As Europe’s economy slows due to its sovereign debt crisis, specialty retailer Guess? Inc. (NYSE:GES) might be in for some tough times ahead. Guess in particular should be severely impacted because of its significant exposure to Southern Europe where the sovereign debt crisis and ensuing slowdown in economy has been most severe. The company has been expanding its footprint in Northern Europe. Success in this region will depend on the company’s ability to design and market apparel that is congruent with the fashion preferences of the region. Guess competes with other specialty retailers such as Aeropostale (NYSE:ARO), Gap Inc.(NYSE:GPS), Abercrombie & Fitch (NYSE:ANF), J.Crew Group (NYSE:JCG) and Urban Outfitters (NASDAQ:URBN).
Deteriorating Economy in Southern Europe Should be a Major Headwind
For Guess, the major headwind in the near future will be the slowing economy in Europe and in particular Southern Europe, where the company has significant exposure with markets such as Italy contributing nearly 15% of Guess’ total annual sales. As the region’s economy deteriorates, Guess should experience negative comparable sales growth for the year. During its Q1 fiscal 2013 earnings call, the company forecasted a decline in its comparable sales for the year ahead, citing tough macroeconomic conditions in Southern Europe as the primary factor.
If Guess decides to increase promotions to drive sales, the impact may show up as a decline in margins. Currently, the company’s European business carries the highest margins for Guess compared to that of other divisions.
Inexperience in Northern Europe Will be a Hurdle
Guess is currently expanding its store base in Northern and Eastern Europe. The company is particularly focused on the markets of Germany and Russia, where it posted double digit comp growth recently.
However, with little experience of operating in Northern Europe, Guess will have to overcome the initial hurdle of setting the right product mix for the region. Fashion preferences tend to be very different in Northern Europe versus Southern Europe. For instance Northern Europeans tend to prefer a more conservative style versus a more fitted and flamboyant style in Southern Europe. Additionally, the company will have to alter its marketing strategy in Northern Europe to suit the target demographic.
We have a price estimate of ~$38, which is 40% above the market price.