Fiscal 2013 has been weak for Guess (NYSE:GES) so far as the retailer reported revenue declines for the first three quarters of the year.  The declines were driven by tough economic conditions in Europe and lower store traffic in North America. The weakness in Guess’ North American operations can be attributed to low promotional activities and a lack of fashion newness in our view.
As the economic environment in Europe continues to remain unfavorable, it makes sense for Guess to focus on improving its business in North America. The retailer is taking some steps to improve its brand strength and responsiveness to changing fashion trends in the region. It has improved its product offerings and the results have been encouraging. Overall, we believe that Guess’ North American operations will play a crucial role in driving the stock closer to our $28 price estimate as the U.S. still remains the biggest apparel market in the world.
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.
The North American retail business constitutes just about 30% of Guess’ value and is the second most important business segment for the retailer in our analysis. This business has remained weak in fiscal 2013 so far mainly due to lower store traffic. The decline in store traffic was caused by Guess’ strategy to increase full-priced sell through and reduce the number of markdowns and discounts. Moreover, the accessories business has also struggled due to a lack of fashion newness while the apparel industry remains highly competitive, promotional and sensitive to emerging fashion trends.
How Is Guess Addressing It?
However, last quarter was better for Guess’ North American retail business as the accessories business improved and did well over the Black Friday weekend. 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%.  As women’s fashion changes more frequently than men’s, a shorter development cycle will help it attune better to changing trends.
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. 
We believe that it’s only a matter of time until Guess increases its promotional activities to respond to the industry trends. With the promising performance of its product categories, the North American retail business should improve in the near future. 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.
Our price estimate for Guess stands at $28, implying a premium of about 15% to the market price.Notes: