Guess’s Q3 FY 2016 Performance Might Improve With The Recent Change Of Its CEO
Guess (NYSE:GES) is set to release its third quarter fiscal 2016 (quarter ended October 31st) results on November 24th. In the second quarter, the company had appointed Victor Herrero – the person responsible for building a $4 billion business for Inditex in Asia – as its Chief Executive Officer. In dire need for strategic changes, the company appointed someone outside the Marciano family for the first time in this position. Guess had been struggling with macroeconomic challenges in its important operational regions. In its international regions, currency headwinds had been slowing down growth, and the declining store traffic in North America is creating a roadblock for its domestic growth. Herrero, who was crucial in bringing about major disruptions in the fast fashion industry, had chalked out a five-pronged strategy to revive the ailing retailer. [1]
For the first half of fiscal 2016, Guess’s revenues stood at $1.03 billion, reflecting around a 10% year-on-year decline. However, the company’s net earnings for the first half stood at $21.6 million reflecting around a 9% year-on-year growth, and its diluted earnings per share increased by 9%, to $0.25. Guess’s second quarter earnings didn’t reflect any growth in any of these parameters due to severe currency headwinds. [2] [3]
For full fiscal 2016, the company expects a 0.5% to 1.5% decline in net revenues, in terms of constant currency, and an additional 7.5% decline due to currency headwinds. Its diluted EPS for the year is expected to fall between $0.89 to $1.02 (with a currency headwind impact of around $0.40).
We’ll revise our $24 price estimate for Guess, post the earnings results.
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Guess’s appointment of an ‘outsider’ as its CEO shows how keen the company is to revive its performance from its lackluster state. In Guess’s Q2 FY2016 earnings call, Mr. Herrero spoke about a 5-pronged strategy to revive Guess. [1]
Some of the strategies include the following: The sales force will need to possess an exhaustive knowledge about Guess’s products and their uniqueness as compared to its competitors. This will help in understanding the unique customer requirements and providing her with what she truly demands (pull-based strategy), rather than supplying her with whatever is available (push-based strategy). The brand will also start targeting customers of a lower age group by repositioning itself as a unique lifestyle brand and its presence on digital media will be significantly increased. Towards this end, the company is looking out for a digital marketing officer.
Guess will also increase investments in commercially important stores in order to promote the new younger image. The stores will be further categorized based on their performance level and there will be a rigorous stock management schedule in place. The company will keep a better track of inventories in stock in order to manage its supply chain more efficiently.
The growth initiatives for its first stage will include a flatter organizational structure, better product pricing management, and an increased focus on Asia. Currently, Asia contributes to around 10% of Guess’s revenues ( ~$250 million). But, Mr. Herrero, known for building a massive business for Inditex in Asia, plans to increase the contribution from this region to $750 million, or around 25% of the company’s total revenues.
Guess enjoyed a strong position in Asia till 2013, since then it witnessed a slowdown in the region. The company is still struggling to recover its former position in Asia. Currently, the economic setbacks inflicting China and Korea, along with the currency headwinds, have been Guess’s major roadblocks in Asia.
Guess’s Recent Performance In Different Regions
Americas
In Q2 2016, Guess’s revenues in the Americas experienced a sequential improvement in both store traffic and comparative store sales, versus the first quarter, and the Marciano product line displayed double-digit growth. In view with the improving trends, the company has decided to close 40 stores in the whole year, as against the earlier estimate of 60 stores. [1]
Europe
Like other retailers, Guess had been suffering in Europe due to the weak economic growth in the region. The condition is worse for Guess because its presence is concentrated towards Southern Europe (Spain, Italy, France, and Greece) which had been the worst affected by the recession. However, in Q2 2016, the company witnessed sales growth in Italy, Iberia, and Germany.
Asia
Guess’s performance has improved in China, with double-digit growth in comparative store sales. However, in Q2 2016, this was more than offset by the slowdown in Hong Kong, Macau ( decline in tourist traffic), and Korea (post the MERS crisis).
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Notes:- Guess Q2 2016 Earnings Call Transcript, Seeking Alpha, August 26, 2015 [↩] [↩] [↩]
- Guess’s 10-Q for the quarter ended Aug 1, 2015 [↩]
- Guess?, Inc. Reports Second Quarter Results, Guess News Release, August 26, 2015 [↩]