Guess: Three Factors That Will Augment North American Revenue Per Square Feet
Los Angeles-based specialty apparel retailer, Guess (NYSE:GES), has been struggling in North America for the past few years, due to its slack response to changing fashion trends, a decline in number of tourists, fewer promotional activities and the poor performance of the accessories business. The retailer’s revenue per square feet (an important metric that measures store productivity) declined from $494 in 2009 to $471 in 2012, owing to the aforementioned problems. Despite the company’s aggressive attempts to improve its merchandise design and pricing, its revenue per square feet declined further to $462 in 2013, due to an overall industry slump. Guess’s dismal performance continued in the first three quarters of 2014, on account of weak consumer spending and a decline in foot traffic.
Although the recent past hasn’t been good for the company’s revenue per square feet, we believe that it can gradually recover going forward with growth in online revenues, omni-channel retailing and store consolidation. Although e-commerce revenues don’t contribute much to Guess’s overall sales at the moment, they have grown at a tremendous pace over the past few quarters. If the retailer manages to keep its online growth at these levels, it won’t be long before the channel starts making a material contribution.
In the wake of the ongoing customer shift from store to web shopping, Guess has accelerated the deployment of its omni-channel initiatives, in an attempt to drive its web customers to stores. These initiatives have shown some success so far and they are likely to have a positive impact on store traffic in the long run.
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. With the closure of stores that generate lower-than-average revenue per square feet, Guess’s overall revenue per square feet can move higher.
Our price estimate for Guess stands at $32, implying a premium of close to 60% to the market price.
See our complete analysis for Guess
Online Growth
While Guess’s stores have struggled for growth in North America, its web channel hasn’t had the same problems. The retailer’s North American online revenues increased by a staggering 49% in Q1 2014 and 48% in Q2. Although its growth slowed down a bit to 38% in Q3, it was still significantly better than what its peers achieved. Despite this hefty growth, Guess has been unable to improve its overall results in the region because its web channel is very small in comparison with its overall size. However, in the recently concluded quarter, the positive contribution of robust e-commerce growth was visible. North American online sales increased 38% and had a positive impact of two percentage points on the segment’s overall comparable sales. [1] This indicates that gradually the business will become big enough to have a notable impact on the Guess’s sales. The industry growth forecast supports this argument. According to eMarketer, online sales of apparel and accessories will grow from $44 billion in 2013 to $86 billion in 2018. [2]
Omni-Channel Retailing
Over the past couple of years, Guess has worked hard to integrate its e-commerce business with its stores channel, in order to attract customers irrespective of their preferred shopping medium. 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. During its fourth quarter earnings call, Guess had stated that it will be deploying this service in all of its North American stores. Meanwhile, Guess deployed various multichannel initiatives, which included a “reserve online, pick in store” service, iPad kiosks in select stores, and mobile-optimized version of its websites. Alongside, it upgraded its point-of-sales system, enhanced its product life cycle management system and increased the efficiency of its supply chain. Early in 2014, Guess launched a state-of-the-art mobile app intended to augment customer service, fashion promotion and provide a seamless multichannel shopping experience.
It is worth noting that Guess’s online growth has been better than its peers for several quarters now, which places it in an advantageous position in the context of omni-channel development. With time, the aforementioned strategies along with the robust online growth, will result in an improvement in store traffic, and subsequently revenue per square feet.
Store Consolidation
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. Earlier this year, the company 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.
In its Q2 earnings call, the retailer had stated that it identified 50 stores that will be closed over the course of next 18 months through lease expiration and closure. While this will weigh on the company’s revenue growth, it can positively impact its revenue per square feet. However, this isn’t a sustainable solution, because the company will most likely drop this strategy after it closes a certain number of stores.
How Significant is this Metric?
We currently forecast Guess’s North American revenue per square feet to decline to $455 in 2014 and gradually improve thereafter to reach $510 over the next five-six years. However, if the figure improves to $560 driven by an improvement in merchandise selection, rapid growth in online revenues and success of omni-channel strategies, there will be less than 2% upside to our price estimate for Guess. On the contrary, if the figure remains on the current levels on account of the highly promotional environment in the U.S., there will only be 2% downside to our price estimate. This clearly indicates that North American revenue per square feet isn’t as significant a metric for Guess as it is for some of its peers. However, the company still needs to focus on the aforementioned strategies to curtail its comparable sales decline.
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Notes:- Guess’s Q3 fiscal 2015 earnings transcript, Dec 3 2014 [↩]
- U.S. Retail Ecommerce Sales Highest for Computers, Consumer Electronics, eMarketer, Apr 11 2014 [↩]