Guess Deserves Premium Valuation, Cowen Says After Quarterly Report

Apparel company Guess?, Inc. GES reported third-quarter results Wednesday that initially sent shares tumbling lower, but Cowen said the print signals continued momentum in the brand. 

The Analyst

Cowen's John Kernan maintains a Market Perform rating on Guess with an unchanged $25 price target.

The Thesis

Kernan shared four takeaways from the Q3 print in a Wednesday note. (See his track record here.) 

They are: 

• Non-GAAP EPS of 13 cents fell short of the Street's estimate, but was within management's guidance range. Guess posted an EPS beat consensus above the EBIT line.
• The company saw positive same-store sales in all geographic regions, along with higher average unit retail sales and improved conversion.
• The Americas business grew margins by 330 basis points from a year ago due to lower markdowns, higher price points and rent reductions.
• The international business showed substantial runway, especially in Europe, Asia and China.

Guess' fourth-quarter guidance — which includes a low-single digit decline in Americas retail sales — appears conservative given recent momentum from ongoing gross margin expansion and SG&A rate deleveraging, Kernan said. 

Same-store retail sales should continue to expand by a low single digit in the Americas, while the international business looks "robust," the analyst said. 

Cowen's $25 price target is based on an 18 times multiple on fiscal 2020 estimates of $1.39, a premium to the group average of 15 times.

The premium valuation is warranted given a clear path toward 300 basis points of EBIT margin recovery over the medium term and expectations for a 2.9-percent free cash flow yield in fiscal 2020, Kernan said. 

Price Action

Guess shares were trading higher by more than 3 percent at $22.56 at the time of publication Thursday. 

Related Links:

Guess Provides 'Excellent Opportunity' To Try On A Turnaround Story, Says B Riley FBR

'The Time Is Coming' For Investors To See A Path To Guess?'s Multiple Expansion

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