Wednesday, October 27, 2010

Establish Guess? Inc. Covered Calls

A new covered calls position was established in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Guess? Inc.(GES) covered calls. Guess was one of the covered calls positions that was called away upon Oct2010 options expiration. Today, the price of GES retreated significantly, largely as a result of a Wedbush downgrade from Buy to Hold. The Covered Calls Advisor took that opportunity to re-establish a Guess? Inc. covered calls position for Nov2010 expiration as follows:

Established Guess? Inc.(GES) Covered Calls for Nov2010:
10/27/2010 Bought 300 GES @ $39.51
10/27/2010 Sold 3 GES Nov2010 $40.00 Calls @ $1.30

Guess?, Inc. designs, markets, distributes and licenses its lifestyle collections of contemporary apparel and accessories for a style-conscious 18-to-32-year-old target audience of men and women around the world. In addition to wholesale and retail distribution channels, GES operates in 67 countries via its licensing and distributor partnerships. Apparel and accessories design teams are located in California in the U.S., and in Florence and Bologna, Italy. It offers collections of denim and cotton clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets, and knitwear. The company also grants licenses to manufacture and distribute a range of products that include eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry, intimate apparel, and other fashion accessories. With these collections, Guess is one of the very few international growth retail companies, and the only wonen's-oriented global aspirational/affordable luxury brands with a full lifestyle and accessories offering.

Guess , Inc. markets its apparel under various trademarks, including GUESS, GUESS , GUESS U.S.A., GUESS Jeans, GUESS and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO, and Gc. The company sells its products through retail, wholesale, e-commerce, and licensing distribution channels. Guess operates 425 stores in North America and 96 stores abroad; licensees and distributors operated another 594 non-North American stores.

The Buy Alerts spreadsheet below shows that GES is an attractive value at this time since the total points rating of 16.40 exceeds the Covered Calls Advisor's desired "Buy" threshold of 16.0. Guess is trading at a P/E of 11 based on 2011 estimated forward earnings, which is a 30% discount from both its peers (think RL and ANF) and from its own historic multiple. Also very importantly, at its current price, the future growth potential of the Guess brand seems under-appreciated by investors based on its potential growth drivers related to: (1) rapid expansion in Europe, Asia, and Latin America; (2) expanding new product categories; and (3) potential new store formats. The company's management is very strong, and it recently made good additions to their team -- a new COO from Nike and a new President for Asia who formerly oversaw Levi's huge growth there. The company has $480 million cash, is debt-free, and generates more than $2.50 a share of free cash flow. So it is conceivable that when Guess reports third-quarter results on Nov. 23rd, it might also outline plans for a dividend raise (currently a 64-cents dividend yielding 1.6%), a share buy-back program, and/or even more aggressive expansion plans.

Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the Guess? Inc.(GES) transactions would be as follows:
Stock Purchase Cost: $11,861.95
= ($39.51*300+$8.95 commission)

Net Profit:
(a) Options Income: +$378.80
= (300*$1.30 - $11.20 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock price unchanged at $39.51):
-$8.95 = ($39.51-$39.51)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $40.00): +$138.05
= ($40.00-$39.51)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $39.51): +$369.85
= (+$378.80 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $40.00): +$516.85
= (+$378.80 +$0.00 +$138.05)

Absolute Return if Unchanged at $39.51: +3.1%
= +$369.85/$11,861.95
Annualized Return If Unchanged (ARIU) +47.4%
= (+$369.85/$11,861.95)*(365/24 days)

Absolute Return if Assigned at $40.00: +4.4%
= +$516.85/$11,861.95
Annualized Return If Assigned (ARIA) +66.3%
= (+$516.85/$11,861.95)*(365/24 days)