With big growth in revenues and profits, the sky seems to be the limit for Los Angeles-based retailer Guess Inc.
But are there signs of a slowdown? Some experts wonder if Guess can keep up its torrid pace. Its stock, which hit an all-time high just short of $86 last month, last week traded mostly in the low $80s.
And the company's stock is priced much higher than many competitors. Guess's price-earnings ratio is greater than 30, much higher than Abercrombie & Fitch Co., Ralph Lauren Corp., True Religion Apparel Inc., bebe stores inc. and Nordstrom Inc., all of which have PE ratios under 22.
But Guess has been on an impressive roll. The company last month announced record fourth-quarter and full-year earnings.
"Our 2006 results mark our second straight year where net income doubled from the year-ago level," said Chief Executive Paul Marciano. "This performance places 2006 as Guess's best year ever, with record revenues and record earnings."
All of the company's divisions posted double-digit operating margins in its 14th consecutive quarter of earnings growth. Most promising for 2007 is growth in the international market. Guess has been systematically forging agreements, buying stakes and international licensees and taking its products to buyers overseas, where the margins are typically higher than the domestic market.
"We continue to see the globalization of our brand as our main focus in 2007 and beyond," Marciano said.
Revenues grew 27 percent to $1.19 billion last year. Earnings increased 109 percent to $123 million.
"I would agree that the growth rate last year probably wasn't sustainable," said Christine Chen, vice president of equity research at Needham & Co. LLC. "But that doesn't mean they can't have a strong (earnings) growth rate for the next three to five years, maybe not triple digits, but double digits and maybe that's more realistic."
Chen is one of many analysts who still have a buy rating on the stock. She expects that the company's earnings can grow between 25 and 30 percent, adding that 15 to 20 percent growth is considered very strong in the retail industry.
Most of this growth seemed impossible in February 2003 when Guess stock hit its all-time low of $3.45. Until 2001, Guess was known for its fashion-forward jeans sold in big-box retailers.
Marciano and Chief Operating Officer Carlos Alberini made the tough decision that an expensive retail rollout and international expansion would eventually lead to much higher margins. They opened Guess-branded retail stores, which now make the most money. They still sell their wares in department stores, as well.
Bouncing back from the cost of expansion took longer than expected because of the September 11 terrorist attacks and the subsequent recession.
Although it seems Guess has shed the yoke of rollout expenses, Chen said some of the company's challenges are a result of not having been in the retail game very long.
"They really haven't gotten into sophisticated technology of larger retail," she said. "They have to optimize markdowns, promotions and what not," she said, otherwise, "they're leaving money on the table."
Some of these problems are because Guess still has a relatively small footprint in the retail industry, with 336 stores in the United States and Canada and 413 outside of North America. But as companies get bigger, Chen said, they figure it out.
Chen said margins could grow even more.
"They haven't fixed everything," she said. "Some of the things they can improve on will help margins over time."
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