From Value to Momentum

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Monday April 30, 2018

As most investors know, clothing retailers have been suffering. A cross-section in the sector has gone bankrupt while countless others have slimmed down by closing stores and reducing space in existing outlets.

Stock prices of these companies have either been relegated to the trash bin of history or been placed undesirably into the petite section. But one clothing retailer has been thriving. Care to guess which one?

Well, if you named Guess?, then f�licitations. The stock was trading under US$10 a year ago and is now situated around US$23, defying the odds. What gives?

The trajectory has not been smooth, to be sure. In February, supermodel Kate Upton alleged that Guess co-founder Paul Marciano sexually harassed her when she was 18 years old. He has vehemently denied the accusations. Whether true or not, the stock price plunged about 25 percent, erasing around US$350 million of market capitalization.

Meanwhile, Mr. Marciano has stepped aside from day-to-day activities and may return, depending on how this plays out.

However, the stock price recovery was swift as March earnings eclipsed both analysts’ and management projections, with revenue up a hefty 18 percent over the same month a year ago and earnings per share exceeding projections. That news excited investors.

On a quarterly basis, there were negatives as the new US tax regime caused a US$24.9 million beating, with the repatriation of overseas capital dinging the bottom line for another US$23 million. Bringing this cash home is important to feed the fat quarterly dividend of US22.5 cents.

In addition, the money is needed for the stock buyback program; US$31 million worth of shares were repurchased last quarter. Given that the stock price is around double the book value of US$11.27, from this vantage point repurchasing shares is a dubious allocation of capital.

Overall, insiders are well vested, owning better than 30 percent of the company, which helps to align their interests with shareholders. However, they have been selling some of their positions over the past six months.

Looking forward, prognosticators have much to cheer about — if the outlook comes to pass. North America has been the weak arm of the enterprise and while losses are expected, the hope is that they will be at a diminished rate. The closing of 20 to 25 stores on this continent will certainly sully the bottom line in the short term, but eliminating the weak-kneed operations should help at the end of the day.

Meanwhile, Asian and European revenue growth, which soared by 40 percent over the past year, is anticipated to continue with the opening of 50 to 60 stores overseas.

On another note, some money will be saved on the legal front as a nine-year trademark dispute over a “G” logo with Gucci has been settled. Terms were not publicly disclosed, but Gucci was seeking US$221 million, of which US$4.1 million was awarded in 2012. (Benj is now postulating what the “G” in Gallander might be worth.)

Our purchase price of the stock was at US$12.86, toward the end of 2016. The goal is to sell at no less than US$31.50. In its heyday, the stock traded north of US$50.