Ask investors to name a hot fashion or apparel stock over the past year, and you'll probably get names that include Zumiez (NASDAQ:ZUMZ), Volcom (NYSE:VLCM), True Religion (NASDAQ:TRLG), or maybe even resurgent American Eagle Outfitters (NASDAQ:AEOS).

Now take a look at this chart. Guess? (NYSE:GES) has thumped every one of them.

A lot of you are probably thinking, "How's that possible? It's a washed-up brand!"

Well, it's exactly that kind of thinking that makes it possible. The market still doesn't get Guess?, which is why I've been stumping for the company for quite a while now. This is a simple story of a reformed apparel company that is still making great strides in its operations, with the result that even mediocre sales growth brings impressive benefits to the bottom line. And Guess? has had much better than mediocre sales growth.

Just-released third-quarter numbers tell the tale. Net revenues increased 31%, but net earnings per share were up 120%. That's what happens when you get leverage in a well-run business. When operating margins jump 7.8 percentage points year over year, the earnings spigot opens up all the way.

Only days back, I said that I didn't think Guess? was necessarily a good buy at current prices. (And I own the stock.) The market is making me eat those words today, with shares up some 15% already. And here's why Guess? is worth more than most of us imagined:


I've discussed in the past how Guess? obtains higher-margin sales in Europe, but I completely underestimated the pace of growth there, as well as the opportunity to improve margins. For this quarter, Europe provided nearly one-third of the revenues but more than half of operating earnings.

That bodes well for Guess? shareholders for a few reasons. The company is planning to remedy its lack of penetration in key European markets such as Spain, Germany, and the U.K. It's also expanding into the emerging economies of Eastern Europe. Oh, and we can add South Korea and China to the list of countries where Guess? is working with partners toward a goal of 500 non-North American stores by the end of 2007. That provides some pretty valuable geographic diversification at a time when many of us are wondering whether the American consumer is about to tighten the purse strings.

Of course, I expect that Guess? still won't get as much respect from investors. Newer, more exciting concepts will get all of the attention, and potential investors will look to misleading metrics like the P/E. Guess?, in fact, is massively shorted and is a one-star stock in Motley Fool CAPS.

That's just fine with me. I've been hearing the same, shortsighted, ill-informed arguments against Guess? since 300% ago.

For more on the ways of clothing retailers:

Zumiez and Volcom are Motley Fool Hidden Gems recommendations. American Eagle is a Stock Advisor selection. Get your free Stock Advisor report today, and learn about the Fool's top two picks and the market's dirtiest secret.

At the time of publication, Seth Jayson had shares of Guess? and American Eagle Outfitters but no positions in any other firm mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.