Can Mexico And Brazil Aid Guess’s Ailing Mainline Business?
Guess (NYSE:GES) is one of the few U.S. apparel retailers with well-spread operations globally. While this helps the company diversify its business risks geographically, it has been struggling in almost all of its markets. Low store traffic in North America on account of weak consumer sentiment, sluggish economic growth in Europe and consumer spending pullback in China have been troubling Guess. While the retailer is taking some steps to revive its growth in these regions, it’s also focusing on its business in Latin America. Guess recently opened its first store in Brazil, where the booming middle class and improving lifestyle have created a conducive environment for apparel market growth. In Mexico, the brand enjoys premium positioning and has seen healthy growth in recent quarters. Latin America has become a popular destination for U.S. apparel retailers and warrants a closer look. In this analysis, we’ll specifically look at Brazil and Mexico, which are the focus markets for Guess.
Our price estimate for Guess stands at $30, implying a premium of about 20% to the market price.
See our complete analysis for Guess
Passable Presence In Mexico
Guess has established a decent position for itself in Mexico during the last seven-eight years with 31 retail outlets and 381 wholesale stores at the end of 2012. [1] With its continued expansion, the company’s revenues from the region jumped more than 65% during fiscal 2012-2013. [1] The growth continued in the first two quarters of fiscal 2014 as well, which suggests that the retailer has a lot of room for expansion in Mexico. [2] The company did not report its Mexican results in its Q3 and Q4 earnings call indicating that this isn’t a significant market for Guess at present. This further supports the fact that there exists a huge expansion potential for Guess 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. [3] [4] 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 an expected increase in online retail sales. [5]
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. [6]
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. [6]
Debut In Brazil
Towards the end of 2013, Guess opened its first store in Brazil, which is the sixth most populous country in the world and the largest Latin American economy. 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. [7] The growth is being driven by a fashion conscious growing middle class, an increase in consumer credit availability, and the rising disposable income of people from lower income brackets. Moreover, about 62% of the country’s population is under 29 years of age, which favors the apparel market growth, as most apparel sales come from the younger population. [8]
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. [9] 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. [10] They also tend to shop for apparel products on credit more frequently than other emerging nations. [9]
Apart from these factors, the upcoming FIFA World Cup 2014 and 2016 Olympics are likely to fuel demand for apparel. [11] Overall, the Brazilian apparel and footwear market is expected to grow to $154 billion by 2017. Considering that apparel sales usually account for about three-fourth of this market, they are likely to render $115 billion in revenues by 2017. [12] The market is big as well as growing, which makes it a lucrative expansion option for Guess. During the coming years, we expect the retailer to ramp up its expansion to take advantage of the ongoing boom in the market.
Are These Markets Significant?
We do not believe that there will be any significant impact on our price estimate for Guess solely on account of these two markets, as it will take some time for these businesses to grow. The retailer is still in a nascent stage in Mexico and has just entered Brazil. However, this will help the company support its overall growth as its revives its business in North America and Europe. 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.
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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 [↩] [↩]
- Apparel Retail In Brazil, Market Research, Feb 27 2013 [↩]
- Global Population, BBC [↩]
- 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 [↩]
- Apparel in Brazil, Euromonitor, Jul 2013 [↩]
- Brazil Apparel And Footwear Market Research Report, Slideshare, Oct 30 2013 [↩]