Factors Threatening Guess’s Near Term Growth

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Specialty apparel retailer Guess (NYSE:GES) hasn’t been at its best over the past few years on account of several macro-economic and product-related issues. In Europe, persistent weakness in demand and consumption has troubled a number of companies, including Guess, and an economic slowdown in China and South Korea has severely impacted its growth in Asia. In North America, the poor performance of the accessories business, Guess’s pricing strategies and an industry-wide decline in foot traffic have all pummeled the retailer’s growth. Apart from these issues, the strengthening dollar has also played against the company.

What’s interesting to note about Guess’s struggle is that most of the problems responsible for the lack of growth are not exclusive to it. What has troubled Guess has actually affected the entire retail industry in the U.S., Europe and Asia. In this analysis, we take a look at the macro-economic factors that are likely to cause problems for the company in the near term.

Our price estimate for Guess stands at $25, implying a premium of close to 25% to the market price.

See our complete analysis for Guess

Weak Macro-Economic Conditions In Europe

Guess is facing problems in Europe mainly due to the unfavorable economic environment and its high concentration in the worst hit southern Europe. The retailer operates over 600 stores in Europe and has high exposure to countries such as Spain, Italy, France and Greece, where economy remains weak. Economic growth in Italy and France has been painfully slow, arising from weak domestic demand, which is troubling retailers such as Guess. Even during the first quarter of 2015, revenues from these markets were down in low-mid single digits despite a relatively better economic environment. Since the company cannot expect a substantial rise in demand in the foreseeable future, it may have to consolidate its business, or it won’t see much growth. In addition to weak demand, the retailer has been losing some of its revenues to self-cannibalization, due to high concentration in the aforementioned markets. This makes business consolidation all the more important. At present, things aren’t looking too good for Guess Europe.

The European business accounts for about 35% of Guess’s value, as per our estimates.

Foot Traffic Decline In The U.S.

Store-based retailing is weakening in the U.S. Buyers are avoiding stores and consistently moving towards online shopping for its convenience and incentives. As a result, foot traffic across the industry has declined significantly over the past couple of years, which has impacted sales of almost all store-based retailers in the country. Several reports from RetailNext and ShopperTrak have stated that store traffic in the U.S. has declined by more than 5% year over year almost every month of the last couple of years. [1] Simultaneously, online sales have gone up, but the majority of store-based retailers have lost more from a decline in store traffic than they have gained from incremental online sales. Amid falling traffic and growing online sales, retailers such as Guess have adopted the omni-channel model, where stores are serving as fulfillment centers in addition to catering to incoming buyers. Companies are now trying to offer its buyers the best of two worlds (online and stores), while closing stores that are not necessary for the omni-channel model. Even Guess is consolidating a small portion of its domestic store fleet.

The North American retail and wholesale business together account for about 32% of Guess’s value, as per our estimates.

Economic Slowdown In Asia

After witnessing runaway growth in Asia for several years, Guess lost its momentum is 2013 and continues to struggle to date. The slowdown in Chinese and South Korean economies has made its extremely difficult for Guess to match its historical performance, and currency headwinds have just made things worse. Last year, the Chinese economy did not do too 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 slower rate in 2015. [2] Hence, Guess may continue to see weak foot traffic and cautious consumer spending in 2015, forcing it to persist with aggressive promotions and discounts. In South Korea, economic growth softened towards the latter half of 2014. The country’s central bank expects the economy to slow down further in 2015 on account of lower inflation and weak consumer spending. [3] This can push Guess to go heavy on discounting this year, and that can weigh on its revenue growth and margins.

The Asian business accounts for about 10% of Guess’s value, as per our estimates.

Currency Fluctuations

Guess earns close to 50% of its revenues from outside North America, and so its growth is highly susceptible to currency fluctuations. In 2014, for instance, dollar appreciated significantly against euro and Asian currencies, which pummeled Guess’s revenues coming in from Europe and Asia, adding to its existing problems. Though this is something the company cannot control, it still remains a big threat. In fact, dollar is expected to gain more strength in 2015, which will keep a check on Guess’s European and Asian business, which aren’t doing well even without the currency issues. Exchange rate analysts at BMO Capital believe that the dollar can appreciate 5%-15% against other currencies in 2015. [4]

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Notes:
  1. Retail Next Press Room []
  2. China’s 2014 economic growth misses target, hits 24-year low, Reuters, Jan  20 2015 []
  3. South Korea GDP Growth at Nearly 1-1/2 Year Low, Trading Economics, Jan 22 2015 []
  4. Dollar Forecast to Rise 15 Pct in 2015 Say BMO Capital, PoundSterling Live, Jan 22 2015 []