Guess Resolves To Make A Turnaround With The Help Of Its Newly Appointed CEO

Guess (NYSE:GES) released its second quarter fiscal 2016 results on August 26th. The highlight of the earnings call was the appointment of Victor Herrero as the Chief Executive Officer of Guess Worldwide in July 2015. This is the first time in the company’s history that someone outside the Marciano family will be assuming the position. The criteria for selecting Mr. Herrero was his success in Inditex, a Spanish multinational clothing company, where he built a $4 billion business in Asia after starting from scratch. The 35-year-old Guess brand, with a presence in over 90 countries, is in dire need of major strategic changes. The specialty apparel retailer has been struggling with its performance, lately. Like other players in the retail industry, macroeconomic challenges in its major regions of its operations had hit Guess’s sales. Currency headwinds from its international regions and declining store traffic in North America are two significant challenges that had been crippling Guess’s growth in recent times. The appointment of a new CEO can be seen as a remedial measure for the company in an effort to make a turnaround in its performance. According to Guess’s management, Victor Herrero had been one of the instrumental personnel behind the disruptions observed in the fast fashion industry, hence it believes Victor Herrero might have what it takes to revive the ailing retailer. ^[1]

Guess’s revenues for the quarter stood at $546 million depicting a 10% year-on-year decline (1% decline in constant currency terms). The company’s net earnings for the quarter stood at $18.3 million reflecting around a 17% year-on-year decline. The company’s diluted earnings per share decreased by 19.2%, or 5 cents, to $0.21, with currency headwinds accounting for an erosion of around $0.10. ^[2]

We’ll revise our $25 price estimate for Guess, shortly.

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Victor Herrero’s 5-Pronged Strategy To Revive Guess ^[1]

•  The Sales And Merchandising Strategy

The sales force should have a thorough knowledge of the products sold and how those are unique from their competitors. The managers are expected to transform into product experts with an exhaustive knowledge of latest trends, product composition, and the most crucial selling items. The goal of this strategy is to feel the consumer’s pulse and understand what he or she truly desires. Instead of a push- based strategy of supplying whatever the company currently produces, Guess will henceforth rely more on a pull or demand based strategy by aiming to provide what the customer really wants.

• Digital Marketing Strategy

The brand will be portrayed as a unique lifestyle concept and the average age of its target audience will be lowered. Digital marketing and social media will play an important role in spreading the new brand  image and in connecting with the millennials via fashion bloggers, social media, etc. The company is on the lookout for a digital marketing officer to conceptualize these visions.

• Store Strategy

After reviewing the store structures, Guess will invest in the commercially important stores to project the company’s new brand image. The stores will be categorized into three segments based on their level of performance and then a roadmap for improvement will be strategized for each category. There will also be a rigorous check kept on the level of stocks so as to gauge the performance in a  more quantitative manner and also to effectively replenish stocks whenever required.

• Yearly Retail Calendar

Guess will maintain a yearly retail calendar for all its stores so that it can capture all the selling opportunities such as mall events, promotions, holidays, in a more effective manner.

• Increase Stock Keeping Units (SKUs) In Stores

The increased number of SKUs will give an idea about what’s working and what isn’t and hence, help in building a better collection of products, with a focus on the newer and faster-growing categories.

 The Top Initiatives That Guess Plans To Undertake ^[1]

Phase I

• The product pricing will be periodically reviewed and revised according to the market sentiments. The company plans on achieving a better synchronization between the market environment and its pricing strategies in this manner.
• The company will increase its focus on Asia. Since Victor had been highly successful with the Inditex Asia business, he aims to replicate the success with Guess. Currently, Guess’s Asia business contributes around $250 million in revenues accounting for over 10% of the company’s revenues. Victor plans to increase the revenue contribution to around $750 million (or around 25% of the company’s total revenues). Guess started losing its stronghold in Asia since 2013 prior to which it experienced impressive growth in the region. The company is still grappling to recover its former position in Asia. Currently, the economic slowdown in China and Korea, along with the currency headwinds, have been Guess’s major roadblocks in Asia.
• The company will transition towards a flat and centralized structure, where corporate decisions such as logistics, finance, communications, and stock allocations, will be centralized in its headquarters. This will help enhance the firm-wide synergy between various operations.

Phase II

In the second phase of the growth initiatives, the company will focus on streamlining costs and enhancing the wholesale business.

Guess’s Regionwise Performance In The Second Quarter

Americas

Though Guess’s revenues in the Americas (erstwhile this division was known as North America, the name was changed to emphasize the growing representation of South and Central American countries in Guess’s business) Retail segment declined by 2% in constant currency on a year-over-year basis, however, there was a sequential improvement in both store traffic and comparative store sales, versus Q1 2016. The company’s sales through the e-commerce channel improved by 20% year-on-year. From a brand perspective, the Marciano product line displayed double-digit growth and there was also a sequential improvement in the Guess brand of product sales. With respect to store closures, the company had revised its estimates based on improving trends in the second quarter and expects to close roughly 40 stores for the full year (as against its earlier estimate of 60 store closures). ^[1]

Europe

The revenues in Europe experienced a 4% year-on-year constant currency growth. The quarter was positively impacted by $15 million worth of earlier than expected shipments. The sales growth was impressive in Italy, Iberia, and Germany. 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 the recession. ^[1]

Asia

The Q2 revenues in Asia declined by 6% in constant currency terms. The performance in China had significantly improved with double-digit growth in comparative store sales. However, this was more than offset by the slowdown in Hong Kong, Macau ( decline in tourist traffic), and Korea (post the MERS crisis). ^[1]

Guidance For Full Fiscal 2016

• Net revenues: 0.5% to 1.5% decline in constant currency and an additional 7.5% decline due to currency headwinds
• Operating Margin: 5% to 6% (including currency headwinds of 130 basis points)
• Diluted EPS: $0.89 to $1.02 (with a currency headwind impact of around $0.40)

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1. Guess Q2 2016 Earnings Call Transcript, Seeking Alpha, August 26, 2015 [↩] [↩] [↩] [↩] [↩] [↩]
2. Guess?, Inc. Reports Second Quarter Results, Guess News Release, August 26, 2015 [↩]