Over the past six months, G-III’s stock price fell to $26.77. Shareholders have lost 10.2% of their capital, which is disappointing considering the S&P 500 has climbed by 14.3%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think G-III Will Underperform?
Even though the stock has become cheaper, we’re cautious about G-III. Here are three reasons you should be careful with GIII, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, G-III’s 3.9% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for G-III, its EPS declined by 4.2% annually over the last five years while its revenue grew by 3.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. 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.
G-III has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 10.5%, below what we’d expect for a consumer discretionary business.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of G-III, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at $26.77 per share (or a forward price-to-sales ratio of 0.4×). The market typically values companies like G-III based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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