Competitively Priced Products Could Boost Guess’ North American Retail Business

Guess‘ (NYSE:GES) revenue per square feet in North America has been on a decline since 2009, due to low store traffic that in turn is the result of less popular merchandise and and fewer promotional activities. From $494 in 2009, the figure declined consistently to $471 in 2012. Despite the company’s aggressive attempts to improve its merchandise design and prices, its 2013 results remained weak, owing as well to an overall industry slump. However, underlying performance suggests that Guess’ efforts are starting to bear fruit.

The retailer has added a greater product variety at entry level prices to attract cost conscious customers. It has also made some significant changes to its design and merchandising team to revamp its product design system. This has yielded good results as Guess reported that the newer merchandise has resonated well with its customers.

While a near term turnaround is unlikely, we believe that Guess’ results will improve gradually. Therefore, we forecast the retailer’s revenue per square feet in North America to start improving from 2014 and reach $500 over the course of next five-six years.

Our price estimate for Guess stands at $35, implying a premium of 15% to the market price.

See our complete analysis for Guess

North American Retail Business Continues To Struggle

From 2009 to 2012, proportion of Guess’ North American retail business in its overall revenues decreased from 46% to 42%, despite continued expansion. Fiscal 2013 (CY 2012) was particularly weak for the company as its revenues declined by 0.1% mainly due to low store traffic. This is attributable to a decrease in the number of tourists, lack of prevailing fashion trends and poor performance from accessories business. The impact was further intensified by Guess’ strategy to increase full-priced sales and reduce the number of markdowns.

The retailer’s problems continued in fiscal 2014 (CY 2013) due to several macroeconomic factors that were challenging for the entire U.S.apparel industry. Consumer confidence was low due to increased taxes, slow job growth, higher healthcare costs and gasoline price increases. Also, buyers preferred spending on products such as cars and houses to take advantage of low interest rates. Subsequently, consumers held back from spending on items such as apparel and accessories.

Moreover, fast-fashion brands such as Gap Inc (NYSE:GPS), Urban Outfitters‘ (NASDAQ:URBN), Forever 21, H&M and Zara were able to attract U.S. buyers with their popular merchandise. This fashion-conscious buying impacted the sales of a number of retailers such as American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF), and also Guess. As a result, Guess’ comparable store sales in North America declined by 9.8%, 2% and 5% respectively, during the first three quarters of fiscal 2014. The company expects this trend to continue in the fourth quarter as well.

However, Products At Entry Level Prices Are Performing Well

Despite Guess’ stumbling sales, there are a few product categories that have performed well. Towards the end of 2012, the company revamped its merchandise mix by increasing its denim offerings and iconic styles at the entry level prices of $75-$95. Interestingly, Guess’ $79 denim has become one of its most popular merchandise lately. The company reported that its $79 denim delivered positive results in the first quarter and its sales trend improved in the second. During Guess’ third quarter earnings call, COO and executive vice president, Russell Bowers, said that Q3 sales of $79 denim was much better than Q2. This improvement continued in November with double-digit comparable sales growth at full priced stores with denim. ^[1] Considering the fact that November wasn’t the best month for the U.S. apparel industry, this performance was pleasing.

Comparable sales growth at full priced stores indicates that $79 denim is improving every month and its price points are more appealing than its design. This is evident from the fact that other categories such as dresses have also done very well at opening price tier. Hence, if the company continues to follow this strategy, other categories can also deliver better results in the future.

Last year, Guess hired Sharleen Ernster Lazear (13 years with Victoria’s Secret) to specifically oversee and enhance its product offerings. It also appointed Hillary Super, who had previously worked with American Eagle Outfitters and Gap Inc., as vice president for retail merchandising. Given their valuable experience, we believe that they can add some freshness to Guess’ product designs. With compelling prices and attractive designs, Guess should be able to win its customers back in the long run.

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

1. Guess’ Q3 fiscal 2014 earnings transcript, Dec 4 2014 [↩]