The specialty retailer Guess (NYSE:GES) has had a relatively weak fiscal 2013, with all three quarters registering a revenue decline driven by weakness in Europe and North America. While the macroeconomic concerns still persist in Europe, traffic has remained low in North American retail stores because of low promotional activities. On the other hand, Guess’ Asian business has been growing at a healthy rate.
Our price estimate for Guess stands at roughly a 15% premium to the market price. What justifies this premium? Can Guess exceed this estimate?
We believe that gradual improvement in Europe and the greater contribution of its Asian business can be positive catalysts for the stock. In addition to this, the improving performance of product segments in North American retail will further help. 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.
Europe Can Be A Better Contributor
European Business accounts for about 40% of Guess’ revenues and is the most valuable segment for its stock according to our estimates. As most of the retailer’s European business is situated in southern Europe, the current weak macroeconomic situation in countries such as Spain, Italy and Greece makes this business vulnerable in the near term.
However, amid the persistently tough economic conditions, Guess’ performance in the Italian market has improved driven by increased promotions. Moreover, the retailer is planning to further expand its business in Europe by mainly targeting under-penetrated markets of Northern and Eastern Europe. It also received positive results from its development markets of Russia and Germany. The revenues in Russia registered more than 100% growth in the recent quarter, and the next season’s orders were up by 50%. Therefore, we believe that while the economic conditions will remain unfavorable in the near-term, the European market has good potential in the longer-term if Guess can successfully execute the expansion and continue the success it has seen with promotions.
According to our estimates, the European operations constitute ~ 30% to the company’s value.
Window Of Hope In North America
According to our estimates, the North American retail business is second in the list of most valuable stock drivers. This business also remained weak due to low store traffic. The decline in store traffic was driven by Guess’ strategy to increase full-priced sell through and reduce the number of markdowns and discounts. Moreover, the accessories business also struggled due to lack of fashion newness. As the apparel industry remains highly competitive, promotional and sensitive to emerging fashion trends, Guess might be missing out due to the aforementioned reasons.
However, the last quarter was better for Guess’ North American retail as the accessories business improved and did well over the Black Friday weekend. The retailer is planning to improve its focus on its product design in-order to elevate its brand image. Moreover, 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. Guess also shortened the development cycle of women’s apparel by 50%. As women’s fashion changes more frequently than men’s, a shorter development cycle will help them attune better to changing trends.
Following this success, Guess has worked on improving the product offerings in men’s apparel and accessories. This has generated fruitful results in the recent quarter with men’s apparel and footwear performing strongly. We believe that it’s only a matter of time until Guess increases its promotional activities to respond to industry trends. With the promising performances of its product categories, the North American retail business can improve in the future. Furthermore, improvement in the e-commerce channel will complement the retail business’ growth. Guess launched its Global World of Guess branding site as well as its m-commerce in 2011
According to our estimates, North American retail constitutes just under 30% to the company’s value.
Asia Will Revive Guess’ Growth
Although the revenue contribution of the Asian region still remains low, it has increased from 6% in 2008 to 10% in 2011. Moreover, the business in this region has grown by 16%, 21% and 8% in the past three quarters. Asia is one of the most important markets for apparel retailers with China being the focal point. Apparel retailers such as Abercrombie & Fitch (NYSE:ANF) are beginning to expand in the Chinese market. However, Guess will have the first mover advantage as Abercrombie is still in the early stages with only 3 stores in the region.  Even Gap (NYSE:GPS) opened its first outlet stores in China in its last quarter.  Along with China, Guess registered strong double digit growth in South Korea.
Although the Asian operations currently do not contribute much value to the company, given the potential and the plans for expansion, this region will be critical for future growth. Guess plans to open 40 stores in the region next year and it partnered with a licensee, which operates around 2,400 stores across Asia. Asia, which houses two of the world’s largest economies, is relatively under-penetrated by western brands. This makes it an important region for Guess as well as other apparel retailers.
According to our estimates, the Asian operations constitute around 15% to the company’s value.
Our price estimate for Guess stands at $28, implying a premium of about 15% to the market price.Notes: