Guess? Inc.: On Sale

published 27 February 2006

Guess? Inc. reported record profits last week for the year ending December 31, 2005 -- and its price plunged from more than $46 to $37. Why? Because management offered conservative guidance on first quarter 2006 profits. But Zacks Equity Research thinks the selloff offers a terrific buying opportunity.

Guess (symbol GES) designs, sells and licenses casual apparel, especially denim, in the U.S. and abroad. The company operates 315 stores -- up 10% from last year -- and also sells its jeans over the Internet, to other retailers and via licenses for watches, handbags, shoes and the like. "Guess remains a popular brand for customers seeking denim fashions and accessories," says Zacks. "This is helping the company enjoy the favorable fashion cycle for denim and leading to strong sales growth."

The numbers look good. Zacks expects per-share earnings to increase from $1.31 last year to $1.56 in 2006 and $1.90 next year. That gives the stock a price-earnings ratio of 24 on this year's estimate, and 20 on next year's. That's cheap measured against Zacks' forecast of several years of 20% earnings growth. The growth is being driven, Zacks says, not only by sales growth, but also by manufacturing efficiencies that are increasing profit margins. Zacks expects Guess to post double-digit operating margins the next three years.