As specialty retailer Guess (NYSE:GES) announces its Q3 fiscal 2013 earnings on November 28, the impact of the European economy will be one of the areas of focus given its large exposure to this market.  Moreover, following the trend of the previous quarters, we anticipate the North American business revenues to remain sluggish. Lastly, we will also watch for updates on its expansion plans in the U.S., Asia and Europe given its heavy dependence on international sales. 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.
What Is The Significance Of European Business?
The European business constitutes about 30% of Guess’ value according to our estimates and 36% of the revenues and so is a valuable driver for Guess. In the previous quarter, revenues from the European business declined by 2%, which was better than what the retailer expected.  Excluding the struggling markets of Italy and France, revenues increased by 8% showing that the value focused brand has held up reasonably well despite the weak market conditions.
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North American Business Will Stay Weak
The North American business struggled in the previous quarter due to the highly promotional environment, a decrease in the number of tourists and a poor performance in its accessories. According to Guess, accessories were missing the latest trends, which added to the weak performance. Although the retailer made some improvements this quarter, we believe that it could still be struggling to drive growth with accessories and its apparel business.
Margins Will Be Under Pressure
Guess’ plans of increasing its promotional activities in North America as well as currency fluctuations will likely to weigh on the retailers margins. This will be slightly offset by lower cotton prices, which is helping alleviate input costs. Guess’ margins were already impacted in the last year and a half due to an increase in the cost of raw materials, freight, labor and commodity prices such as oil. 
Updates On Expansion Plans
Guess’ revenues outside North America account for more than half of its total revenues. So its expansion plans in key markets like Europe and Asia will be in focus. Guess plans to develop its markets in the under-penetrated markets of Northern and Eastern Europe, Germany and Russia. Moreover, Its Chinese business grew by 40% in the last quarter.  It will be interesting to see the region’s performance in this quarter. We will also be watching Guess’ long term strategy for China. Asian operations constitute about 10% of the company’s value according to our estimates.
Our price estimate for Guess stands at $36, implying a premium of about 50% to the market price. We will update our estimates following earnings.Notes: