Italy and France are two of the most mature markets for Guess‘ (NYSE:GES) European business, which constitutes about 30% of its value according to our estimates.  The retailer’s sales have suffered in these regions over the past few quarters due to weak macroeconomic conditions, leading to a 7% decline in European revenues in fiscal 2013.  Although the company is expanding in other promising markets such as Russia and Germany, it cannot ignore the importance of Italy and France. These countries are still among the biggest apparel markets in Europe.
The economic environment in Italy has been particularly weak and is not likely to improve in the near term. However, given the growing share of chain retailers and the huge market, Italy’s apparel sales can rebound once consumer confidence picks up. In France, the improving economy, growth in e-commerce and a change in shopping trends offer a silver lining for Guess.
Italy Will Most Likely Remain Weak In The Near Term
Although the debt crises hit the entire European region, Italy was particularly weak with apparel sales suffering badly in 2009 and 2010.  The decline was less profound in 2011, but the sales in the region were still far from their pre-recession levels. As a result, the retail environment in Italy became highly promotional with discounts being offered throughout the year rather than just during the summer and winter months.  Guess had to resort to heavy promotional activities in Italy last year to attract customers. 
Since the economic conditions in the country haven’t improved much this year, we do not expect Guess to do any better in Italy in the near future.  Moreover, the 1% VAT increase by the Italian government will further impact the already cautious consumer spending.  However, Guess can take assurance from the expectation that chain retailers are likely to gain share going forward as big brands are increasing their investments to open new shops.  It makes sense for Guess to remain focused on the market and not lose out on this trend.
France Offers Some Hope Of Revival
Due to the economic slowdown, the apparel market in France has remained stagnant for the past four years. As purchasing power has declined due to high unemployment and low wages, French shoppers have been holding back their spending on apparel. Instead, they are spending on essential needs such as food and healthcare products. However, the men’s apparel category showed some encouraging signs in an otherwise weak apparel market in 2012. According to Euromonitor, French men are highly particular about what they wear in terms of clothing, fragrances and cosmetics. Moreover, they tend to spend more on apparel products compared to women. There has been a change in the shopping trend in the region as more men are buying apparel for themselves while historically, women used to shop for them.  Guess can leverage this trend to facilitate the sales of its men’s products in the region.
Additionally, fast-fashion and affordable brands have become a viable option in France which is evident from the success of Vivarte, KIABI Europe and Hennes & Mauritz. Guess can revive its sales by remaining responsive to changing fashion trends and offering products at competitive prices. Also, online retailing continues to grow at a robust pace despite the lull in the overall apparel industry. With online shopping becoming easier and as buyers have access to a greater variety of products, French shoppers are making more purchases through e-commerce websites.  Guess can take advantage of this trend and promote its direct-to-consumer channel aggressively in the region.
The economy of France ($50+ billion apparel market) is showing some signs of improvement with renewed consumer confidence.  In the second quarter of 2013, the country’s economy expanded by 0.5% which was its best gain since January 2011.  Even as investments dropped, the rise in consumer spending and increased business output drove the region’s better-than-expected growth.
Our price estimate for Guess stands at $34, implying a premium of about 15% to the market price.Notes:
- Guess’ SEC filings [↩] [↩]
- Apparel in Italy, Euromonitor International, Sept 2012 [↩] [↩] [↩] [↩]
- Guess’ Q3 fiscal 2013 earnings transcript, Nov 28 2012 [↩]
- Germany and France haul euro zone out of recession, Reuters, Aug 14 2013 [↩] [↩]
- Apparel in France, Euromonitor International, Sept 2013 [↩] [↩]
- Apparel Retail In France, Market Research, Feb 27 2013 [↩]