Guess’s Strategic Initiatives In 2015 And Its Future Implications

Guess (NYSE:GES) started 2015 on a very weak note. The company’s stock experienced a decline of over 30% in 2014 due to its persistent lackluster performance in all its important regions of operations. Though the company’s lukewarm performance continued over to 2015, it is important to note that Guess’s recovery seems to have been set in motion. Guess’s management realized that it needed to take some drastic measures to turnover its performance and towards that end, in Q2 FY2016 Guess appointed Victor Herrero (the executive responsible for building a $4 billion business for Inditex in Asia) as its Chief Executive Officer. For the first time in its history, the company appointed someone outside the Marciano family in this position. 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] In Q3 FY 2016, some of the initiatives have already been set in motion. Guess’s stock price in 2015 declined by only 4.5% year-on-year, in comparison to the huge erosion in 2014.

For the first nine months of fiscal 2016 (third quarter ended in October 31, 2015), Guess’s revenues stood at $1.55 billion, reflecting around a 10% year-on-year decline. The company’s net earnings for the period stood at ~$34 million depicting a 16% year-on-year decline. ^[2] This decline was primarily attributed to currency headwinds along with a declining foot traffic in the U.S. (however, the company has started seeing sequential improvements), Europe’s macroeconomic challenges, and the slowdown in Hong Kong and Macau in Asia. Guess has started witnessing improvements in China and South Korea.

Our $24 price estimate for Guess is at around a 20% premium to the current market price.

See our complete analysis for Guess

What Were The Initiatives Proposed By Victor Herero?

• The sales force is expected to have an exhaustive knowledge of the products sold and how those are differentiated from Guess’s competitors. This strategy can help the company understand the consumer psyche better in order to supply  the demand requirements. Guess is planning on relying more on a pull or demand based supply strategy.
•  Guess will be more aggressive with the promotion of a fresh brand image through the digital marketing and social media, which along with a greater reach will also try targeting a younger customer base than before.
• The company will target its commercially important stores in promoting its new brand image. Also, the stores will be put into three categories in accordance to their performance and a road map for growth will be formulated for each category.
• The stock movements will be reviewed more rigorously to gauge the performance better and to maintain a more efficient supply chain management.
• Guess will also maintain a yearly retail calendar to better attract consumers during all important events and holidays.

Along with these, the top priorities for Guess currently are: A better product pricing strategy, focus on the Asian business, and the transition towards a flatter hierarchy in Guess’s corporate environment. In the second phase of its development, Guess will focus on streamlining costs and enhancing the wholesale business.

 How Far Has Guess Progressed?

• Guess has started conducting sales workshops and product related training sessions to make its sales people better acquainted with its offerings. A bestsellers’ report has also been introduced so that the sales force can take advantage of that to maximize the sales of bestselling products.
• 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.
• Guess is trying to display a more diverse array of products in its stores along with an emphasis on the bestselling items.
• Also, focus is being given towards better stock management and effective replenishment of stocks.
• The company is currently looking 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.

Asia Will Be Crucial To Guess’s Future Growth

Guess’s sales have been sliding in Asia since 2013, when its net sales rose by just 0.4% after witnessing significant growth over the prior years. In 2014, the company witnessed a 4% decline in its Asia revenues to $281 million, primarily due to the slowdown in China’s economy. Guess’s current CEO Mr. Herrero is known for his impressive leadership for Inditex in Asia where he built a $4 billion business from scratch. Mr. Herrero has increased his attention for Guess’s Asia business. In Q3 FY2016, the company hired a new Director each 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. Further, Guess has doubled its capital allocation for the Asian stores and the e-commerce business in Asia has been strengthened by a greater presence in websites like Tmall, JD.com, and Guess.cn. ^[3]

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1. Guess Q2 2016 Earnings Call Transcript, Seeking Alpha, August 26, 2015 [↩]
2. Guess’s 10-Q for the quarter ended October 31, 2015 [↩]
3. Guess Q3 2016 Earnings Call Transcript, Seeking Alpha, Nov 24, 2015 [↩]