Shareholders of Guess would probably like to forget the past six months even happened. The stock dropped 29.4% and now trades at $14.06. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Guess, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.Even with the cheaper entry price, we're cautious about Guess. Here are three reasons why we avoid GES and a stock we'd rather own.
Why Do We Think Guess Will Underperform?
Flexing the iconic upside-down triangle logo with a question mark, Guess (NYSE:GES) is a global fashion brand known for its trendy clothing, accessories, and denim wear.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Guess grew its sales at a weak 2% compounded annual growth rate. This fell short of our benchmarks. 
2. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Guess historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.1%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Guess’s revenue to rise by 5.8%, close to its 5.2% annualized growth for the past two years. This projection is underwhelming and implies its newer products and services will not lead to better top-line performance yet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Guess, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 5.5× forward price-to-earnings (or $14.06 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at Chipotle, which surprisingly still has a long runway for growth.
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