Guess’ Gaps Higher On Strong Results
Guess‘ (NYSE:GES) shares jumped almost 18% in the after hours trading on strong Q2 fiscal 2014 earnings. The retailer performed well in North America and Europe where its business has struggled in the past few quarters. Its ‘comparable store sales decline’ declined from 10% in Q1 fiscal 2014 to just 2% in the second quarter due to better product performance and good customer response. This performance is commendable given Guess’ recent history and the fact that the U.S. apparel industry remained weak in the second quarter and troubled a number of retailers including Aeropostale (NYSE:ARO), American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF).
It appears that Guess’ efforts to revive its business in North America have started started to pay off. In addition, the company’s revenues from Europe increased by 1% with strong growth coming from Russia, Germany and other new markets. [1] We expect a better contribution from France and other countries as the economic conditions improve. However, growth stalled in Asia due to a slowdown in the company’s Chinese business on the account of weak consumer spending. Let’s take a look at what’s Guess doing better.
See our complete analysis for Guess
Efforts In North America Are Paying Off
Prior to this quarter, Guess was struggling in North America due to low store traffic, fewer markdowns, weak accessories sales and a lack of popular apparel fashion trends. The situation changed as some of the steps that the company took previously to improve its business paid off.
Guess hired a new design head to specifically focus on its product designs and added more product categories to its opening price tier. It increased its denim offerings and iconic styles at opening prices of $75-$95, while the majority of its apparel products were previously in the $108-$148 price range. [2] Guess stated that the customer response to these products was good. [1] This strategy will allow the company to take advantage of the fact that the U.S. shoppers are getting increasingly value conscious.
Guess is also focusing on its inventory management as it recently hired Mike Relich who has 30 years of retail experience as chief operating officer to lead supply chain, omni-channel and process improvements. [1] The company entered the third quarter with a clean inventory position, which will allow it to operate with fewer markdowns. [1] Moreover, omni-channel retailing provides Guess with an incredible opportunity to serve its customers through all the available channels. At the start of the year, the retailer launched VendorNet(R) Omnichannel technology to optimize inventory across its stores and distribution centers. [3] This allowed the fulfillment of online orders with store inventory thus helping Guess’ e-commerce growth. The retailer’s online revenues have grown by almost 25% during the last 12 months, and the growth might accelerate going forward. [1] A number of retailers such as Gap (NYSE:GPS), Urban Outfitters (NASDAQ:URBN) and American Eagle Outfitters have benefited from omni-channel retailing.
Europe Comes Out Of The Slump
Following a decline of 7% in fiscal 2013 and 13% in Q1 fiscal 2014, Guess’ revenues from Europe finally saw positive growth in Q2 fiscal 2014. This can be attributed to strong results from Russia, Germany and relatively new and under-penetrated markets. The sales in Russia and Germany continued their strong momentum in this quarter after jumping 105% and 40% respectively in Q1 fiscal 2014. Though small, these countries still remain the key growth markets for the retailer.
Russia is emerging as an important apparel market in Europe as it is relatively untapped. Apparel space per 100,000 Russians is only 37,600 square feet, which is just 10% of what it is in the U.S. [4] Moreover, Russians tend to spend about 3.1% of their income on apparel, which is noticeably more than China, Germany and the U.S. Through 2015, McKinsey expects the region’s apparel market growth (8%) to remain faster than income growth (7%). [4] In addition, Germany is the largest apparel market in Europe with annual sales of over $75 billion. [5] Although the apparel market growth has been slow over the past (CAGR of 0.8% from 2005-2009), it is likely to pick up in the future as the economy is improving. [6] There is clear evidence that Guess’ expansion in relatively under-penetrated markets is paying off.
Italy and France, which are two of the most mature markets for Guess in Europe, continued to face economic headwinds. [1] However, the economic condition in France seems to be improving as the region’s GDP growth stood at 0.5% in the second quarter of 2013. This was its strongest gain since 2011. [7] France’s annual apparel sales stand well over $50 billion, and the market’s growth will see some support from improving consumer confidence. [8]
China Holds Promise Despite The Recent Slowdown
To our surprise, Guess’ revenues from Asia declined by 1% in Q2 fiscal 2014 due to weak results from China. The company stated that the recent pullback in the consumer spending in the region was the main reason for this dismal performance. [1] However, China still provides tremendous potential for Guess in the long term as it is the second largest apparel market in the world. The region’s apparel sales have grown rapidly from $110 billion in 2009 to $140 billion in 2012, and are expected to touch $220 billion by 2016. [9] [10] Within this market, the casual wear segment has been growing at the highest pace as Chinese shoppers continue to shift to western styles for clothing.
Guess needs to be careful about how it leverages China’s growth. The company can rely on its strategy of offerring more products at opening prices to compensate for weak consumer spending. This will allow it to attract sufficient store traffic and assist its brand building. Moreover, omni-channel retailing can help Guess tap the huge Internet user base in China. eMarketer forecast online retail sales in China to increase from $110 billion in 2012 to $440 billion in 2016. [11]
Our price estimate for Guess stands at $32, which is inline with the market price. However, we’re in the process of updating the model in light of the recent earnings.
Understand How a Company’s Products Impact its Stock Price at Trefis
- Guess’ Q2 fiscal 2014 earnings transcript, Aug 28 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Guess’ Q4 fiscal 2013 earnings transcript, March 20 2013 [↩]
- Guess To Launch VendorNet Omnichannel Technology To Drive Ship-From-Store Fulfillment, GSI Commerce, Jan 29 2013 [↩]
- Dress For Success: Cracking Russia’s Apparel Market, McKinsey, Nov 2011 [↩] [↩]
- Apparel In Germany, Euromonitor, April 2012 [↩]
- Germany: clothing industry guide, Research and Markets, March 2011 [↩]
- Germany, France haul euro zone out of recession, Reuters, Aug 14 2013 [↩]
- Apparel Retail in France, Market Research, Feb 27 2013 [↩]
- From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
- China’s apparel retail market: $218 industry by 2016, Trans World News, Aug 3 2013 [↩]
- B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 [↩]