The apparel industry can be quite fickle. Industry trends change quickly and can leave investors owning a retail company with a whole lot of out-of-fashion merchandise.

#-ad_banner-#It’s key for investors to look for apparel retailers that offer products that are unlikely to fall out of fashion. The best products are those that shoppers will wear regardless of what new fashions and trends emerge.

Guess (NYSE: GES) is one of the best plays in the apparel space, because it’s a leader in a product that many people wear every day: jeans.

Although styles of jeans have developed over the years, the fact that people wear jeans hasn’t changed much over the years.

Guess released earnings earlier this month that beat analysts’ estimates for the fourth straight quarter. However, the company offered weak guidance, and analysts lowered their forward estimates and price targets. This spooked investors, and GES is down 10% this year. (In comparison, the Dow Jones U.S. Apparel Retailers Index is flat this year.)

Short interest has been on the rise over the past couple years. It’s now up to 13% as of the end of February. That’s because many investors recognized that the shopper’s ability and desire to spend over $100 on a pair of jeans was quickly declining.

However, while a couple of the other big players in the jeans market, Joe’s Jeans (Nasdaq: JOEZ) and True Religion, are still targeting the premium market (where jeans can sell for easily more than $100 a pair), Guess is looking to extend its market share by offering merchandise across a range of price points.

	Wikimedia Commons/Makele-90
	Guess has exposure to the fast-growing international markets and plenty of room for expansion in North America, with only 500 stores.

Offering a greater variety of affordable products is a positive when it comes to boosting sales, especially in a comparatively weak economic environment. With this kind of transition, Guess could be set for a short squeeze as the short sellers recognize that the company has turned the corner.

Just last year, Guess snatched up the American fashion brand Marciano, which further broadens its portfolio. It’s also expanding its G by Guess brand, which caters to younger shoppers, domestically and internationally.  

Guess is very much an international company as well, with some 300 stores spread across Europe, Asia and Mexico. International sales make up over half of Guess’ revenue. It’s also rapidly expanding into established and emerging markets alike, including Brazil, Germany, Russia, Japan and India.

E-commerce is another great way to bring in additional revenue. Guess will be boosting its e-commerce presence in South Korea, Russia and Brazil this year. Along the e-commerce lines, Guess also launched a mobile app last year, which enables customers to browse and shop from mobile devices.

A couple other major apparel retail peers that are major players in the jean market are already up nicely on the year, including Abercrombie & Fitch (NYSE: ANF) and Gap (NYSE: GPS). But Gap has a debt load well above Guess and a dividend that’s inferior, but it also trades at a premium to Guess across the board.

Guess, on the other hand, has a 3.2% dividend yield. There’s also negligible debt and 20% of its market cap is covered by the $508 million in cash on the balance sheet, which means that dividend payout could easily be set to rise.

With one of the best balance sheets, highest margins and a return on investment that’s above 15%, the case for a higher multiple for Guess is easily justifiable. It has exposure to the fast-growing international markets and plenty of room for expansion in North America, with only 500 stores, compared with nearly 1,000 Gap outlets and over 1,000 Old Navy stores.

Risks to Consider: A delay in the rebounding of the economy could lead to a slowdown in Guess’ top line growth. Additional competition from other major apparel retailers could also be a negative factor.

Action to Take –> Guess trades at just over 15 times forward earnings, and shares are 20% off their 52-week highs. The apparel industry average price-to-earnings (P/E) ratio is close to 20 — which, on Guess’ expected fiscal 2016 earnings of $1.80 a share, suggests that GES should be trading at over $36 in just over a year. That’s better than 30% upside.

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