VALUATION HIGHLIGHTS

1. European Operations constitute 45% of the Trefis price estimate for Guess?'s stock.
2. North American Retail constitutes 22% of the Trefis price estimate for Guess?'s stock.
3. Asian Operations constitute 8% of the Trefis price estimate for Guess?'s stock.

WHAT HAS CHANGED?

1. Guess Tops Q2 Estimates

Revenue in the fiscal second quarter grew 3% year-over-year (y-o-y) to $665 million, beating the consensus estimate by $25 million. The retailer reported FQ2 revenue drops across its Americas retail (-8% Y/Y), Americas wholesale (-13%) segments, offset by an increase in Europe (+9%), Asia (+19%), and Licensing (+13%) segments. Its operating margin grew to 9.7% in Q2 2024 from 8.3% in Q2 2023, driven by leveraging of expenses. Consequently, earnings per share of $0.73, were up 74% y-o-y and beat the Wall Street analyst consensus by 32 cents.

Note: Guess' FY'23 ended on January 28, 2023. Q2 FY'24 refers to the quarter that ended on July 29, 2023.

2. Guidance

The company said it expects fiscal 2024 revenue growth of 2.5% to 4%, up from a previous forecast of 2% to 4%. EPS for the year at between $2.88 and $3.08 versus the prior forecast of $2.60 to $2.90.

BUSINESS SUMMARY

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 fiscal 2023, the company directly operated 1,046 retail stores in the Americas, Europe, and Asia. The Company's partners operated 562 additional retail stores worldwide.

SOURCES OF VALUE

European segment is one of the largest contributors 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 $1.6 billion by the end of our forecast period as the company expands in markets such as 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.

KEY TRENDS

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. Hence, 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. Though this is something the company cannot control, it remains a significant threat.