Product, marketing, and supply chain changes are hitting their mark and will continue to drive future top-line growth.
By Bridget Weishaar | 08-24-17 | 09:00 AM | Email Article

No-moat Guess appears to have found its stride, posting its fourth quarter of positive revenue growth (up 5%) and achieving higher-quality of sales with gross margin increasing 40 basis points to 34.5%. Given the consistency in improving the top line over the last year, we believe that product, marketing, and supply chain changes are hitting their mark and will continue to drive future top-line growth. Further, we were encouraged to hear that management plans to accelerate store closures in the U.S. as we believe this remains a significant overhang on the ability to reach its goal of a 7.5% adjusted operating margin. Management now expects to close 70 stores this year (up from 60) and also recently executed an agreement with a landlord to restructure their terms of 26 of the leases with expirations now occurring in less than 24 months. In the long run, we see the U.S. as a percentage of global sales falling to 25% from under 36% currently.

Bridget Weishaar is a senior equity analyst for Morningstar.

We expect to increase our $13.50 fair value estimate by 7%-8% to account for the better-than-expected growth in Europe and Asia as well as the resulting operating margin increase from leverage. That said, we still see operating margin remaining below the 7.5% level as the U.S. remains an overhang on performance. Therefore, we still see average annual revenue growth in the 6% to 7% range over the next five years, but now expect operating margin to reach around 5% versus our current model calling for 4% in fiscal 2022.




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