1/17/2008

Guess Defies Questions
By Brian Sozzi

Given our store level observations throughout the holiday shopping season of specialty apparel companies, the news from Guess Inc. (ticker symbol: GES) on January 9 came as minimal surprise.  The company announced that comparable store sales (or comps, which are sales from stores open in excess of a year) for December rose by a double-digit percentage rate, following a similar advance the previous month.  Such results for the combined November-December period were unheard of within the retail sector at large as consumers cut back on discretionary purchases ranging from apparel to seasonally related goods.

In our view, the strong performance out of Guess is indicative of the consumer appeal of the brand, which continues to showcase high levels of merchandise differentiation relative to competing specialty apparel chains.  We were impressed by the company’s holiday assortment in the men’s, women’s, and accessories categories, and observed only modest markdown activity at company-operated stores and wholesale accounts.

As a result of the ensuing turbulence in equity markets in recent weeks brought about by recession fears, shares of Guess have tumbled hard, and are now trading at a 39.0% discount to the 52-week high achieved on October 17.  Although we acknowledge the stress points on household budgets currently, we believe best of breed retailers that have competitive advantages stand to weather the slower consumption environment for 2008 successfully.  Guess has a budding international operation, not to mention expansion opportunities for its U.S. store base across all concepts, both providing us with confidence in the long-term potential of the stock.  We are maintaining our overweight recommendation on the stock.