- European Operations constitute 53% of the Trefis price estimate for Guess?'s stock.
- Licensing & Other constitutes 29% of the Trefis price estimate for Guess?'s stock.
- North American Wholesale constitutes 13% of the Trefis price estimate for Guess?'s stock.
WHAT HAS CHANGED?
- Guess Tops Estimates in Q3 FY 2021
Revenue in the fiscal third quarter declined by 8% to $569.3 million, topping the consensus estimate of $515.6 million in sales. That was a meaningful improvement compared with the declines that the apparel maker suffered throughout the first half of the year. That resulted in adjusted earnings per share of $0.58, well above the $0.05 per share in adjusted profits that Wall Street analysts were modeling for. Guess had to close approximately 5% of its stores near the end of the quarter due to government lockdowns. However, investors were pleased that Guess declared a quarterly dividend of $0.1125 per share, the second dividend declaration after it temporarily deferred the payout in the fiscal first quarter.
- Impact Of COVID-19
Covid-19 pandemic continues to take its toll on the apparel retail sector. Guess stock was also beaten down due to store closures during the pandemic. As a result, it furloughed workers, reduced corporate pay, and cut expenses to compensate for the loss of revenues. The company resorted to substantially marking down merchandise. In many cases, the company also sold clothes at a loss. Going forward, the retailer has declined to provide specific financial guidance for Q4. The company merely offered commentary, expecting revenue in the fiscal Q4 to be down in the low to mid-twenties percentages due to store closures and product development changes.
Growing Customer Base
Guess' strong revenue growth can be partially attributed to its growing customer base. For increasing its customer base, the company is mainly targeting the millennials, and to do so, it is strengthening its digital presence and upgrading its omnichannel capabilities. Additionally, it is transitioning all its websites into a state-of-the-art responsive site, which will improve the user experience with faster speed and fewer navigation steps. It has also partnered with marketplaces such as Tmall, JD, and vip.com in China, La Redoute and Otto in Europe, and Amazon in the U.S. and Canada to further build the omnichannel capabilities.
After years of poor performance, Guess is currently on a recovery path, as was evident in its year-over-year improvement in performance during fiscal 2020. The recovery was mainly a result of the implementation (which is still ongoing) of the strategic initiatives proposed by its CEO, Victor Herrero. Guess's international business, which accounts for around 60% of its sales, is growing at a faster pace than its domestic business due to the allocation of more capital resources to the former. For the full fiscal year 2020, Guess's revenues growth increased 2.6% to $2.67 billion, compared to $2.6 billion in the prior year.
As per Guess's three-year plan, around two-thirds of its revenue and profit growth is expected to come from outside the U.S. Guess is in the process of opening new stores in Russia, Turkey, Ireland, Finland, Sweden, and Denmark. It will expand stores in Italy, France, Spain, Portugal, the United Kingdom, Belgium, Netherlands, Germany, and Poland. The company has a three-year revenue growth target of $200 million in Asia and $300 million in the Americas (which includes the U.S., Canada, Mexico, and Brazil).
- Guess appointed a new CEO to effect a turnaround in its performance
- Victor Herrero was appointed as the Chief Executive Officer of Guess Worldwide, and this is the first time in the company's history that someone outside the Marciano family assumed 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.
- Herrero formulated a 5-pronged strategy to revive Guess, which includes a reformed set of sales and merchandising strategy, digital marketing strategy, store strategy, maintenance of a yearly retail calendar, and increased stock-keeping units in stores.
- Some of the top initiatives that Guess would undertake include a periodic review of product pricing, focus on the Asia Market to increase its contribution to Guess's total revenue from the current 13% to around 25%, and a flat organizational structure.
- Guess's progress in Asia
- With an aim to grow the Asia business significantly, the company has doubled its capital allocation for the Asian stores and the e-commerce business in Asia with a greater presence in websites like Tmall, JD.com, and Guess.cn.
- Guess's revenue growth in Asia has been driven by new store openings, a rise in e-commerce sales, and comparable-store sales growth in Greater China.
- Guess is aiming for a performance turnaround in the Americas
- Guess is striving to create a better balance between the American retail and wholesale businesses to reap more benefits from this changing trend.
- The company closed 17 stores in the U.S. and Canada in FY 2020, and it plans on closing a total of 70 stores in the Americas by this fiscal year-end.
- Guess is also trying to improve its product offering in the region, and this has been an ongoing process that will continue over the near future, as well. A lot of customer feedback is also being taken in order to synchronize the changing customer demands into its offerings.
