Earnings Analysis: Guess? Inc. (NYSE:GES)

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Earnings Analysis: Guess? Inc. (NYSE:GES)Guess?, Inc. (NYSE:GES) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Guess? Inc.’s analysis versus peers uses the following peer-set: The Gap Inc. (NYSE:GPS), Urban Outfitters, Inc. (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO), Abercrombie & Fitch Co. (NYSE:ANF), Carter's, Inc. (NYSE:CRI), Fifth & Pacific Companies Inc (NYSE:FNP), Stein Mart, Inc. (NASDAQ:SMRT) and bebe stores, inc. (NASDAQ:BEBE). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
Quarterly (USD million) 2012-10-31 2012-07-31 2012-04-30 2012-01-31 2011-10-31
Revenues 628.8 635.4 579.3 775.8 642.8
Revenue Growth % (1.0) 9.7 (25.3) 20.7 (5.1)
Net Income 36.6 42.6 26.5 95.2 65.7
Net Income Growth % (14.0) 60.9 (72.2) 44.7 9.3
Net Margin % 5.8 6.7 4.6 12.3 10.2
ROE % (Annualized) 13.6 15.2 9.0 31.8 22.0
ROA % (Annualized) 8.6 9.7 5.7 20.5 14.3

Valuation Drivers

Guess? Inc.’s current Price/Book of 2.1 is about median in its peer group. The market expects less growth from GES-US than the median of its chosen peers (PE of 11.4 compared to peer median of 22.4) and for its current rates of return that are around peer median (ROE of 17.3%) to decline. The company attempts to achieve high profit margins (currently 7.7% vs. peer median of 6.4%) through differentiated products. It currently operates with peer median asset turns of 1.5x. GES-US’s net margin is its lowest relative to the last five years and compares to a high of 11.5% in 2011.

Economic Moat

Changes in the company’s revenues are in-line with its peers (annual revenue changed by 8.1%) but its earnings performance has been better — its annual earnings changed by -8.1% compared to the peer median of -16.6%, implying that it has better cost control relative to its peers. GES-US currently converts every 1% of change in revenue into -1.0% of change in annual reported earnings. GES-US’s current return on assets is around peer median (11.1% vs. peer median 11.1%). This contrasts with its higher than peer median return on assets over the past five years (17.2% vs. peer median 8.4%), suggesting that the company’s relative operating performance has declined. The company’s gross margin of 43.4% is around peer median suggesting that GES-US’s operations do not benefit from any differentiating pricing advantage. In addition, GES-US’s pre-tax margin of 11.6% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

While GES-US’s revenues growth has been above the peer median (8.7% vs. 1.9% respectively for the past three years), the stock’s PE ratio of 11.4 is less than the peer median. This implies that the company’s earnings are peaking and the market expects a decline in its growth expectations. GES-US’s annualized rate of change in capital of 13.4% over the past three years is higher than its peer median of -1.4%. This investment has generated an above peer median return on capital of 25.6% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.
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