Macroeconomic Travails And Flat Demand In Its Main Regions Might Keep Guess Under Pressure
Guess (NYSE:GES) is slated to release its Q2 fiscal 2016 results on August 26th. The specialty apparel retailer had been struggling lately with its financial performance. On account of the macroeconomic challenges faced in its major regions of operations, Guess, like other players in the retail industry, had been adversely hit. This, coupled with declining store traffic in North America and currency headwinds, had impaired the company’s top line growth. This downhill trend is expected to continue for the company in the near future.
In the first quarter, Guess witnessed an 8.4% decline in net revenues to $478.8 million; however, excluding the impact of currency headwinds, the year-over-year change was flat. Surprisingly, even after its top-line erosion, Guess reported a profit of $3.3 million in Q1 FY2016, with operating margins of 0.9%, which was above its previous guidance of -1.5% to -1%. The company reported losses of $2.1 million in the same period, a year ago. The Q1 FY2016 bottom-line performance was boosted by a weak comparable period, tight expense management, a favorable impact from segment and business mix, fewer markdowns, and higher initial markups. [1]
Guess’s second quarter performance is expected to be hit by a macroeconomic slowdown and lackluster demand in certain geographies. The retailer expects currency headwinds to have a negative impact of almost 9.5% on consolidated revenue growth for the second quarter and 7% for the full year.
We’ll revise our $25 price estimate for Guess, post its second quarter earnings results.
See our complete analysis for Guess
Guess’s Performance Had Been Adversely Hit In All Its Main Geographies
- North America
Guess is trying to restructure its business in the U.S. with the opening of stores in lucrative locations, closing down stores at unprofitable locations, and building a stronger presence through the omni-channel (online and stores) model. U.S. buyers are displaying an increasing level of preference to online shopping due to its conveniences. In its Q1 fiscal 2016 earnings call, Guess’s management had spoken about the company’s ongoing progress towards omni-channel integration. During the first quarter, Guess had shut down 11 stores, which brought its store count to 470. [2] The company plans to close 60 stores and open 10 retail outlets across North America for the full year. This, coupled with the strengthening U.S. dollar against the Canadian dollar, might further dampen the retailer’s revenues in North America.
It is important to note that, even though the online shift is helping Guess’s e-commerce revenues, it is still losing more due to the loss of store customers. In Q1 2016, Guess experienced a 14% e-commerce revenue growth, which wasn’t large enough to lift the overall growth figures. Guess had witnessed higher growth through the e-commerce channel in the past.
Additionally, Guess needs to rev up sales in its merchandise portfolio. Its Marciano line delivered positive sales growth in the first quarter and the retailer needs to leverage the success strategy for Marciano for the rest of its products. Though Guess is trying to reposition its merchandise portfolio to better suit customers’ tastes, the retailer hasn’t struck the right chord with its users yet.
The North American retail and wholesale business together account for about 30% of Guess’s value, as per our estimates.
- Europe
Guess, like other retailers, is facing problems in Europe due to weak macroeconomic conditions. To exacerbate the situation, Guess’s presence is concentrated towards Southern Europe (Spain, Italy, France, and Greece) which had been the worst affected by recession. However, Guess’s problems in Europe started even before the onset of the depreciation of the Euro against U.S. dollars, with a lackluster demand for its products in the main markets. The company might have to consolidate its European business in the future and strive harder to create a more appealing brand image. A slight improvement in its performance might be expected from Europe towards the latter half of fiscal 2016. However, this might be dampened by the currency headwinds.
The European business accounts for about 35% of Guess’s value, as per our estimates.
- Asia
Guess started losing its sheen in Asia since 2013 before which it experienced impressive growth in the region. Unfortunately, the company is still grappling to recover its erstwhile strong foothold in Asia. The slowdown of the Chinese and Korean countries, coupled with the currency headwinds have made it increasingly difficult for the retailer to return to its former glory. In 2014, China’s GDP growth rate hit a 24-year low and is expected to continue growing at an even slower pace in 2015. [3] South Korea’s economic growth softened towards the latter half of 2014, and the country’s central bank expects the economy to slow down further in 2015, on account of lower inflation and weak consumer spending. [4] Consequently, Guess’s poor performance in Asia is expected to persist in 2015, forcing the retailer to offer heavier discounts that can further weigh on its revenue growth and margins.
The Asian business accounts for about 10% of Guess’s value, as per our estimates.
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Notes:- Guess Reports First Quarter Results, Guess, June 2, 2015 [↩]
- Guess’s Q1 fiscal 2016 earnings transcript, June 2 2015 [↩]
- China’s 2014 economic growth misses target, hits 24-year low, Reuters, Jan 20 2015 [↩]
- South Korea GDP Growth at Nearly 1-1/2 Year Low, Trading Economics, Jan 22 2015 [↩]