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Investment Overview for Guess? (NYSE:GES)
WHAT HAS CHANGED
Guess has been struggling with its performance, lately. Like other players in the retail industry, macroeconomic challenges in its major regions of operations adversely affected its sales. Currency headwinds from its international regions and declining store traffic in North America are two significant challenges that have been crippling Guess's growth in recent times. Towards this end, the company appointed a new CEO to kick-start a fresh growth path.
- Guess appointed a new CEO to effect a turnaround in its performance
- In July 2015, Victor Herrero was appointed as the Chief Executive Officer of Guess Worldwide. This is the first time in the company's history that someone outside the Marciano family will be assuming the position. The criteria for selecting Mr. Herrero was his success in Inditex, a Spanish multinational clothing company, where he built a $4 billion business in Asia after starting from scratch.
- Herrero has formulated a 5-pronged strategy to revive Guess which includes a reformed set of sales and merchandising strategy, digital marketing strategy, store strategy, maintenance of a yearly retail calendar, and increased stock keeping units in stores.
- Some of the top initiatives that Guess would undertake include a periodic review of product pricing, focus on the Asia Market to increase its contribution to Guess's total revenue from the current 10% to around 25%, and a flat organizational structure.
Below are key drivers of Guess's 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. As the environment remained weak in the subsequent years, Guess's revenues in the region fell to $903 in 2013 and $825 in 2014. Going forward, we expect European business revenues to decline slightly this year and increase gradually thereafter as the economic scenario improves and the company expands in lucrative markets such as Russia and Germany. We expect revenues to reach $830 million by the end of the Trefis forecast period. However, If Guess's European revenues increase to $1 billion 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 they increase to only $750 million due to a weak economic environment, there could be 5% downside to our price estimate.
Revenue per Square Foot - North American Retail
- Revenue per Square Foot:
Guess's revenue per square foot in North America declined from $493 in 2010 to $448 in 2014. The decline was primarily due to a decrease in the number of tourists and poor performance of the accessories business. An industry-wide decline in foot traffic was also responsible for weak store sales growth. Going forward, we expect the figure to increase gradually and reach $483 by the end of the Trefis forecast period. If revenue per square foot increases to $550 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 $390, 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's core customers are style conscious customers between the ages of 18 and 32. At the end of 2014, the company had 481 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 $825 million in 2014, 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 $942 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 area of southern Europe. The retailer operates close to 600 stores in Europe and has high exposure to countries such as Spain, Italy, and Greece, where economies remain 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 35% of Guess’s revenues, the weakness has impacted its overall performance. In 2014, Guess’s revenues from Europe decreased by 8.7%, dragging its overall revenues down by 6%. 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 the 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’s 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.
Competitively priced products for N.A.
Despite Guess’s stumbling sales, there are a few product categories that have performed well. Towards the end of 2012, the company revamped its merchandise mix by increasing its denim offerings and iconic styles at the entry level prices of $75-$95. Interestingly, Guess’s $79 denim has become one of its most popular merchandise items lately. The company has reported that its $79 denim has consistently delivered positive growth. Comparable sales growth at full priced stores indicates that $79 denim is improving every month and its price points are more appealing than its design. This is evident from the fact that other categories such as dresses have also done very well at opening price tier. Hence, if the company continues to follow this strategy, other categories can also deliver better results in the future.
Foot traffic decline in the U.S. troubling stores
Due to the increased proliferation of smartphones and tablets, and the convenience of shopping online, U.S. buyers have been making more purchases on the Internet. Consequently they are visiting fewer stores, which is a concern for a number of retailers including Guess. Over the last couple of years, store traffic across the industry has declined at least 5% year-over-year for most months, which has troubled several store-based retailers including Guess. The retailer has lost more due to a fall in foot traffic, than it has gained from incremental online sales.
Slowdown in Asian business
Guess’s historical growth in Asia was driven by its strong expansion in the region. Between 2010-2012, the retailer's revenues from the region increased at an average annual rate of more than 25%. However, in 2013 the growth slowed down to just 0.7% and revenues stumbled 4% in 2014. The company said that weak economic conditions in China were mainly responsible for its growth slowdown. At the end of 2014, Asian business accounted for just 8.5% of Guess's total revenues, and we expect this figure to reach just 9.6% over the next five-six years, provided revenue growth in the region picks up, backed by improvement in China and success in South Korea.
Susceptibility to currency fluctuations
Guess earns close to 50% of its revenues from outside North America and hence, its growth is highly susceptible to currency fluctuations. In 2014, for instance, the dollar appreciated significantly against the euro and Asian currencies, which pummeled Guess's revenues coming in from Europe and Asia, adding to its existing problems. Though this is something the company cannot control, it still remains a big threat. In fact, the dollar is expected to gain more strength in 2015, which will keep a check on Guess's European and Asian business, which aren't doing well even without the currency issues.
Short-term store consolidation
Given that the future of retailing in the U.S. is e-commerce, it is unlikely that retailers such as Guess will expand their store networks in the country. In fact, several of them, including Guess, are actually consolidating their respective networks. In August 2014, in an effort to improve its margins, the company announced that it will close 50 of its underperforming stores world-wide within 18 months. Guess shut four such locations in the U.S. in the third quarter, and is likely to close some more going forward, and expand at a slower-than-historic pace. Therefore, its revenue growth in the region is extremely difficult, as robust growth in comparable store sales is unlikely given the small size of its online channel.
How Does Trefis Modelling Work?
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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