Guess: Comparables Are Deteriorating, And I'm Returning The Stock To The Too Hard Pile (Rating Downgrade)

Core Viewpoint - Guess?, Inc. reported Q2 2024 results that appeared optically good with a 10% top-line growth, primarily driven by the acquisition of rag & bone, but underlying comparable retail sales showed significant declines, particularly in the Americas and APAC regions [1][2][4] Financial Performance - The company experienced a 10% growth in top-line revenue, largely attributed to the acquisition of rag & bone, although specific figures were not disclosed [2] - Direct-to-consumer (DTC) comparable sales fell by 10% in the Americas and 14% in APAC, indicating ongoing challenges in these markets [2] - SG&A expenses increased by 23% year-over-year, amounting to an additional 50 million, partly due to the integration of rag & bone [3] Market Dynamics - The Americas segment has faced declining comparable sales since Q2 2023, with traffic issues and potential product problems contributing to the poor performance [2][5] - Europe showed a slight improvement with a 1% growth in comparable sales, suggesting that the brand is gaining traction in this region [2] Strategic Insights - The company plans to double its advertising-to-revenue ratio from 1.5%, which would increase marketing expenses by an additional 50 million annually [3] - Management intends to continue investing in marketing despite lower comparable sales, which may impact margins if sales do not improve significantly [3] Valuation Considerations - The current market capitalization of Guess? is approximately $1.05 billion, with a projected net income of about$150 million for FY25, resulting in a P/E ratio of 7x [4] - If sales decline by 10% in FY26, net income could drop to around $56 million, leading to a P/E ratio of 18x, indicating that the market anticipates continued negative trends [4] Analyst Sentiment - Concerns were raised regarding the potential influence of paid analysts on management's communications, which could affect investor perceptions [3][5] - Given the challenges and uncertainties surrounding the company's future, it has been suggested to categorize Guess? as a "too hard" investment opportunity, prompting a shift to a Hold rating [5]