The no-moat retailer is over-stored, and the brand does not resonate with consumers.
Although signs of life continue to be seen in international markets, with positive comparable sales growth in Europe and China in the third quarter, Guess
' product is still struggling in the Americas, which accounts for about 50% of company revenue (retail and wholesale combined). In the near term, we expect Guess to continue to underperform in these markets and will likely lower our $0.59 fiscal 2017 adjusted earnings per share estimate to within the company’s lowered guidance of $0.42 to $0.52. We also plan to reassess our estimate for mid-single digit Americas Retail revenue growth in fiscal 2018, noting that the company now sees Americas retail revenue down in the low to midsingle digits for this year and is contemplating shuttering 50 additional stores (about 9% of total current Americas store count). Therefore, we see our $18 fair value estimate declining about 5%, and still don’t view the risk/reward profile of the shares as attractive at current levels.
Bridget Weishaar is a senior equity analyst for Morningstar.
Looking at the long term, we continue to think that Guess is over-stored and that the brand does not resonate with consumers, yielding a lack of pricing power (the basis for our no-moat rating). We see the stock as adequately pricing in this brand weakness and the risks attached to the company’s aggressive brick-and-mortar store growth plan (store count expected to increase by about 50% over the next three years). In our opinion, management's expectations for 11% compound annual revenue growth and 20% compound annual EPS growth over the next three years seem a bit ambitious given that third-quarter revenue was up only 3% and earnings per share were $0.11 versus $0.15 in the prior year. Therefore, we feel that it is best to err on the side of caution, with our forecast calling for low-single-digit top-line growth on average annually over the next five years and mid-single-digit EPS growth as leverage from revenue improvement is somewhat offset by the higher costs of running the store base.
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