Guess Takeaways: Earnings Depressed As Europe Sinks But Asia Provides Hope
Guess’ (NYSE:GES) Q3 earnings were a mixed bag with a revenue decline in Europe, stagnant revenues in North America and a surge in Asian markets. The overall results remained weak due to the tough economic environment in Europe, where revenues fell by 8.3%. The gross margins also declined by 3.5% driven by an increase in the markdowns. [1]
However, amid the struggling results, the Asian business came out as a winner with substantial revenue growth. As the European business continues to be impacted by slow economy, which is likely to persist for a while, the retailer’s strong performance in the Asian market will be in greater focus going forward. Although the Asian operations don’t contribute much to Guess’s value currently, the strong expansion plans for the region will be something to watch.
See our complete analysis for Guess
Asian Operations Look Promising
Asia is one of the most lucrative markets for apparel retailers as it houses two of the world’s largest economies. In the third quarter of fiscal 2013, Guess reported revenue growth of 16% from the Asian markets following a growth of 21% in the previous quarter. [1] Furthermore, the lack of competition from retailers such as American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF) makes this region even more important for Guess.
Guess’ business in South Korea and China registered double digit growth. [2] It was driven by Guess’ strong expansion in the region. During the last quarter, the retailer opened 21 stores and 45 concession shops and has 40 stores planned for the next year. [2] On the other hand, the retailer plans 50 stores for the U.S. Given its presence in the two markets, the rapid growth in Asia is clearly visible.
China being the second largest economy and the most populated country in the world, provides a huge potential for value based apparel retailers. Guess partnered with a licensee in China during the quarter, which operates more than 2,400 stores across the region. [2] This positions the retailer well in the Chinese market and will enable it to fuel its long-term growth. We believe that over the course of time, Asian business will be a much better value contributor.
According to our estimates, the Asian operations constitute ~ 12 % of the company’s value.
European Business Likely To Endure
With the persistently weak economic conditions in the European market, Guess’ revenues are likely to be under pressure. The weak economic environment the consumer confidence decreases will in turn lead to a decline in consumer spending. Moreover, revenues have also suffered due to currency fluctuations, i.e. weaker euro leading to lower revenues in dollar. For instance, in the third quarter the revenues from the region increased by 2% in euro and decreased by 8.3% in dollar.
The revenue increase can be attributed to retail expansion in Europe and a better contribution from Italian market driven by increased promotions. Moreover, Guess received positive results from its development markets of Russia and Germany with former reporting more than 100% growth. While these aspects look promising from a long term perspective, the decisive factor will be the economic growth of the region.
Our price estimate for Guess stands at $28, implying a premium of about 10% to the market price.
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