If you don't like your stomach in your throat, then Guess? (NYSE:GES) is not for you. At least, not this week.
Let's recap. The company's COO, Carlos Alberini, gets a Wells Notice from the SEC, and the stock still levitates near its 52-week high. Sure, it was regarding his prior employer, but still: Wells Notice? Stock up? That's kooky. Then, yesterday the firm reports stellar earnings with a 16% gain in same-store sales, margin growth, disciplined store expansion -- all yielding a whopping 73% increase in Q4 earnings per share, and the stock tanks. Free cash flow, by the way, was up 100%. Yet today, she tanks some more.
Ostensibly, El Streeto seems to be worried about tepid guidance for the upcoming quarter and year, particularly the "mid-single-digit" predictions for same-store sales growth for the full year and the low-teen overall sales growth. We have, of course, seen this game play out with other peer retailers -- Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO), American Eagle Outfitters (NASDAQ:AEOS), and Pacific Sunwear (NASDAQ:PSUN) among them. The Street is hypersensitive to comps sales predictions, even though they turn out so often to be completely wrong. (And by the way, a quick peek at the chart shows you the potential for profit from those panicking wrongniks.)
I'm not so worried, because Guess? has been beating expectations for a while now -- even its own -- and because the company doesn't need to grow at 70% to grow into its valuation. Continued margin gains, which the company is also predicting, along with better-than average growth in the higher-margin European business, will, I believe, keep things humming along nicely.
Guess?' European and other worldwide exposure is growing quickly and now accounts for about half of earnings, but the European biz is on a different schedule from the U.S., so it introduces some odd seasonality for those who are used to only American retailers. Guess? management believes the brand has great potential to expand into northern European nations where, as of now, there's little to no presence. Moving ahead, the plan is to also merge more of the European and American lines to take greater advantage of economies of scale. Moreover, the firm has added staff to continue streamlining operations and reducing costs, toward a goal of 11.5% operating margins for 2006.
Having seen management reach its 10% operating margin goal early this year, and having seen the stock soar in response, I'm willing to give this crew the benefit of the doubt, hang on to my shares, and watch what happens next year. Guess? may no longer clobber the Street's estimates by double-digit percentages in the year ahead, but that doesn't mean the growth is gone for good. I think this week, the Street is guessing wrong again about Guess?' prospects.
For other fashionable Foolishness:
Pacific Sunwear is a Motley Fool Stock Advisor pick.
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Seth Jayson wishes he was cool enough to shop at Guess? rather than just own the stock. He is a member of the extended family of bargain sniffers at Inside Value, which explains why he was on to Guess? more than 100% ago. At the time of publication, he had shares of Guess?, American Eagle Outfitters, and Aeropostale, but no positions in any other company mentioned. View his stock holdings and Fool profilehere. Fool rules arehere.
