The Q4 fiscal 2013 results for Guess (NYSE:GES) remained weak due to low store traffic in North America and Europe. The weak holiday season in the U.S., payroll tax increase and low store traffic due to adverse weather conditions led to 6% decline in the retailer’s comparable store sales in North America.  In addition to this, sluggish economic conditions in Southern Europe, which accounts for more than 60% of Guess’ Europe revenues, weighed on its international growth. However, Asia was a bright spot and continues to be promising market.
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- How Do We Expect Guess’s North American Retail Business To Grow Over The Next 5 Years?
To address the weakness in North America, Guess is making a few changes in its management and working on multiple strategies to attract more customers. Moreover, it is looking to reduce its dependence on Southern Europe by expanding in lucrative markets of Russia and Germany. Complemented by healthy growth in Asia, these strategies can pay off for Guess in the long term.
What Is Guess Doing To Attract More Customers?
Guess is focusing on elevating its brand image through in-store events and social media marketing.  In-store events such as the summer festival are aimed at attracting more customers with distinct product offerings. Guess is launching a music festival capsule collection for this summer, which includes unique bohemian style handcrafted vintage apparel and accessories.  On the social media front, Guess has made significant strides with its Facebook (NASDAQ:FB) fan following increasing from 1 million in 2012 to 4.6 million presently.   Social media marketing can be very helpful in reaching out to a large audience with relatively small investment.
Additionally, Guess is undertaking omni-channel retailing by combining the online and in-store mobile platforms with a social experience.  The company has installed iPads in its stores to better interact with the customers.  The intent is to create a seamless shopping experience across all channels.
Guess’ competitor, American Eagle Outfitters (NYSE:AEO) is also looking to develop its omni-channel capabilities. Guess recently started fulfilling its web orders through its store inventory and also introduced a feature that allows online orders to be picked up at its stores. A similar strategy has worked well for other retailers such as Urban Outfitters (NASDAQ:URBN) and Ann (NYSE:ANN), and is likely to help Guess as well.
On the product side, Guess will be increasing its denim and iconic style offerings at opening price points of $75-$95 to better balance its product mix, which we believe can help sales. Currently, the majority of its products fall in the $108-$148 price range.  The company is also looking to add new prints, fits and washes in its denim range, which defines its heritage. Additionally, it is working on reducing the lead time to about five weeks in order to remain responsive to changing trends.  Guess’ main problem has been low store traffic and these strategies might provide the solution.
Changes In North American Retail Management For Effective Execution
It’s clear that Guess’ management needs to enhance its focus on formulating and implementing effective strategies for North America. The retailer is hiring new executives for crucial departments of design and merchandise. The new design head comes with a strong 15-year experience in women’s apparel segment.  The company believes that the new management will help it execute its strategies better.
Increasing Dependence On Russia And Germany
Guess’ two key markets, Russia and Germany, delivered encouraging results in an otherwise troubled Europe. Most of the retailer’s revenues in Europe come from the southern region, which faces significant economic challenges. Therefore, Guess is looking to increase its reliance on these two markets.  Revenues from Russia have grown substantially over the last couple of years. As a part of its long term strategy, the retailer plans to continue expanding in this region.  According to Guess, Russia’s business has a potential to triple over the next five years, and it sees a similar potential in Germany as well.
Russia is becoming an important market in Europe since it remains relatively untapped.  According to Mckinsey, apparel space per 100,000 Russians is only 37,600 square feet, which is just 10% of what it is in the U.S.  Despite having lower per capita income as compared to Russia, Brazil has larger apparel space. Moreover, Russians tend to spend about 3.1% of their income on apparel, which is noticeably more than China, Germany and the U.S.  This clearly indicates the growth potential of Russia’s apparel market. Through 2015, McKinsey expects the region’s apparel market growth (8%) to remain faster than the income growth (7%).
Our price estimate for Guess stands at $28, implying a premium of about 15% to the market price.Notes:
- Guess’ SEC filings [↩]
- Guess’ Q4 Fiscal 2013 earnings transcript, March 20 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Guess Summer Revival Music Festival Collection, Sunshine Kelly, March 15 2013 [↩]
- Guess’ Facebook Page [↩]
- Guess Puts iPads in Stores to Enhance Shopping, Mobile Commerce Daily, Jan 6 2012 [↩]
- Clothing Companies Flock To Russia in Search of Untapped Revenue, Russia Beyond The Headlines, Jan 14 2013 [↩]
- Dress For Success: Cracking Russia’s Apparel Market, Mckinsey, Nov 2011 [↩] [↩]