Guess (NYSE:GES) is struggling in its main markets as its store traffic in North America remains low and Europe continues to reel under the pressure of a weak economy. While the company is taking some steps to revive its growth in these regions, it’s also focusing on its business in Latin America. In the recent quarterly earnings, Guess came out with plans to open its first store in Brazil by the year end. It also saw a surge in its revenues in Mexico where the brand enjoys premium positioning. Latin America has become a popular destination for the U.S. apparel retailers and warrants a closer look. In this analysis, we’ll specifically look at Brazil and Mexico, which are focus markets for Guess.
The Brand Is Well Established In Mexico
Guess has established a decent position for itself in Mexico during the last seven years and currently operates 31 retail outlets and 381 wholesale stores.   Despite this significant presence, the company’s revenues from the region jumped more than 65% during fiscal 2012-2013.  The growth continued in the first quarter of fiscal 2014 as well which suggests that the retailer has a lot of room for expansion in Mexico. 
With rising disposable income and fashion consciousness, Mexico has become an attractive market for affordable brands. About 78% of the region’s population resides in urban areas and about 46% Mexicans are below 25 years of age.   This implies that a major portion of Mexico’s population is young, follows good lifestyle trends and is aware of fashion. This bodes well for the apparel industry’s long-term growth outlook. Currently the region’s apparel market size stands at around $5.7 billion, and is expected to grow at a GAGR (compounded annual growth rate) of 3.4% from 2012-2017 driven by improving lifestyle, economic growth and expected increase in online retail sales. 
Historically, apparel products have been available in Mexico through a number of channels such as grocery chains and direct retailers.  However lately, specialty retailers have become much more popular and emerged as the most important distribution channel in the market in 2012.  These retailers are increasing their market share by expanding in major shopping centers across the country. This has resulted from Mexican buyers laying a greater emphasis on shopping experience, which is often better in a specialty store as compared to a department store. 
Although these factors are encouraging for Guess, its growth in Mexico might not be easy. Lately, a number of multinational brands such as H&M, Gap Inc. (NYSE:GPS), American Eagle Outfitters (NYSE:AEO) and Forever 21 have ventured in the region, resulting in increased competition. 
Guess Is Entering Brazil
Guess plans to open its first store in Brazil by the end of fiscal 2014. Brazil is the sixth most populous country in the world and the largest economy in Latin America.  Over the past four years, the region’s apparel market has grown at an average annual rate of 7.4% with an estimated $50.7 billion in sales in 2012.  The growth is being driven by Brazil’s fashion conscious growing middle class, increased consumer credits and rising disposable income of people from lower income brackets.  Moreover, about 62% of the country’s population is under 29 years of age.  This favors the apparel market growth as most apparel sales come from the younger population. 
Brazil’s middle class, earning an income between $690-$2,970 per month, grew from 38% of the total population in 2003 to 55% in 2010.  The figure is expected to continue to increase for the next several years. A study by management consulting firm A.T. Kearney suggests that Brazilian shoppers spend significantly more on apparel products than Chinese shoppers.  They also tend to shop for apparel products on credit more frequently than other emerging nations.  Given the market’s potential, we believe that Guess will realize strong sales from the outset. However, increased competition from the U.S. apparel retailers such as Gap can weigh on its growth.
What Is The Significance?
We do not believe that there will be any significant impact on our price estimate for Guess solely on the account of these two markets and will take some time to grow these businesses. The retailer is still in a nascent stage in Mexico and has yet to enter Brazil. However, this will help the company support its overall growth as its revives its business in Europe North America. Moreover, it will help Guess in geographical risk diversification by reducing its dependence on the sluggish economies of the U.S. and Europe, which contribute about 65% to the company’s value according to our estimates.
Our price estimate for Guess stands at $30, roughly inline with the market price.Notes:
- Guess’ Q4 fiscal 2013 earnings transcript, Mar 20 2013 [↩] [↩]
- Guess’ Q1 fiscal 2014 earnings transcript, May 30 2013 [↩] [↩]
- Urban population (% of total), The World Bank [↩]
- Mexico Age Structure, Index Mundi [↩]
- Mexico-Apparel Retail, Market Line, Feb 5 2013 [↩]
- Apparel in Mexico, Euromonitor International, Apr 2013 [↩] [↩] [↩] [↩]
- Global Population, BBC [↩] [↩]
- Apparel Retail In Brazil, Market Research, Feb 27 2013 [↩]
- Apparel In Brazil, Euro Monitor, Jul 2012 [↩] [↩]
- Brazil-The Next Emerging Destination For Retail, apparel resources [↩] [↩]
- Brazil Is Most Attractive Emerging Market For Apparel Retailers Looking To Invest Abroad, ATKearney, June 2 2008 [↩]