Guess currently trades at $12.83 per share and has shown little upside over the past six months, posting a small loss of 2.1%. The stock also fell short of the S&P 500’s 7.1% gain during that period.
Is now the time to buy Guess, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Guess Will Underperform?
We don't have much confidence in Guess. Here are three reasons why we avoid GES and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Guess’s 4.9% annualized revenue growth over the last five years was sluggish. This was below our standard for the consumer discretionary sector. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Guess has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, lousy for a consumer discretionary business.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Guess burned through $15.71 million of cash over the last year, and its $1.59 billion of debt exceeds the $151.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Guess’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Guess until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Guess doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 7.8× forward P/E (or $12.83 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Guess
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