I recently wrote about weakness in the consumer discretionary sector (XLY). Pandemic era excess savings have evaporated, consumer sentiment is at a six-month low of 67.4 and retail sales are stagnant. Any company flourishing under these conditions must be doing something right.
Guess? (NYSE:GES) therefore caught my attention as it broke to new 10-year highs in April.
Relative Strength in GES
There are a lot of consumer discretionary and apparel stocks in downtrends. Inflation has pressured margins and dampened consumer spending. Yet, GES managed to break out and made a new 10-year high as recently as April.
The new high above $31 led to an aggressive reversal and GES is now making a sharp dip, but this could be a buying opportunity if the underlying fundamentals remain positive.
GES – Impressive Q4 and FY ’24
FY 2024 results were released on March 20th and included the crucial holiday season sales results. Q4 was impressive.
Revenues Increased to $891 Million, Up 9% in Both U.S. Dollars and Constant Currency Delivered; Operating Margin of 16.3%; Adjusted Operating Margin of 14.6%GAAP EPS of $1.71 and Adjusted EPS of $2.01
Indeed, the board was so pleased they declared a Special Dividend of $2.25 per share. Q4 capped a solid year with revenue growth of 3%.
Paul Marciano, Co-Founder and Chief Creative Officer, talked about GES’s “brand elevation strategy” and it appears it is working. Guess? has positioned its brand in a sweet spot – not too luxury or expensive to be out of reach for Gen-Z, but still exclusive and fashionable. My sixteen-year-old son has several Guess T-shirts and rotates them with Calvin Klein and Hugo Boss when he goes out with friends.
Due to the approval of Gen-Z, GES has good pricing power. Margins in Q4 were a major plus.
GAAP operating margin in the fourth quarter of fiscal 2024 increased 3.6% to 16.3%, from 12.7% for the same prior-year quarter, driven primarily by higher revenues and initial markups and lower expenses, including a net positive impact from the settlement of a previously-disclosed stockholder derivative lawsuit, partially offset by the unfavorable impact of currency and higher markdowns.
Over FY ’24, margins were flattish, but this can be seen as a positive in a high inflation environment. GES have managed to maintain their margins through higher initial markups and controlling expenses. I recently wrote about Burberry (OTCPK:BURBY) who saw margins collapse from 20.5% to 14.1% in FY ’24.
EPS has climbed to $3.158 which was last achieved in 2012. This gives GES a PE ratio (TTM) of 12.9.
This would be an attractive valuation if GES were set to grow at a similar pace in FY ’25. Unfortunately, the outlook is less rosy.
Dark Clouds on the Horizon
Guidance for FY ’25 is mixed. Revenue growth is projected to continue in the low single digits, but a number of headwinds are expected to hurt margins and EPS.
Q1 margins are expected to be negative. When asked about this in the earnings call, COO/CFO Markus Neubrand had this to say:
…the Red Sea crisis has an impact on our freight rates and on the inbound costs that we have incorporated in today’s guidance, where we expect increasing freight rates, especially in the first-half of fiscal year 2025, and then they were expected to be moderated in the second-half of fiscal year 2025.
Markus said this back in March, but the situation in the Red Sea has not improved.
The acquisition of rag and bone – the first acquisition ever for Guess? – will also likely distort some of the results.
…rag & bone acquisition, we expect that it will be modestly accretive, so there will be some margin dilution from rag & bone. And there are some other benefits that we’ve incorporated in our guidance, like the KYDC, Kentucky DC operations that have been outsourced to a logistics partner. All of this has been incorporated in the guidance we’ve been giving in operating margin that we see between 7.5% and 8.5% for fiscal year 2025.
North American sales have been a weak spot too, and with consumer data on the slide, it could get worse.
EPS for FY ’25 is expected to dip into the $2.56-$3.0 range.
Putting it All Together
Long-term, GES is in a solid position. Growing revenues and steady margins are an attractive prospect in a sector where many companies are struggling. Most important of all, Guess? is fashionable with Gen-Z and the brand sits in a sweet spot for high street sales.
In the near-term, expected headwinds in H1 ’25 are leading to a dip. This looks justified as EPS could contract 20%. But where exactly would GES offer an attractive entry?
The price has already dipped 30% from the April high into $24 which is potential support at the 200dma and the 50% retrace of the 2022-2024 rally. It is also the area of the 2023 highs.
This looks like an attractive entry, although Q1 results are due out on Thursday, May 30th. $577M revenue is expected, alongside EPS of $-0.38. This has set the bar pretty low and could lead to a beat. Furthermore, the 30% decline since the April high has priced in at least some of the expected bad news. The risk is a miss or weak guidance could break $24 and the next compelling support level is at $20.2.
Personally, I like GES, but industry headwinds mean I am in no rush to risk buying ahead of earnings. I will either buy above $24 if the release is positive, or near $20 if it is negative.
Conclusions
Relative strength in GES reflects its strong long-term fundamentals. The near-term dip should be a buying opportunity as industry headwinds should be temporary and improve in H2 ’25. Whether the dip continues to $20 or reverses from $24 likely hinges on earnings later this week and revised guidance.
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