Guess Earnings Preview: What To Expect From Different Markets

Guess (NYSE:GES) is expected to release its Q1 fiscal 2014 earnings on May 30. The European business, which is the most important segment for the retailer, is likely to remain under pressure due to sluggish economic growth and prolonged cold. However, some specific markets have performed well and we’ll keep an eye out for them this quarter. The retailer’s growth in North America has been slow to due to low store traffic and higher full-priced sales. Although Guess is making efforts to drive its store traffic, we expect Q1 results to remain weak on account of the payroll tax increase and delayed spring. The most encouraging trend for the retailer is the rapid growth in its Asian business which is likely to continue.

See our complete analysis for Guess

Weak Economy And Prolonged Cold Will Drag Down Europe’s Results

Guess’ revenues from Europe decreased by 7% in fiscal 2013 due to sluggish economic growth. ^[1] The prolonged cold in the region has further worsened the situation for apparel companies due to fewer customers visiting the stores and delayed spring spending. Multibrand retailer Jones Group (NYSE:JNY) reported weak results from Europe in Q1 even though it performed well previously despite the unfavorable economic environment in the region. ^[2]

Most of Guess’ operations are situated in southern Europe where the macroeconomic situation in countries such as Spain, Italy and Greece is particularly weak. Hence, we do not expect any improvement this quarter. Nevertheless, it is worth noting that Guess’ growth is encouraging in some specific European markets such as Russia and Germany. Last quarter, revenues from these two regions registered 105% and 40% growth respectively. ^[3] We expect the business in these markets to remain healthy despite the negative impact of a persistent winter. However, their revenue contribution is currently small and the growth of Guess’ overall European business will be determined by the broader state of the region’s economy.

Impact Of Cold Weather Will Offset Guess’ Recovery In North America

What’s The Problem In North America?

Guess’ North American operations remained weak during the last fiscal year due to a decrease in the number of tourists and a poor performance from its accessories business. ^[1] The effect was prominent in Q2 fiscal 2013 when the retailer stated that its accessories were missing fashion newness, which had a mitigating effect on the store traffic. ^[4] This was further impacted by Guess’ strategy to increase full priced sell-through and reduce the number of markdowns and discounts. The weak holiday quarter didn’t help either and the company’s North American retail revenues declined slightly in fiscal 2013. ^[1]

How Is Guess Addressing It?

Guess is making efforts to attract more customers and improve comparable store sales. ^[3] The company is focusing on elevating its brand image through in-store events and social media marketing. In-store events such as the summer festival are aimed at attracting more customers with distinct product offerings. Guess is launching a music festival capsule collection for this summer, which includes unique bohemian style handcrafted vintage apparel and accessories. ^[5] On the social media front, the retailer has made significant strides with its Facebook (NASDAQ:FB) fan base increasing from 1 million in 2012 to 4.6 million currently. ^{[6] [3]} Social media marketing can be very helpful in reaching out to a large audience with a relatively small investment.

Additionally, Guess is undertaking omni-channel retailing by combining online and in-store mobile platforms with a social experience. It has installed iPads in its stores to better interact with customers. Omni-channel retailing refers to a seamless shopping experience through all the available channels such as physical stores, mobile, Internet, catalog, etc., which enables the retailers to engage customers irrespective of the shopping channel they prefer. On the product side, Guess is lowering its starting prices for denims and iconic style offerings. The company is looking to add a greater balance to its product mix by introducing new prints, washes and fits in its denim range, which defines its heritage. Additionally, it is working on reducing the lead time to about five weeks to remain responsive to changing trends. ^[3]

Why The Efforts Might Not Pay Off In This Quarter?

Although the company’s efforts are commendable, Q1 fiscal 2014 is likely to remain weak. This year’s winter has persisted longer than usual, resulting in lower demand for spring clothing. For instance, the demand for shorts during the fourth week of March fell by 12% compared to the previous year. ^[7] A number of retailers such as American Eagle Outfitters (NYSE:AEO), Limited Brands (NYSE:LTD), Jones Group etc., have felt the effect and Guess will be no different. Also, the 2% payroll tax increase in the U.S. earlier this year is likely to weigh on consumer spending.

Rapid Growth In Asia Will Continue

Guess’ revenues from Asia have grown at a rapid pace during the past few years. We expect this trend to continue as the growing middle class, increasing disposable income and Guess’ limited presence in the region offer good market potential. China remains important as it is the second largest apparel market in the world. McKinsey expects total apparel sales in the country to reach $200 billion by the end of 2014. ^[8]

Our price estimate for Guess stands at $27, implying a discount of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Guess’ SEC filings [↩] [↩] [↩]
2. Jones Group’s SEC filings [↩]
3. Guess’ Q4 fiscal 2013 earnings transcript, March 20 2013 [↩] [↩] [↩] [↩]
4. Guess’ Q2 fiscal 2013 earnings transcript, Aug 22 2012 [↩]
5. Guess Summer Revival Music Festival Collection, Sunshine Kelly, March 15 2013 [↩]
6. Guess’ Facebook Page [↩]
7. Prolonged Winter Puts Retail Sales In Deep Freeze, CNBC, March 31 2013 [↩]
8. From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]