Can Guess Stock Return To Pre-Inflation Shock Highs?

[Note: Guess’ FY’23 ended on Jan 28, 2023]

Guess Stock (NYSE: GES), a retailer that designs, markets, distributes, and licenses apparel and accessories for men, women, and children, currently trades at $20 per share, around 35% below its level of $31 seen on May 27, 2021 (pre-inflation shock high), and has the potential for sizable gains. GES saw its stock trading at around $14 at the end of September 2022, when the Fed kept increasing rates, and now remains 38% above that level. In comparison, the S&P 500 gained about 20% during this period. The company’s stock benefited from the growth in the international business, but the Americas Retail business saw softness in demand during this time. As a general protective move to shore up inventory, the retailer ordered products earlier than normal to deal with supply chain headwinds. The strategy seems to have worked in FY2023 (year ended Jan 2023), as the company has been able to deliver more products to wholesalers due to its accurate acquisition of enough products. Still, the foreign currency fluctuations (FX) are definitely a drag on the company and we expect the FX headwinds to continue in FY 2024 as well.

Interestingly, GES stock had a Sharpe Ratio of 0.4 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level means that Guess will have to gain about 55% from here. While it has the potential to recover to those levels, we estimate Guess Valuation to be around $21 per share, almost in line with the current market price. Our detailed analysis of Guess upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how GES stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

GES and S&P 500 Performance During 2007-08 Crisis

GES stock declined from nearly $50 in October 2007 (pre-crisis peak) to around $16 in March 2009 (as the markets bottomed out), implying that GES stock lost almost 68% of its pre-crisis value. It recovered post the 2008 crisis to levels of about $42 in early 2010, rising roughly 163% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

GES Fundamentals Over Recent Years

GES revenues decreased from around $2.7 billion in FY 2020 (year ended in Jan 2020) to about $1.9 billion in FY 2021, due to the impact of the Covid-19 lockdown. The company was negatively impacted by store closures and a fall in discretionary spending. Following this, the company was able to grow its sales as Covid-19 vaccines were made available and the company saw a boost in consumer demand. Consequently, GES’ revenue reached $2.7 billion in FY 2023. Earnings per share grew from around $1.35 in FY 2020 to $2.62 in FY 2023. 

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Guess stock has the potential for strong gains once fears of a potential recession are allayed.

[1] Month-to-date and year-to-date as of 8/17/2023
[2] Cumulative total returns since the end of 2016

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