Why 2015 Will Be A Mediocre Year For Guess’s Asian Business

May 20th, 2015 by Trefis Team
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After seeing runaway growth in revenues in Asia for several years, Guess (NYSE:GES) lost its momentum in 2013 as its net sales in the region increased just 0.4%. In the subsequent year, revenues declined 4% to $281 million mainly due to a weak macro-economic environment in its core market, China. Last year, the Chinese economy did not do to well, as salary growth across the market remained weak, which negatively impacted consumer spending. The country’s GDP growth rate hit a 24-year low in 2014, and is expected to grow at an even smaller rate in 2015. Hence, Guess may continue to see weak foot traffic and cautious consumer spending in 2015, forcing it to persist with aggressive promotions and discounts.

South Korea, the other important market for Guess in Asia, also did not yield desired results last year. Though it is a promising market for Guess from a long-term perspective, the retailer’s performance in the region remained soft in 2014, owing to unfavorable economic conditions towards the end of the year. The country’s central bank expects the economy to slow down further in 2015, on account of lower inflation and weak consumer spending. This can push Guess to go heavy on discounting this year, that can weigh on its revenue growth and margins.

Negative currency headwinds troubled retailers such as Guess throughout last year and it can happen this year as well, given that dollar is expected to appreciate further against other currencies. While this signals the gradually improving momentum in the U.S. economic growth, it isn’t helping companies with global operations.

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Our price estimate for Guess stands at $28.32, implying a premium of close to 50% to the market price.

See our complete analysis for Guess

Weak Economic Growth In China And South Korea

Guess earns a bulk of its Asian revenues from China and South Korea, where persisting market conditions aren’t too conducive for non-discretionary retailing. Last year, the retailer’s revenues declined 4% and this year, both these economies are expected to perform worse. In 2014, China’s GDP expanded by 7.4%, trailing the official growth estimate of 7.5%. While the growth rate appears appealing as such, it was nothing compared to China’s growth standards, which can be gauged from the fact that its 2014 GDP gains were the slowest in 24 years. 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. This year, IMF expects the country’s GDP to grow just 6.8%, which implies that consumer spending will be worse in 2015 and, hence, retailers such as Guess cannot expect a turnaround in their performance. [1]

South Korean GDP grew 3.3% in 2014 following a 3% increase in the prior year. While there were clear signs of economic improvement in 2014, growth was particularly weak towards the latter part of the year, owing to a painfully slow recovery in consumer spending. [2] In fact, this pushed South Korea to revise its 2015 GDP growth forecast twice in a span of one month. In December 2014, the country’s central bank trimmed its 2015 growth forecast from 4.0% to 3.8% and, less than a month later, this was revised down again to 3.4%. [3] [4] Earlier this month, IMF revised its growth target for South Korea to 3.3%. [5] Given the prevailing conditions in the market surrounded by weaker-than-desired inflation, it won’t be surprising if the country’s 2015 GDP fails to meet the target. Guess stated in its Q4 2014 earnings call that the level of promotional activities in the market was higher-than-anticipated, and we believe that the retailer might continue with the strategy in 2015 as well.

Negative Currency Headwinds

The dollar has appreciated significantly among other currencies over the past year, signalling the strengthening U.S. economy. Since July last year, it has gained 16% against euro and 15% against yen. [6] For U.S. retailers such as Guess, Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF), this has suppressed revenues coming in from European and Asian markets. In Q4 2014, there was a 2 percentage point difference in Guess’s Asian revenue decline on a reported basis and a constant currency basis. Through the year 2015, the dollar is expected to appreciate 10% against other currencies, which means Guess’s international revenues will feel a formidable downward pressure, even if it somehow manages to reduce the intensity of its promotions.

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Notes:
  1. China’s 2014 economic growth misses target, hits 24-year low, Reuters, Jan  20 2015 [↩]
  2. South Korea GDP Growth at Nearly 1-1/2 Year Low, Trading Economics, Jan 22 2015 [↩]
  3. South Korea Cuts Its 2015 Growth Forecast, Business Insider, Dec 22 2014 [↩]
  4. Bank of Korea Cuts 2015 Inflation, Economic Growth Forecast, Bloomberg, Jan 15 2015 [↩]
  5. IMF cuts Korea’s growth forecast to 3.3%, The Korea Times, Apr 15 2015 [↩]
  6. The winners and losers of a strong dollar, The Washington Post, Jan 23 2015 [↩]