Recovering In China Will Be An Arduous Task For Guess

-26.41%
Downside
31.20
Market
22.96
Trefis
GES: Guess? logo
GES
Guess?

After flourishing for over four years, Guess‘s (NYSE:GES) growth in Asia stalled mainly due to weak results form 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 in the wake of weakening economy. While revenues from the region fell by only 3% in Q4, they stumbled by 8% in both the quarters of 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. Although Guess is trying hard to improve its performance in China, weak market conditions are not making it easy for the retailer. Moreover, serving discerning Chinese consumers in a highly competitive environment isn’t easy even for established players. Hence we believe that Guess’s performance in the region may continue to falter in the near term.

Our price estimate for Guess stands at $32, implying a premium of close to 50% to the market price.

See our complete analysis for Guess

Slowing Economic Growth

Over the past few months, retail sales in China have followed a disappointing growth trend. They grew by just 11.9% year over year in August, (which is slow by China’s standard), missing consensus estimate of 12.1%. In fact, it was the month with slowest retail sales growth since April 2014. [1] Overall, China’s retail sales growth this year has been slower than what it was last year. In 2013, retail sales in China grew at a monthly average of over 13% year over year, while they increased at an average monthly rate of 12% during the first eight months of 2014. [2]

This can be attributed to the recent slowdown in China’s economic growth. While the country’s GDP grew 7.7% last year, it is expected to expand at a slower pace in 2014 (~7.5%) and 2015 (~7.3%). [3] Hence, retail sales growth in the region in near-medium term will most likely remain weak, which will increase the problems for apparel retailers. Guess’s struggle in China began last year, when retail sales growth and economic environment were better than the current year. Given that the economy and retail growth have slowed down this year, Guess’s problems may worsen.

Chinese Market is not Easy to Survive in

Between 2000 and 2005, top 500 domestic brands in China had an average life cycle of just 1.5 years. In addition to the fierce competition in the market, this was attributable to rapidly changing consumer tastes. Among different age groups, consumer preferences vary drastically, which makes it difficult for retailers to target a particular age group. For instance, a retailer specifically targets the age group of 18-25 years, several loyal customers will outgrow this age range within a few years. Subsequently, their needs will change and they might start shopping at other places. Ultimately, the retailer loses its loyal customer base due to the lack of merchandise relevant to different life stages of a customer. Given that Guess doesn’t have many brands that focus on different customer groups, the aforementioned trend will continue to trouble it while it strives for better sales. [4]

The Chinese apparel market is highly competitive with a number of fashion-focused brands expanding aggressively. Fast-fashion brands Zara and H&M, who troubled several apparel retailers including Guess in the U.S., are on their way to do so in China as well. These brands have entered tier 1 cities and are planning to grow their business rapidly. Zara operated about 120 stores in China in 2012, which is likely to double in the near future. On the flip side, Guess isn’t expanding aggressively in the market and it will have to rely on rise in same store sales for a bulk of its revenue growth. Hence, it can easily fall behind fast-fashion retailers.

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Notes:
  1. Growth in retail sales slows to four-month low in August, Focus Economics, Sept 15 2014 []
  2. China Retail Sales YoY, Trading Economics []
  3. World Economic Outlook, IMF []
  4. Winning in China’s Apparel Market, AT Kearney []