After flourishing for over four years, Guess‘s (NYSE:GES) growth in Asia has stalled, mainly due to weak results from its core market, China. During Q2 and Q3 fiscal 2014, the retailer’s Asian revenues declined by 4% and 6%, respectively, (on a constant currency basis) as Chinese buyers spent more cautiously. While revenues from the region fell by only 3% in Q4, they stumbled by 8% in Q1 fiscal 2015. The magnitude of sales decline in the region is increasing, which is not a good sign for Guess. The retailer has already been struggling in its main markets — Europe and North America — and was relying on Asia to provide some respite.
However, there have been some positives for the retailer’s Asian business in the form of growth in South Korea. During the past several quarters, Guess’s revenues in South Korea have increased at a modest rate, which has had an offsetting impact on weak Chinese results. Given that South Korea holds high growth potential and is Guess’s largest market in the Asian region, it is quite important for the retailer from a long-term perspective.  Considering several expansion opportunities at hand, Guess is planning to extend its reach in South Korea, which is likely to bolster its Asian business in the foreseeable future.
Our price estimate for Guess stands at $30, implying a premium of about 30% to the market price.
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Chinese Slowdown Is Weighing On Asian Results
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 the economic slowdown in China as the primary reason for its dismal performance. Though the region’s apparel market is set to boom in the long term, it looks fairly challenging at the moment.
The salary growth of Chinese consumers is slowing down, which is directly impacting the region’s consumer spending. This is hampering retail market growth, which in turn is weighing on China’s economic growth. The region’s GDP growth rate decelerated to 7.5% in Q2 from 7.7% in Q1, and settled at 7.7% for the entire year.   Although this growth was slightly better than economists’ forecast of 7.5%, several economic slowdown signs appeared towards the end of the year.  In wake of rising debt burden, Chinese authorities scaled back on credit at the end of 2013, which slowed the investment growth. As a result, World Bank now expects Chinese economic growth to slowdown to 7.6% in 2014. This indicates that consumer confidence will remain sluggish this year as well, which will continue to trouble several retailers including Guess.
South Korea Shows Promise
South Korea’s apparel industry witnessed strong growth in 2012 despite weak consumer confidence. This was fueled by the increasing popularity of specialty apparel brands and growing demand for outdoor wear and sportswear due to rising consumer awareness of health and well-being. Specialty retailers, who offer good quality products at affordable prices, are prospering due to increasing demand for value-added products. With frequent changes in fashion styles, international specialty retailers have performed well since 2007. Even domestic retailers are now focusing on product design and variety to add to their brands’ international appeal. This trend bodes well for Guess as it is one of the popular global brands.
Additionally, Internet has emerged as a strong shopping channel with several department stores and apparel retailers adding e-commerce to their business. Retailers are also focusing on the m-commerce channel as smartphone penetration in South Korea is on the higher side. Going forward, mobile commerce is likely to become the key to online retailing as it offers maximum convenience to shoppers. Guess can take advantage of this trend if it launches some useful mobile apps and integrates them with its stores. 
Considering the aforementioned factors, it makes sense for Guess to continue investing in South Korea along with its expansion in China, Japan and India. Incremental revenues from new store openings coupled with increasing same-store sales and e-commerce growth, can translate into strong revenue growth for Guess in South Korea. We believe that this growth will gradually outweigh the revenue decline in China, and Guess’s Asian business will return to growth again.Notes:
- Guess’s Q4 fiscal 2014 earnings transcript, Mar 19 2014 [↩]
- China Falters In Efforts To Boost Consumption, The Wall Street Journal, July 16 2013 [↩]
- China’s economy to slowdown to 7.6% this year: World Bank, The Economic Times, Jun 6 2014 [↩]
- China’s economy grows robust 7.7 percent in 2013, but signs of slowdown emerge, The Washington Post, Jan 20 2014 [↩]
- Apparel in South Korea, Euromonitor, Jul 2013 [↩]