Hampered by Europe, Guess? (GES) Makes an Attractive Acquisition Target

May 23, 2012 7:40 AM EDT
Shares of Guess? (NYSE: GES) are trading higher ahead of the bell Wednesday following its first-quarter 2013 earnings beat, issued after the market closed Tuesday. But there may be an underlying reason for the exuberance...

Guess? (which is holding tough with the '?' in its logo) topped revenue views and beat EPS expectations by 3 cents. The kicker is second-quarter guidance came in below views and the clothier lowered its fiscal 2013 sales expectations.

So what gives with Guess?...? M&A.

With Guess? shares hitting three-year lows, the stock is valued at 3.5 times EBITDA, the lowest of any U.S.-based clothing retailer and less than half of the industry mean. Free cash flow puts it in the top 3 percent versus peers, has low debt, and about $500 million of cash on the books.

One large issue is Europe. Guess? gets about 38 percent of profits from the region, which led to a 41 percent drop in market cap from about $5 billion as debt issues and contagion worries hit the stock like a ton of bricks.

But the slump is good for those looking at Guess? as a leveraged buyout opportunity. Cash from operations held at about 11 percent of the company's stock price over the last year and was double the median free cash glow yield in the industry.

There's also the brand. Bloomberg noted a recent Interbrand survey putting Guess? ahead of all rivals -- save for Gap (NYSE: GPS) -- at 29th on the list. Peer Express (NYSE: EXPR) didn't even crack the top 50.

Finally, one analyst from Lazard Capital Markets thinks Guess? needs to ease its prices, particularly in Europe.

With analysts positive on the stock and strong demand continuing in the Asian markets, companies would do well to take a hard second look at one of America's iconic clothing brands.

Shares are indicated about 7 percent better ahead of the bell Wednesday.

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