GES | Far Better Than Headline Suggests

These GES results are definitely better than the first blush. Company reported a headline miss of $0.24 vs the Street at $0.29. The press release was as sloppy as the headline – we’d give GES management a D- for that one. But in a nutshell, the entire miss to our model was FX-related. In constant currency, the business remains extremely healthy – much more so than other apparel companies that are dropping like flies. Europe (50% of sales) constant currency revenue was up an impressive 26% -- though up only 14% in reported dollars. That was one of the few holes to poke in the model. America’s retail (30% of sales) was +7%, and wholesale (10%) was +50%, which was well ahead of our model. Licensing was a particular standout – while only 4% of sales it’s 35% of EBIT – so it’s massively important to the model. Licensing was up 23% on top of 66% growth last year. Gross margins were up 100bps on top of a ridiculously tough comp last year, which is a positive callout. Inventories ended the quarter +19.5% vs sales +14% -- FAR more controlled than the rest of apparel retail, which we’re seeing put up negative sales/inventory spreads of 30-50%. So while we don’t like the headline miss, the reality is that the underlying brand heat is very much intact, and we’re seeing management execute here better than 90% of apparel retailers. With all of that said, it kinda blows us away that 21% of the float can be held short when the company is executing this well, has an Accelerated Share Repo program in place that will take it through July (after which it is still likely to buy back stock), has an activist circling, management has a huge compensation incentive to get this stock over $35 – the lever triggers next month, and above all that, the stock is trading at less than 5x earnings – or closer to 3x our TAIL EBITDA estimate. We get it, it's Quad 4 and the style factors for GES are wrong. No one wants to buy a small cap volatile apparel name in this kind of environment. But we think that the margin target that the company put out for this year is low by up to 100bps, and think there’s TAIL (Feb25) earnings power over $5 per share. We think this name has meaningful downside support, and after peeling back the onion, really liked what we saw from the quarter. We’re buyers at the current sub-$20 level. Best Idea Long.