Guess’s Struggle Continues; Reports Loss In Q1 Fiscal 2015
Specialty apparel retailer Guess (NYSE:GES) isn’t showing any signs of recovery. In fact, its results are getting worse as it recorded a loss of $2 million in Q1 fiscal 2015 after reporting profits for several quarters. The retailer’s total net revenues declined by 5.6% as it continued struggling in all its major markets. North American retail comparable sales declined by 4% due to low store traffic on account of weak fashion and severe cold at the start of the quarter. In Europe, the uncertain economic environment and political turmoil in Russia and Ukraine subdued the slight recovery Guess witnessed in the previous quarter. Overall revenues from the region fell 8% in constant currency and operating margins shrunk by 1%. [1]
The retailer’s struggle in North America and Europe isn’t new, but its slump in Asia is somewhat fresh. After registering strong growth for several years, Guess’s Asian business hit a roadblock in the second quarter of fiscal 2014, when its revenues declined by 4% in local currency. Since then, the company’s revenues from Asia have been declining at an alarming rate, which continued in Q1 fiscal 2015. In its previous earnings call, Guess cited economic slowdown in China as the primary reason for its dismal performance.
Although overall results were weak, the company’s North American e-commerce business was particularly strong, delivering top-line growth of almost 50% during the quarter. The retailer stated that strengthening e-commerce channel and integrating it with the physical channel to uplift store sales remains a priority for the company. In the long run, such initiatives can aid Guess’s efforts to improve store and web traffic, and subsequently comparable sales.
Our price estimate for Guess stands at $30, implying a premium of about 35% to the market price. However, we are in the process of updating our model in light of the recent earnings.
See our complete analysis for Guess
Weak Economy Offsets Marginal Recovery In Europe
Guess’s revenues in Europe declined by 7% in fiscal 2013, and by 13%, 3% and 7%, respectively, during the first three quarters of fiscal 2014 (in local currency). Although this trend continued in the fourth quarter with a 8% decline in revenues, retail comparable sales improved marginally. The company saw high single digit positive comps in Spain and low-single digit positive comps in France. Even though Italy’s comparable sales growth remained negative in Q4, it turned out to be positive during the early part of Q1 fiscal 2015. Historically, Guess has been unable to perform well in the region due to economic crises in its mature markets such as Italy and France. Early signs in the first quarter suggested that the trend was about to reverse. However, the company’s results showed otherwise.
Guess’s revenues in Europe fell by 8% and its operating margins declined to -4.2% from -3.2% in the same quarter last year. The segment’s loss increased by 27% as the political upheaval in Russia negatively impacted Guess’s Eastern Europe results. Although the company stated that the economic situation in Southern Europe has improved, its impact on the results isn’t visible. We believe that Guess’s recovery in Europe will be painfully slow as Italian apparel sales still suffer from high taxes, increasing unemployment and low consumer confidence. Average monthly spending by Italian consumers on clothing has come down from €142 in 2009 to €126 in 2012. According to Euromonitor, the key to survive in the Italian apparel market is e-commerce and discounting. [2] Guess needs to come up with certain strategies that are centered around these key aspects.
North America Remains A Big Concern
From 2009 to 2012, the 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 on account of 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.
Although Guess tried to garner customer attention through competitively priced products, its efforts haven’t yielded desired results so far. The company’s retail revenues in North America declined by 4% during the quarter and its wholesale revenues fell by 8%. While several apparel retailers have struggled for growth during the recent slump in the apparel industry, some players such as Zara, Forever 21 and H&M have been successful in attracting customers. Their deep understanding of customer needs and tastes along with low reliance on the logo business have kept them ahead of peers. Guess will have to work harder to become a part of this league.
Surge In Online Revenues And Omni-Channel Initiatives Can Help In The Long Term
During the first quarter of fiscal 2014, while Guess’s comparable sales in North America declined by 4%, its e-commerce revenues surged by 50%. The retailer has witnessed such growth in previous quarters as well, propelled by omni-channel initiatives such as reserve in stores, online fulfillment through store inventory, etc. During the second quarter of fiscal 2014, the retailer began the fulfillment of its online orders through store inventory. By the end of the third quarter, more than 100 of its stores were fulfilling e-commerce orders, and the figure likely went further up in the next two quarters. In addition, the company has deployed several other initiatives such as iPad Kiosks, mobile optimized websites, state-of-the-art mobile app, and loyalty program to promote its omni-channel portfolio.
We believe that by strengthening its omni-channel platform, Guess will be able to garner significant customer attention over the Internet, and subsequently divert its web traffic towards its stores. Over time, this can help the company improve its store sales and better anticipate customers’ tastes. Moreover, with most retailers moving towards this retailing concept, it will allow Guess to remain competitive.
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Notes:- Guess? Inc Reports First Quarter Result, Guess Inc. May 29 2014 [↩]
- Apparel in Italy, Euromonitor, Nov 2013 [↩]