I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Guess? (NYSE: GES). Is this fashionable apparel maker the real thing? Let's get right to the numbers.

Foolish facts



CAPS stars (out of 5) ****
Total ratings 626
Percent bulls 90.3%
Percent bears 9.7%
Bullish pitches 66 out of 72
Highest rated peers Cherokee, Jones Apparel Group, Gymboree

Data current as of Nov. 27.

An active pick of our Motley Fool Hidden Gems service, Guess? has performed well recently. Third-quarter revenue and profit both handily beat expectations, and management announced plans to issue a special $2 per share one-time dividend to go along with its regular payout. The stock rallied more than 10% on the news.

But some of those gains may also be due to speculation. Private equity firms TPG and Leonard Green & Partners are taking J. Crew (NYSE: JCG) private in a deal worth $2.86 billion. Investors appear to be wondering if Guess? is on another firm's holiday shopping list. Fools just see a bargain.

"Oversold due to fears about [the] European economy. P/E at about 11, [which is] very low historically," All-Star investor xserver wrote in July. The stock is up more than 50% since.

The elements of growth


Last 12 Months



Normalized net income growth 23.1% 4.4% 11.5%
Revenue growth 15.9% 1.7% 19.6%
Gross margin 44.2% 44.2% 44.1%
Receivables growth 16.9% 10.4% 3.1%
Shares outstanding 90.9 million 92.7 million 92.3 million

Source: Capital IQ, a division of Standard & Poor's.

Judging by this table, I'd say Guess? is poised to continue rallying. Let's review:

  • After a terrible 2009, Guess? is recovering nicely. Normalized net income, in particular, is growing much faster than revenue and at twice the rate the company achieved in 2008. Both are good signs.
  • Stable gross margin suggests the retailer is being smart with markdowns, going cheap only where it ups the overall profit opportunity. Strong cash flows also speak to this dynamic. (Guess? has generated more than $200 million in free cash flow over the trailing 12 months.)
  • And yet shares outstanding may be the best part of this stock story. Management seized upon a sell-off in its shares to repurchase stock at a discount, returning capital to shareholders above and beyond the dividends already being paid. There's a word for moves like that: awesome.

Competitor and peer checkup


Normalized Net Income Growth (3 years)

Abercrombie & Fitch (NYSE: ANF) (32.7%)
Gap (Nasdaq: GPS) 12.9%
Guess? 12.3%
Polo Ralph Lauren (NYSE: RL) 8.2%
Steve Madden (Nasdaq: SHOO) 21.3%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 27.

On the basis of long-term normalized net income growth, Guess appears to be just average. But as its most recent quarterly performance shows, its management and growth opportunity are anything but.

Grade: Sustainable
In fact, Guess? has embarked on what appears to be a successful program to expand in Asia as its European operations recover. Thanks to its generous cash flows, management has the liquidity to execute this plan without diluting existing shareholders. It's a win-win, and over time should lead to greater returns for investors.

Now it's your turn to weigh in. Do you like the company at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on Guess? Add it to your watchlist by clicking here.

Motley Fool Options has recommended subscribers write Guess? covered calls. The Motley Fool owns shares of Guess? Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.