Ever since the launch of its first store in Asia, specialty retailer Guess (NYSE:GES) has seen robust revenue growth. Over the last three years, the retailer’s revenues from the region have increased by more than 75%. However to our surprise, this growth halted in the second quarter of fiscal 2014, as Guess’ revenues declined by 1%. The company stated that the recent pullback in consumer spending in China was the main reason for this dismal performance.
Nevertheless, we believe that this is just temporary weakness and the retailer’s results can improve once consumer confidence bounces back. The second largest economy of the world, China, holds immense potential for western apparel retailers with its growing middle class and increasing urbanization. In addition to this, Guess is planning to further develop its operations in India and Japan, where rising income levels and improving lifestyle will likely fuel the demand for western clothing. In this analysis we’ll take a closer look at why it makes sense for Guess to expand in these markets.
According to our estimates, Guess’ Asian operations contribute close to 15% to its value. We currently forecast the retailer’s revenues from Asia to reach about $520 million within the next five to six years. However, if the company aggressively expands in these markets, pushing the figure to $800 million instead, there could be 5% – 10%% upside to our price estimate. We believe the optimistic case is very much possible given the huge potential of these markets and the retailer’s efforts to establish itself. Our price estimate for Guess stands at $35, implying a premium of about 15% to the market price.
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China – Growing Urbanization – $220 billion+ Market by 2016
Even when the global economy was reeling under the impact of the recession in 2008-2009, China was able to sustain its growth with rising income levels and increasing urbanization.  The main reason behind the increase in the region’s disposable income was the substantial rise in labor costs. With the increase in labor costs, China witnessed an improvement in the income levels which ultimately drove the Chinese to urban areas. At the end of 2012, about 53% of Chinese resided in urban areas, which was significantly lower than the proportion of urban population in the U.S. and Japan.  This indicates that there still exists a huge scope of urbanization and this figure can reach 65% by 2025. 
These factors have resulted in rapid growth in China’s apparel industry. Prior to 2011, the region’s apparel sales were growing at an average annual rate of about 16%.  The apparel market stood at $110 billion in 2009, grew to $140 billion in 2012 and is expected to touch $220 billion by 2016.  Moreover, the booming e-commerce channel in China also provides tremendous growth potential for Guess. eMarketer forecasts online retail sales in China to increase from $110 billion in 2012 to $440 billion in 2016. 
This is why several U.S. apparel retailers including Guess are aggressively expanding in China. Over the past two years, Guess has grown its Greater China business by almost 75%. For the current fiscal year, the retailer plans to open about 50 stores in China and only 17 stores in North America. 
India – Rapid Economic Growth – $120 billion+ Market By 2020
India has witnessed rapid economic growth over the past few years and is likely to become one of the fastest growing economies in the next decade.  A growing middle class, a large skilled and unskilled work force, improving education standards and substantial foreign investments can transform India into one of the largest economies in the world. In 2005, out of the 210 million households in the country, about 21 million earned more than $4,000 a year, which is defined as the consuming class by consulting group McKinsey. A report by McKinsey suggested that this figure will triple by the end of 2015.  This trend is directly influencing apparel industry growth in India.
India’s apparel market stood at $40 billion in 2011 and is expected to reach $120 billion by 2020.   Rising urbanization is likely to be one of the key growth drivers as urban consumers often want different clothes for different purposes and events. McKinsey study stated that about 38% of Indian buyers are likely to shop for special events compared to 5% Brazilians, 3% Russians and 6% Chinese. In 2010, only about 29% of the country’s population resided in the urban areas. Over the course of next 20 years about 300 million Indians will move into the urban population. 
A big chunk of this urban population will comprise of youngsters who want trendy clothing to match their new lifestyle and higher discretionary income. A 2010 McKinsey survey suggested that about 62% of Indian buyers felt that their clothing should reflect on-going fashion trends.  Also, only about 20% of Indian women living in urban areas are employed. Hence, their wardrobe is limited to traditional home wear and special occasion wear. As more women move to cities and gain employment, female customers will increasingly shop for professional attire, casual wear and party wear.  With increasing foreign exposure and influence of western lifestyle, the proportion of branded apparel sales is expected to go up to 35% by 2020 from 25% in 2011. 
Japan – Good For Affordable Brands – $110 Billion+ Market
Although Japan’s apparel market stands big at about $110 billion, its growth has suffered due to a decline in consumer spending and weakness in the economy.  However, the situation is getting better with Japanese government’s Cool Biz campaign and the consumer shift to affordable products.  The government has urged companies to limit air conditioning and set warmer room temperatures, which has resulted in increased demand for casual clothing suited for such environment from business suits.  An encouraging sign for Guess is the growth in Japan’s Internet retail market despite a lull in distribution patterns and mass merchandising in 2011.  Last year, Guess’ management stated that Japan will be the next target for the company after China, and it plans to open its first flagship store there by fiscal 2015. Notes:
- Apparel In China, Euromonitor, Apr 2012 [↩]
- China’s population – Peak toil, The Economist, Jan 26 2013 [↩]
- United Nations, Department of Economic and Social Affairs [↩]
- 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 [↩]
- Guess’ Q4 fiscal 2013 earnings transcript, Mar 20 2013 [↩] [↩]
- Indian Apparel Market: Current Status And Future Outlook, Confederation of Indian Textile Industry, Sept 27 2012 [↩] [↩] [↩]
- India’s Fast-Growing Apparel Market, McKinsey & Company, June 2012 [↩] [↩] [↩] [↩] [↩]
- Overview of the retail apparel market, United Arrows [↩]
- Apparel In Japan, Euro Monitor, June 2012 [↩] [↩]
- Japan ‘Super Cool Biz’ Campaign Urges Businessmen To Shed Suits, Save Energy, Huffington Post, Jan 8 2011 [↩]