Reasons For Our ~25% Downgrade Of Guess’s Stock Price Estimate
We recently downgraded our stock price estimate for Guess by close to 25%. After several years of weak performance, though Guess’s quarter-over-quarter performance has been improving in fiscal 2017 (fiscal year ends in January), yet Guess still has a long way to go. While Guess’s Q3 FY2017 revenues grew by 3% y-o-y as compared to a 0.2% y-o-y decline in Q2, the erosion of its bottom line continued, with a 27% y-o-y decline in Q3 FY 2017. Hence, though Guess has been successfully implementing the strategic initiatives as proposed by its CEO, Victor Herrero, yet the recovery of all its business segments and eventually the growth of its bottom line might still take some time.
These are some of the changes we made to Guess’s forecasts:
- Earlier, we forecast the America retail stores revenues to increase from $1.03 billion in 2016 to $1.36 billion by the end of our review period. We have revised our estimates for Guess’s America revenues to increase from close to $1 billion in 2016 to $1.32 billion by the end of our review period. Also, Guess’s America EBITDA margin was expected to grow from 18.5% to 26%, which has been revised to 18% in 2016 to 25.5% by the end of our review period.
- We had also forecast America wholesale revenue to increase from $103.4 million in 2016 to around $111 million by our review period end, however, now we’ve revised the estimates to $98 million in 2016 to $105 million by review period end. The EBITDA margin has also been revised downward by around 50 basis points during the same time period.
- We have marginally decreased the European Operations’ revenues from our previous estimates of ~$738 million in 2016 to $815 million by the end to the new estimate of ~$731 million in 2016 to ~$807 million by the end.
- The Asian Operations’ revenues were previously estimated to grow from $266 million in 2016 to $399 million by the review end which has been slightly revised to $254 in 2016 to $381 by the review period end.
- Finally, Guess’s Licensing & Other business revenues that was previously estimated to grow from $106 million in 2016 to $110 million by the review period end, has been revised to $102 million in 2016 to $106 million by the review period end.
Though Guess’s European and Asian Operations had started showing signs of growth, the other three segments are yet to make a turnaround. Guess’s America retail sales continued with its decline mostly due to the reduction in the per unit price of the product even though the number of orders remained the same as the third quarter last fiscal year. Guess earns around 45% of its revenues from the Americas and hence it has charted out a four-point plan to improve performance in the Americas that includes: 1. Rent reduction, where it is estimated to gain a savings of around $9 million through lease negotiations; 2. Store closures, where it has closed 52 stores since last year and aims in closing 50 additional stores by the end of next year. The gain of operating income through this move is estimated to be around $11 million; 3. Forming sourcing networks in low cost regions, such as Bangladesh, and building relationships with high quality suppliers; and 4. Better digital initiatives to boost sales in the region.
Along with these measures, we can expect the Americas business to recover with time. However, presently there’s still a long way to go and hence the company’s stock price needed to be revised downward as of now.
Have more questions about Guess? See the links below.
- What Is Guess’s Revenue And EBITDA Breakdown?
- How Has Guess’s Revenue And EBITDA Composition Changed Over 2012-2016E?
- Guess Q4 FY2016 Pre-Earnings Report
- What Led To Guess’ Revenue And EBITDA Decline Over The Last Five Years?
- Guess: Fiscal Year 2016 In Review
- How Did Guess’s Stock Perform Vis-A-Vis Its Peers Over The Last 5 Years ?
- What Is Guess’ Fundamental Value Based On 2016 Estimated Numbers?
- How Did Guess’ Different Segments Perform Over The Last 5 Years?
- Guess Q1 FY 2017 Earnings Preview
- Key Takeaways From Guess’s Q1 FY 2017 Earnings
- Guess’s Expected Revenue And EBITDA For 2016: Trefis Estimate
- Is The Guess Stock Price Driven By Current Earnings Or By Market Sentiments?
- How Do We Expect Guess’s North American Retail Business To Grow Over The Next 5 Years?
- How Is Guess’s Revenue Composition Expected To Trend?
- How Fast Is Guess’s Asia Operation Expected To Grow Over The Next Five Years?
- Guess’s Q2 FY2017 Earnings Preview
- How Do we Expect Guess To Perform In Its Q3 FY 2017 Earnings?
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