These Three Things Matter Most For Guess
A new CEO with a successful track record on board and a five point turnaround strategy in place, can Guess (NYSE:GES) meet the challenges of declining store traffic in a competitive retail industry and turn itself around? We believe so, given CEO Victor Herrero’s track record in Asia and the company’s focus on its Asian business growth. These could be key driving factors for future growth. The company is working on a strategy to communicate customer feedback in several ways back to the product team so as to to adapt its products to changing customer needs in a more timely way. This can improve its sales in future. Improving the cost structure is the new CEO’s priority and given Guess’ low margins, better supply chain management and low overhead costs can improve the valuation of the company.
See our complete analysis for Guess
Asian Markets
Over the next five years, the Asian clothing and apparel sector is expected to grow at the rate of 9.5%, surpassing growth rates of all other regions in the world. Consumer expenditure on clothing and footwear is expected to reach around $920 billion in 2018 from $625 billion in 2014. [1]. Given this growth potential and Mr. Herrero’s successful track record of leading Inditex, where he built a $4 billion business in Asia from scratch, we believe this focus on Asian markets could be key for Guess’ growth. Currently Asia contributes to around 10% of Guess’ revenues and the new CEO aims to increase this contribution to 25% of total revenues. Asian operations account for less than 10% of Guess’ valuation as per our estimates and we expect revenues from Asia to increase to around $300 million at the end of our forecast period. However, if the company meets its targets of rapid expansion in Asia and revenues touch $750 million by the end of our forecast period, there can be a 10% upside to our price estimate.
Adapting Products To Changing Customer Needs
Guess plans to develop its sales executives as “product experts” who will develop in depth knowledge of latest trends, product composition and key product differentiators. This team will act as sales experts and provide feedback to the production team, which can then adapt the product design to customer needs.
To attract a younger customer base, Guess plans to use social media for marketing and digital channels for customer feedback from millennials. This feedback will again feed into idea generation. It also plans to increase the number of stock keeping units (SKUs) in its stores to gather feedback and focus on fast growing product categories. All these initiatives are aimed at adapting its products to customer needs and this could be the most important driver of Guess’ future growth.
Improvement In The Cost Structure
Guess’ margins are lower than most of the other industry players, indicating a high cost structure. Its declining sales add pressure on the margins, given the impact of fixed costs. Improving the profitability of the company by focusing on the cost structure, supply chain and overhead is one of the priorities of the new CEO and we believe this can have a significant impact on the valuation of the company.
A 250 basis points increase in the EBITDA margins of Europe operations over our forecast period can lead to a 5% upside in our price estimate of the company.
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