- The online marketing is being boosted more than traditional marketing with celebrity endorsements, which is further helping in building the relevance for its brands. Along with that, marketing and promotions through emails and updating of its mobile applications are also some of the steps that the company took, recently. Guess is building its omnichannel capability, as well. It tied up with Amazon Prime in Q2 and has started partnering with Walmart's Jet.com.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Guess's value that present opportunities for upside or downside to the current Trefis price estimate for Guess:
European Business Revenue
- European Business Revenue:
Revenues from European operations have grown from $538 million in 2007 to $1,011 million in 2012. However, the figure dropped to $939 million in 2013, primarily due to the company's over-reliance on southern Europe, where economic conditions are particularly weak. As the environment remained weak in the subsequent years, Guess's revenues in the region fell to $903 in 2014, $825 in 2015, and further to $791 and $998 in 2017 and 2018, respectively. Guess' profitability in the wholesale business is currently growing in Europe, which is evident from the fact that despite not growing the number of wholesale dealers significantly over the past year, the revenues from the wholesale business kept growing. This metric surged by 14% to 1,142 million in 2019 before further improving to $1,248 million in FY2020. Going forward, we expect European business revenues to reach around $1,250 as the company expands in lucrative markets such as Russia and Germany. However, If Guess's European revenues increase to over $2 billion by the end of the Trefis forecast period driven by aggressive expansion in lucrative markets, there could be a 15% upside to our price estimate for Guess.
Revenue per Square Foot - North American Retail
- Revenue per Square Foot:
Guess's revenue per square foot in North America declined from $493 in 2010 to $425 in 2016, and it declined further in FY2020 to $369. Due to a lack of footfall in the brick-and-mortar stores, Guess had been suffering in North America for quite a few years in the past. Hence, currently, the company is gradually trying to reduce its footprint and increase its profitability in the region. Currently, the Americas contribute over 40% to Guess' total revenues. The management plans on reducing this contribution to around 25% in the future, and it plans on achieving a 7.5% overall long term operating margin in the Americas. To achieve these goals, the company is creating a better balance between the American retail and wholesale businesses, while closing stores, improving its product offerings, and building a stronger online presence through celebrity endorsements, marketing, and promotions. Going forward, we expect the figure to decrease gradually and reach ~$340 by the end of the Trefis forecast period. If revenue per square foot increases to $600 by the end of the Trefis forecast period, there could be a significant upside of 5% to the Trefis estimate for Guess.
Guess is a specialty retailer that designs, markets, distributes, and licenses one of the world's leading lifestyle collections of contemporary apparel and accessories for men, women, and children. Some of the company's most popular brands include GUESS, G by GUESS, and MARCIANO. Guess's core customers are style-conscious customers between the ages of 18 and 32. At the end of 2020, the company had 433 directly operated stores in North America alone. The company also has a large footprint in Southern Europe and is rapidly expanding distribution in Northern and Eastern Europe and Asia.
SOURCES OF VALUE
Europe Segment is one of the largest contributor to the company's stock price
Guess' profitability in the European wholesale business is currently growing, which is evident from the fact that despite not growing the number of wholesale dealers significantly over the past year, the revenues from the wholesale business kept growing. Going forward, we expect European business revenues to reach around $1,250 million as the company expands in lucrative markets such as Russia and Germany. However, If Guess's European revenues increase to over $2 billion by the end of the Trefis forecast period driven by aggressive expansion in lucrative markets, there could be a 15% upside to our price estimate for Guess.
Foot traffic decline in the U.S. troubling stores
Due to a lack of footfall in the brick-and-mortar stores, Guess had been suffering in the Americas, specifically in North America, for quite a few years in the past. Hence, currently, the company is gradually trying to reduce its footprint and increase its profitability in the region. Now, the Americas contribute over 40% to Guess' total revenues. The management plans on reducing this contribution to around 25% in the future, and it plans on achieving a 7.5% overall long term operating margin in the Americas. To achieve these goals, the company is creating a better balance between the American retail and wholesale businesses, while closing stores, improving its product offerings, and building a stronger online presence through celebrity endorsements, marketing, and promotions.
Susceptibility to currency fluctuations
Guess earns close to 50% of its revenues from outside North America, and hence, its growth is highly susceptible to currency fluctuations. In 2014, for instance, the dollar appreciated significantly against the euro and Asian currencies, which pummeled Guess's revenues coming in from Europe and Asia, adding to its existing problems. Though this is something the company cannot control, it remains a significant threat.