Online Growth And Store Consolidation Will Help Guess’s Store Productivity
Guess‘s (NYSE:GES) North American revenue per square feet declined from $494 in 2010 to $462 in 2013 driven by a decline in the number of tourists, the poor performance of the accessories business, and the company’s strategies to conduct more full priced sales. Moreover, a pullback in consumer spending, as well as customer shift to fashion-forward brands, had a negative impact on Guess’s store productivity as well.
However, going forward, we expect the retailer’s store productivity to improve, driven by incremental online sales, the development of an omni-channel platform and consolidation of an under-performing store network. Guess’s online sales have been growing at a robust pace, which has encouraged it to push aggressively towards omni-channel retailing to leverage customers’ online shopping interest to enhance store sales.
Due to weak store performance, the company has decided to consolidate its U.S. store network, which has become a prominent trend in the U.S. apparel industry lately. Following an analysis of its North American store fleet, Guess identified 50 stores to close during the next 18 months that no longer generate sufficient store traffic. Although this will have a negative impact on the retailer’s revenue growth, it can improve store productivity.
Our price estimate for Guess stands at $32, implying a premium of more than 40% to the market price.
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Online Sales Growth & Omni-Channel Retailing Will Help Productivity
With increasing Internet penetration and proliferation of smartphones and tablets, online apparel sales have grown at a robust pace over the past five or six years, and Guess has been at the forefront of this growth. This is evident from the fact that Guess has sustained a tremendous direct-to-consumer growth rate in the recent past, when growth across the industry was relatively slow. The retailer’s North American online revenues increased by a staggering 49% in Q1 2014 and 48% in Q2. Such growth is expected to continue in the future, as eMarketer forecasts that online sales of apparel and accessories will grow from $44 billion in 2013 to $86 billion in 2018. In addition to growth in the industry, Guess’s omni-channel initiatives will help it sustain a strong and steady growth momentum.
Over the past year and a half, Guess has worked hard to integrate its e-commerce business with its stores channel, an its mobile and social media strategy. During the second quarter of 2013, 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. Additionally, Guess has deployed various multichannel initiatives, which include a “reserve online, pick in store” service, deploying iPad kiosks in select stores, and developing a mobile-optimized version of its websites. Alongside, it has upgraded its point-of-sales system, enhanced its product life cycle management system and increased the efficiency of its supply chain. Earlier this year, Guess launched a state-of-the-art mobile app intended to augment customer service, fashion promotion and provide a seamless multichannel shopping experience.
We believe that as the company continues to develop this platform, it will be in a better position to drive store and web traffic. This will ultimately help its revenue per square feet. Guess has stated in its earnings call, that it expects significant growth for omni-channel over the next three years. Their efforts to date support this.
Store Consolidation will Result in Higher Revenue per Store
Guess has been struggling in North America for some time now and a portion of its stores aren’t operating at their full capacity. However, since they all account for similar store space, the retailer’s overall revenue per square feet is below the revenue per square feet of stores operating at optimum capacity. After analyzing this, the company recently unveiled plans to close 50 stores that do not generate adequate revenues. Since Guess is already struggling to attract customers due to low brand loyalty, it is planning to close underperforming stores to offset the impact of low store traffic.
The retailer has identified 50 stores that will shut over the course of next 18 months through lease expiration and closure. [1] While this will weigh on the company’s revenue growth, it can positively impact its revenue per square feet. Moreover, closing such stores will reduce Guess’s SG&A expenses at a faster rate than its revenue decline, which can push its margins upwards. However, fewer stores mean a fall in revenues and thereby cash flow. Hence, we believe that the company cannot persist with its consolidation strategy for too long. In fact, it may not close more outlets after it is done with these 50 stores.
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- Guess’s Q2 fiscal 2015 earnings transcript, Aug 27 2014 [↩]