November 12, 2008 - Guess?, Inc. (GES-NYSE) designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children. The company's products include collections of denim and cotton clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets, and knitwear.

Guess?, Inc. offers its products through its own stores, a network of wholesale accounts, and Internet. As of February 2, 2008, the company operated 373 stores in the United States and Canada, which include 187 full-price retailstores, 97 factory outlet stores, 34 G by GUESS stores, 38 MARCIANO stores, and 17 Guess Accessories stores. It also operated 40 stores in Europe, 76 stores in Asia, and 7 stores in Mexico. The company was founded in 1981 and is headquartered in Los Angeles, California.

First of all, no one can guess the bottom of the retail market. Everyone knows it's bad out there. Consumers have stopped spending. It's going to be a very bad Christmas. Best Buy, the electronics retailer, says it's the worst business environment ever, that customer traffic is down to levels never experienced. Investors get that. Retailers are in for a tough time.

Now that I've painted the worst possible picture, I give you Guess?, a retailer, for your consideration.

It's trading at 6 times earnings from the last 12 months. The Forward P/E is 4.75. The stock carried a P/E between 15.6 and 44 since 2000. It's trading at 1.5 times book value. There's almost $300 million in cash with only 2% of capital coming from debt. There's $3.13 a share in cash. So you're paying $10.60 a share for the business (at the current quote for the stock of $13.73), a business that made $1.99 last year and has analysts predicting $2.52 this year and $2.86 next year. At least those are the current forecasts. They will be tempered to reflect the trying times very shortly.

But how much will these earnings be pared? If the company only sold its clothes in the U.S., earnings projections would have to go down dramatically. But Guess sells internationally. In Europe, sales in the second quarter jumped by 61%. Management sees European sales hitting $1 billion by 2011 or 2012, up from $500 million in fiscal 2007. That will help profits since margins are higher in Europe.

Furthermore, denim sales in North America did very well in the second quarter (ended in July, fiscal year ends February 2). They were up 8.1%. It's the denim that is at the core of earnings for Guess, accounting for about 30% of revenues. But at $150 a pop for their premium (and very fashionable) jeans, one wonders how many of those will sell in these times, domestic or internationally. (Guess? has a wholesale operation that is finally contributing in a meaningful way to sales and profits, thanks to Asian sales and more work with Macy's.)

Over the last 5 years, earnings have grown, on average, 77.85% a year. In the next 5 years, analysts believe that number will shrink to 17.5%, but that's still a strong growth number. For the quarter ended in October, analysts predict earnings of 65 cents, compared to 62 cents in the same quarter last year. For next quarter, they see 80 cents, compared to 59 cents. But those numbers don't reflect the most recent slowdown by consumers. Expect them to be less when analysts revise their forecasts.

More numbers: Guess? officers and directors own 37% of the stock. The dividend was recently raised by 25% to 10 cents a quarter, giving a yield of 2.6%. Market Cap is $1.31 billion with 94 million shares outstanding and a float of 63 million. The number that stands out: Return on Equity. For the last 12 months it was 33.91%. It's been in the high 20% level for the last 2 years. Operating margin was 17.8% for the last 12 months and Profit margin was 10.82%. The stock carries a relatively high beta of 1.68. The high for the last 52 weeks was $48.49. The low is being established as this is written. The dividend of 40 cents takes only 16% of profits to pay.

When Guess? hits a bottom is anyone's guess. It could be today or it could be in a couple of months as reports on sales show declines. Or they may show increases, thanks to international sales. Whatever happens, this is a well-managed company that came from a near death experience in 1999 and 2000 when the stock traded at $1.70 a share. Things have improved greatly since then. But if all economies are hit as hard as the U.S., all stocks will feel it, including Guess?. However, the beauty of retail stocks is that they are usually the first ones that show improvement when the market turns. Check deeper into the numbers to see if Guess? belongs on your watch list.

- Company Web site: www.guess.com

- Ted Allrich