The consumer discretionary sector has faced significant challenges, with pandemic-era excess savings evaporating, consumer sentiment at a six-month low of 67.4, and stagnant retail sales.
In such an environment, companies that manage to flourish must be doing something right. Guess Inc. (GES) is one such company, recently hitting new 10-year highs in April, despite the broader sector’s struggles.
Relative Strength in GES
Many consumer discretionary and apparel stocks have been in downtrends due to inflationary pressures on margins and reduced consumer spending. However, GES has managed to break out and achieve a new 10-year high.
Although the stock has seen a sharp dip recently, this could present a buying opportunity if the company’s underlying fundamentals remain strong.
Impressive Q4 and FY 2024 Performance
In its FY 2024 results, released on March 20th, GES reported significant achievements:
- Revenues increased to $891 million, up 9% in both U.S. dollars and constant currency.
- Operating margin was 16.3%; adjusted operating margin was 14.6%.
- GAAP EPS was $1.71, and adjusted EPS was $2.01.
The company’s board declared a special dividend of $2.25 per share, reflecting confidence in its financial health. Q4 capped a solid year with revenue growth of 3%.
Paul Marciano, Co-Founder and Chief Creative Officer, highlighted GES’s “brand elevation strategy,” which appears to be effective. Guess? has positioned itself as an attractive brand for Gen-Z, not too expensive but still fashionable and exclusive.
This positioning has granted GES significant pricing power, enabling it to maintain healthy margins.
Long-Term Strength and Near-Term Challenges
GES’s margins were a major plus in Q4. The GAAP operating margin increased from 12.7% to 16.3%, driven by higher revenues, initial markups, and lower expenses.
However, despite maintaining margins in a high inflation environment, there are some headwinds expected in FY 2025.
Guidance for FY 2025
The company projects continued revenue growth in the low single digits but expects margins and EPS to face pressure. Q1 margins are expected to be negative due to increased freight rates, particularly in the first half of the fiscal year.
Markus Neubrand, COO/CFO, mentioned the impact of the Red Sea crisis on freight costs, a situation that has not improved.
Additionally, the acquisition of rag & bone, the first acquisition for Guess?, is expected to be modestly accretive but could also cause some margin dilution.
Despite these challenges, GES aims for an operating margin between 7.5% and 8.5% for FY 2025.
Regional Performance and EPS Outlook
North American sales have been weak, and with consumer data on the decline, this could worsen. The company expects EPS for FY 2025 to be between $2.56 and $3.00, a potential decrease from FY 2024.
Market Position and Valuation
Despite near-term challenges, GES is well-positioned for long-term growth. The brand’s appeal to Gen-Z and strategic positioning in the market bode well for future performance.
Currently, GES has a PE ratio (TTM) of 12.9, which is attractive if the company can sustain its growth trajectory.
The price of GES has dipped 30% from the April high to around $24, which is potential support at the 200-day moving average and the 50% retracement of the 2022-2024 rally.
This could be an attractive entry point, although Q1 results expected on May 30th will be crucial. The market expects $577 million in revenue and an EPS of $-0.38, setting a low bar that could lead to a beat.
Current Dip May be a Buying Opportunity
GES’s relative strength reflects its solid long-term fundamentals. The current dip presents a potential buying opportunity as industry headwinds are expected to be temporary, with improvement anticipated in the second half of FY 2025.
The stock’s future direction likely hinges on the upcoming earnings report and revised guidance. Whether it reverses from $24 or dips further to $20 will depend on these factors. Investors should consider these points carefully when evaluating GES as a potential investment.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
