Despite A Lackluster Quarter, Guess’s Recovery Seems To Be Underway

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Guess (NYSE:GES) released its third quarter 2016 earnings results on November 24th. Despite its weak performance, the company had performed within the guidance given in its Q2 FY 2016 earnings. In some of the parameters, Guess’s performance even topped management guidance. For example, the company’s EPS, operating earnings, and operating margins surpassed the high end of the guidance. In its Q2 FY 2016 call, the company’s new CEO, Victor Herrero, spoke about the new roadmap that he had formulated to steer the ailing retailer towards a sustainable growth path. The third quarter earnings discussion focused on the progress the company has made in implementing those strategies. The company is also concentrating on Asia for the growth of its business. It has recently appointed two new directors in the region and has doubled store investments to boost Asia sales. [1]

Guess’s revenues for Q3 FY2016 stood at $521 million, depicting   around a 12% year-on-year decline (~4% decline in constant currency terms). The company’s net earnings for the quarter stood at $12.4 million reflecting a 40% year-on-year decline.  Guess’s diluted earnings per share decreased by around 38%, to $0.15, with currency headwinds accounting for an erosion of around $0.13. [2]

We’ll revise our $24 price estimate for Guess, shortly.

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Guess Is Progressing With The Implementation Of Herrero’s Strategies 

  • Sales And Merchandising Strategy: Introduced Workshops And Review Based Sales 

Aim: The sales force is expected to have an exhaustive knowledge about the company’s products and the unique selling points for Guess.
Progress: Towards that end, sales workshops and product related training sessions have been put in place. Additionally, a bestsellers’ report has been introduced so that the sales people can review it to maximize the sale of popular products.

  • Digital Marketing Strategy: New Position Created As Director Of Social Media To Better Target The Millennials 

Aim: The strategy proposed the portrayal of the brand as a unique lifestyle concept and to start targeting a younger audience group. Towards this end, digital media will play a pivotal role.
Progress: The company recently hired a Director of Social Media because it believes that would be effective in spreading the new brand  image and in connecting with the millennials via fashion bloggers, social media, etc.

  • Store Strategy: Better Visual Merchandising And More Rigorous Stock Replenishment Has Been Put In Place

Aim: To gauge the performance of stores and enhance investments in commercially important stores and to better project the company’s new brand image. Additionally, the stores will be segregated into three performance-based categories. The stock checking would be made more rigorous to make more timely replenishments.
Progress: The company is currently striving to display a more diverse array of products in the stores along with the emphasis on the bestselling items. Also, better stock management and effective replenishment is being given the most importance in the stores.

  • Yearly Retail Calendar: The Implementation Is Underway With An Eye To Capture Both Micro And Macro Events

Aim: To maintain an annual retail calendar so as to better target sales opportunities during  mall events, promotions, or holidays.
Progress: The plan is in the process of being implemented at the district and national levels. It aims to capture both macro events, such as a state or national holiday, and micro events that might occur locally.

  • Increase Stock Keeping Units (SKUs) In Stores: On The Lookout For A Product Manager

Aim: The increased SKUs will point towards the more successful products and help in building the new and rapidly growing categories.
Progress: The company is on the lookout for a product manager who would be the link between the stores and the headquarters, in order to provide customer feedback,  which can then be implemented in the merchandising, planning, and allocation process.

  • Better Product Pricing To Optimize Value Creation For Customers

 Aim: The product pricing will be adjusted as per the market sentiments.
Progress: There were stores  within the EU where different retail stores had different prices for the same product. These differences have been removed and actions are being taken to realign some of the product pricing to provide optimal value to customers.

Guess’s Focus On Asia Is Increasing

Guess has been trying to revive its Asia business since 2013. After witnessing impressive growth in Asia for several years, Guess’s net sales in Asia rose by just 0.4% in 2013. In 2014, mainly due to the slowdown of the Chinese economy (which is Guess’s core market in Asia), Guess’s revenues in Asia fell by 4% to $281 million. However, CEO Herrero – who previously built a $4 billion business from scratch for Inditex in Asia – wishes to focus on Guess’s Asian business growth. You can read our previous article on how the revival of its Asian business can significantly raise Guess’s valuation.

In Q3 FY 2016, Guess took a few steps to gain a better stronghold in its Asia business. The company hired a new Director for China and a new Director of the Middle East, India, and Southeast Asia. Both the directors are Mr. Herrero’s ex-colleagues from Inditex. This move suggests how the new CEO is serious about reviving Guess’s Asia business by working alongside colleagues with whom he is already familiar. Additionally, Guess’s capital allocation for stores in Asia has been doubled to improve business in the region. Finally, the e-commerce business in Asia has been ramped up through websites such as Tmall, JD.com, and Guess.cn. [1]

Guess’s Regionwise Performance In The Third Quarter

  • Americas

Guess’s revenues in the Americas Retail division decreased by 7% year-on-year in terms of US dollars. The results came below the management’s expectation and was mainly due to the company’s promotional activities and the lower average unit sales. However, the e-commerce channel delivered an 18% top line growth in the region. The company is witnessing healthy demand for women’s clothing such as dresses, wovens, and knit tops.  However, the demand for accessories such as handbags, watches, and footwear has been persistently weak. [1]

  • Europe

The revenues in Europe declined by 15% in terms of U.S. dollars. Though the comparative store sales were strong and exceeded the high end of the management’s expectation, the growth was offset by the lower shipment of wholesale products. [1]

  • Asia

The Q3 revenues in Asia declined by 17% in terms of U.S. dollars. Like the previous quarter, the performance in China showed significant growth in comparative store sales, but this was more than offset by a shift of wholesale shipments to the fourth quarter. Guess’s business in Korea witnessed sequential improvement with the phasing out of the G by GUESS business.

Guidance For Full Fiscal 2016

  • Net revenues: 0.5% to 1.5% decline in constant currency and an additional 8% decline due to currency headwinds
  • Operating Margin: 5.5% to 6% (including currency headwinds of 130 basis points)
  • Diluted EPS: $0.93 to $1.02 (with a currency headwind impact of around $0.40)

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Notes:
  1. Guess Q3 2016 Earnings Call Transcript, Seeking Alpha, Nov 24, 2015 [] [] [] []
  2. Guess?, Inc. Reports Third Quarter Results, Guess News Release, Nov 24, 2015 []