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Investment Overview for Guess? (NYSE:GES)
Below are key drivers of Guess' value that present opportunities for upside or downside to the current Trefis price estimate for Guess:
European Business Revenue
- European Business Revenue:
Revenues from European operations have grown from $538 million in 2007 to $1,011 million in 2011. However, the figure dropped to $939 million in 2012 primarily due to the company's over reliance on southern Europe, where economic conditions are particularly weak. Going forward we expect European business revenues to slowly increase and reach $990 million by the end of Trefis forecast period.
However, If Guess' European revenues increase to $1,125 million by the end of the Trefis forecast period driven by aggressive expansion in lucrative markets, there could be 5% upside to our price estimate for Guess. On the other hand, if it decreases to $850 million due to weak economic environment, there could be 5% downside to our price estimate.
Revenue per Square Foot - North American Retail
- Revenue per Square Foot:
Guess' revenue per square foot in North America declined from $493 in 2010 to $471 in 2012. The decline was primarily due to a decrease in the number of tourists and poor performance of accessories business. Going forward we expect the figure to remain comparable in 2013, and thereafter increase to reach $500 by the end of the Trefis forecast period.
If revenue per square foot increases to $575 by the end of the Trefis forecast period, there could be 5% upside to the Trefis estimate for Guess. On the other hand, if it decreases to $410, there could be 5% downside to the Trefis estimate.
Guess is a specialty retailer that designs, markets, distributes and licenses one of the world's leading lifestyle collections of contemporary apparel and accessories for men, women and children. Some of the company's most popular brands include GUESS, G by GUESS, and MARCIANO. Guess' core customers are style conscious customers between the ages of 18 and 32. At the end of 2012, the company had 512 directly operated stores in North America alone. The company also has a large footprint in Southern Europe and is rapidly expanding distribution in Northern and Eastern Europe and Asia.
Europe Segment is the largest contributor to the company's stock price
The European division includes retail as well as wholesale operations. Revenues for the division have increased from $538 million in 2007 to $1,011 million in 2011. Although they came down to $939 million in 2012, they still remained the second largest contributors to the revenues. Based on the company's expansion plans in Northern Europe offset by the weak macroeconomic conditions in the region, we estimate revenues for the division to reach $992 million by the end of the Trefis forecast period.
Weak macroeconomic conditions in Europe are a near term threat
Guess is facing problems in Europe mainly due to the unfavorable economic environment and its high concentration in the worst hit southern Europe. The retailer operates more than 600 stores in the region. As a result, it earns more than 60% of its revenues from this region and has high exposure to countries such as Spain, Italy and Greece, where economy remains weak. In addition to this, the retailer runs the risk of self-cannibalization due to its high concentration in these markets. Since the European business accounts for about 40% of Guess’ revenues, the weakness has impacted its overall performance. In 2012, Guess’ revenues from Europe decreased by 7%, dragging its overall revenues down by 1%. Other players such as Nike, Abercrombie & Fitch and Gap have also struggled in sustaining their growth in Europe.
Targeted expansion in Europe will help in the long run
The northern and eastern regions of Europe remain relatively untapped. Over the longer run, Guess plans to expand aggressively in Russia and Germany, which have generated promising results so far. Although the revenue contribution of these markets is presently low, the company expects business to increase by two to three times over the course of next five years.
Russia is becoming an important market in Europe as it remains relatively untapped. According to McKinsey, apparel space per 100,000 Russians is only 37,600 square feet, which is just 10% of what it is in the U.S. Moreover, Russians tend to spend about 3.1% of their income on apparel, which is noticeably more than China, Germany and the U.S.Germany is the largest apparel market in Europe generating $75+ billion in total apparel sales, but its growth has been slow (CAGR of 0.8% from 2005-2009). However, Guess’ revenues from the region have increased substantially over the past few years. We believe that the retailer can leverage Germany’s growing e-commerce channel and fashion conscious customers to double its business within the next five years.
Growing business and elevating brand in North America
Guess has been focused on increasing its full price sell through in North America. The retailer plans to continue its focus on product designs to elevate its brand image. Improving women’s apparel products was a major focus for Guess in fiscal 2012. The efforts paid off as women’s apparel has remained the strongest category in Guess stores. The company has also shortened the development cycle of women’s apparel by 50%. Following this success, Guess has worked on improving its product offerings in men’s apparel and accessories. This generated good results in Q3 of fiscal 2013 with men’s apparel and footwear performing strongly. Furthermore, an improvement in the e-commerce channel will complement its growth in the retail business and will be helped by its Global World of Guess branding site as well as its m-commerce (mobile commerce) channel which launched in 2011.
Rapid growth in Asian business
Guess’ growth in Asia was driven by its strong expansion in the region.The retailer has 40 stores planned for this year, which is inline with its 50 stores planned for the U.S. During the last four years, the retailer's revenues from the region have increased at an average annual rate of 25%.Asia houses a number of lucrative regions including China, Japan and India. In 2008, Asian operations contributed only 6% to Guess’ revenues, and this figure rose to 11% in 2012. Driven by the market potential, its expansion plans and a strong brand image, we expect the revenue contribution to go expand to 20% towards the end of our forecast period.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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