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Guess? Has the Answers

By Seth Jayson – Updated Nov 16, 2016 at 1:18PM

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Another very good quarter for the comeback clothing retailer sends shares spiking.

When it comes to second-guessing Guess? (NYSE:GES), I 'm not sure anyone, analysts or investors, should bother. The problem is this: No one seems to have a bead on just how well the company has been executing of late.

The fashion retailer surprised Wall Street yet again by blowing far past earnings estimates in the recently completed third quarter. While the Wise figured Guess to come up with $0.37 a stub, earnings per share actually climbed 70% to $0.46, on a 34% revenue increase. And that number includes a special compensation expense of $0.06 per share, related to some rejiggering in the licensing segment.

To be fair, I never expected Guess? would club it that far out of the park either, but since buying shares a while back, I've learned not to overthink this investment. While others might worry every tiny apparel industry hiccup (Too much denim? Embargo troubles?), I keep my eyes on the big picture.

As before, the good results continue to come for all the right reasons: improving sales via store openings, improving comps sales, more profitable product lines. As the revenues increase, the firm's getting some leverage, which is sending margins ever higher. Gross margin clipped up 5.1% to 43.1%, while operating margin reached 13% vs. 10.2% last year.

The firm is producing good cash flow, which is a handy thing since it's planning to continue expanding both in North America and worldwide, through a combination of retail locations and licensed stores for apparel, plus newer, Marciano concept for women and a fast-growing accessories business.

That's why, despite the big rise, and despite the pricey looking trailing P/E, I think I'll be hanging onto my shares. I believe management's doing all the right things, and those growth opportunities look good.

For one thing, the brand is well positioned, by which I mean unique. It's hard to come up with a direct competitor to this company. Sure, Buckle (NYSE:BKE), Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NASDAQ:AEOS) are fishing from the same customer pool on the lower end of the age demographic, while Gap (NYSE:GPS) and Ann Taylor (NYSE:ANN) Loft compete for shopping dollars at the higher end, but they're working very different looks. To judge by the reduction in promotional sales at Guess?, the brand's European appeal seems to be resonating with shoppers.

Investors looking to get in on this continuing growth/comeback story would do well to read the filings carefully and listen to the conference calls. Because Guess? does a lot of business in Europe, where there is a different shopping and fashion cycle, and its seasonality isn't the same as it is for U.S.-only retailers. And given a prior-year acquisition of a former licensee, prior-year figures for revenue, earnings, and balance sheet items like receivables aren't directly comparable.

But there's a lot to like behind these numbers, which is why the only guess I'm willing to make about the future is that this company's management will continue to get it done, and that will pay off for shareholders.

For related Foolishness:

The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our Foolanthropy discussion board through Nov. 6. For guidelines on what makes a charity Foolish, visit www.foolanthropy.com .

Seth Jayson is glad his wife let him in on the Guess? story. At the time of publication, he had shares of Guess? and American Eagle Outfitters, but no position in any other company mentioned. View his stock holdings and Fool profile here . Gap is a Motley Fool Stock Advisor recommendation. Fool disclosure rules are here .

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.47 (-4.40%) $0.39
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27
The Buckle, Inc. Stock Quote
The Buckle, Inc.
BKE
$32.24 (-0.80%) $0.26
Guess?, Inc. Stock Quote
Guess?, Inc.
GES
$15.07 (-3.58%) $0.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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