted back by 8.5% per year, that implies a 2020 price target for GES stock of more than $18.
Bottom Line on Guess Stock
Guess stock remains an attractive way to play a sustained recovery in consumer discretionary spending over the next few quarters.
I say stick with the GES stock until it pushes up toward $17 to $18.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.