Takeaway: The COO/CFO resignation stinks big time. We did not trust the company's accounting in the first place. Now 30-40% downside is in play.

We’re shorting $GES on today’s intra-day bounce. Quite frankly, with the news that the COO and CFO both resigned we presumed that the stock would get shellacked. This is a company where we’ve never been completely comfortable with its accounting, and in justifying margin levels – even after a 600bp slide to 11% -- in its Europe and Licensing businesses. Michael Prince joined from Nike (Converse) to be COO in November 2010, and CFO Dennis Secor has been with the company through most of the Carlos Alberini days (when the company’s reported numbers were actually headed in the right direction). Having Paul Marciano more directly involved in running this business is not a comforting event as it relates to creating shareholder value.


Yeah yeah…GES looks cheap at 10x next year’s consensus. But (we’ve been saying this a lot lately) valuation is not a catalyst. Margins are now at 11%, and we have more confidence that they see 6% before they see 13% without sacrificing meaningful top line growth. If this name sees 8% margins, we’re looking at about $1.65 in earnings on a negative growth rate (obviously a multiple killer). Give that an 8-10x multiple and you’re looking at a 14-17 stock. That’s 30-40% downside from here.



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