No Deal More Fashionable Than Guess as Cash Lures LBO
Guess? Inc. (GES) is turning into the cheapest takeover candidate in the fashion industry.
After slumping to an almost three-year low yesterday, the Los Angeles-based clothing designer and retailer was valued at 3.5 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That’s the lowest of any apparel retailer or clothing-brand owner in the U.S. and less than half the industry median.
While Guess faces its first consecutive drop in annual profit in eight years as demand in Europe slumps and competition erodes operating margins, Jefferies Group Inc. and Morningstar Inc. say the retailer may still entice leveraged buyout firms. Guess has a higher free cash flow yield than 97 percent of its rivals, the data show. It also holds a half-billion dollars in cash, has almost no debt and owns a globally recognized brand name that is driving growth in markets such as China.
“The company’s got a bunch of cash,” Scott Billeadeau, who helps oversee about $12.8 billion at Fifth Third Asset Management in Minneapolis, said in a telephone interview. “The brand is good. You can buy an asset that maybe people are discounting pretty significantly now.”
Telephone calls to Guess’s investor relations department seeking comment weren’t returned. Guess, which also reported quarterly earnings that beat analysts’ estimates yesterday, rose 6.5 percent to $26.03 a share today.
The advance was the third largest in the 205-stock Bloomberg World Retail Index and helped Guess snap a nine-day losing streak, its longest in 12 years. The company now has a market capitalization of about $2.3 billion.
Guess now targets the 18- to 32-year-old “style-conscious consumer” with products from leopard-print shorts to sequin-embellished tank tops and rhinestone-studded watches.
Paul Marciano is chief executive officer at Guess, while Maurice Marciano serves as its chairman.
Once worth more than $5 billion, Guess sank 41 percent in the past year as the European debt crisis undercut consumer demand in the region and lower-priced brands from competitors pushed its operating profit margin to a six-year low.
Net income at Guess, which gets 38 percent of its sales from Europe, will drop 15 percent this fiscal year, according to analysts’ estimates compiled by Bloomberg prior to its quarterly earnings announcement yesterday. Earnings fell 8.3 percent in the year ended January after rising every year since 2002.
After the markets closed yesterday, Guess reported fiscal first-quarter adjusted earnings of about $27 million, exceeding analysts’ average estimate, data compiled by Bloomberg show. Sales in the period also beat projections.
Relative to its reported Ebitda in the year ended January, Guess was valued at a 57 percent discount to the median multiple of 8.2 times for U.S. apparel retailers and clothing-brand owners with more than $1 billion in market value, the data show.
The slump gives leveraged buyout firms the chance to buy a company that’s cheap relative to cash flow and gain a brand that is becoming more popular around the world, according to Peter Wahlstrom, an analyst for Morningstar in Chicago.
After deducting capital expenses, Guess had cash from operations in the past fiscal year equal to about 11 percent of its stock price, or more than double the industry’s median free cash flow yield, data compiled by Bloomberg show.
Guess, which has outlets in more than 85 countries and got 62 percent of its sales outside the U.S., now holds $484 million more cash than debt. That’s higher versus its market value than any U.S. apparel company apart from Jos. A. Bank Clothiers Inc.
“It still screens well” as a takeover candidate, Wahlstrom said in an e-mail. “The company still generates meaningful free cash flow, carries no debt and has a good long-term global growth strategy.”
Interbrand cited Guess’s ability to adapt to changes in revenue in any region, which helped to make the brand “more protected than most.” Express Inc. (EXPR), one of its biggest mall competitors, wasn’t ranked among Interbrand’s top 50 brands.
Both San Francisco-based Gap and Columbus, Ohio-based Express get most of their revenue from North America, according to data compiled by Bloomberg.
“What makes the company attractive is that you’ve got one of the few true global brands out there trading at such a deep discount valuation,” Randal Konik, a New York-based analyst at Jefferies, said in a telephone interview. Investors aren’t giving Guess “enough credit for the brand power it has.”
Konik says Guess would also appeal to private-equity firms that can cut costs to boost its operating margin, which fell below 16 percent in the year ended in January, the data show.
Diana Katz, a New York-based analyst at Lazard Capital Markets LLC, says Guess deserves a lower valuation because Europe will continue to hurt its sales. U.S. rivals that offer discounts such as Express are also undercutting Guess, she said.
“Their stuff is priced too high,” Katz said in a telephone interview. “It has a massive overhang with Europe. There doesn’t seem to be any light here.”
Any interested buyer would also have to persuade the Marciano brothers, which own about 28 percent of Guess, to sell the company they founded.
Jefferies’ Konik says the rewards of owning Guess outweigh the risks, especially as Asian demand rises and sales in Europe recover. He estimates Guess is worth $50 a share as a standalone company, about double its price yesterday. Morningstar says Guess could command more than $40 a share in a takeover.
“The company is still on a growth trajectory,” Konik said. Plus, “it’s cheap.”