What To Watch For In Guess’s Q4 And Fiscal Year 2017 Earnings

-27.04%
Downside
31.47
Market
22.96
Trefis
GES: Guess? logo
GES
Guess?

Guess is slated to release its Q4 and fiscal year 2017 financial results on March 15th (fiscal year ended on January 28th).  After years of poor performance, Guess is currently on a recovery path as was evident in its quarter-over-quarter improvement in performance during the fiscal 2017. The recovery was mainly a result of the implementation (which is still ongoing) of the strategic initiatives that was proposed by its CEO, Victor Herrero, in 2015. 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. In the third quarter of FY 2017, the most significant growth came from the European region that witnessed growth in both the top as well as the bottom line. Alongside that, Guess’s increasing focus on its Asia business is also showing reaping benefits. The other three divisions of the company, namely, Americas Retail, Americas Wholesale, and the Licensing businesses are yet to show signs of recovery. Guess’s top line grew by 3% y-o-y in the third quarter and we expect the growth trend to continue in the fourth quarter, as well. However, Guess’s persistent operating loss (~27% y-o-y decline in Q3) might also carry on in Q4 though the rate of decline might slow down.

Guess Needs To Make A Turnaround In Americas

The Americas business is an important market for Guess’s business as it earns almost 45% of its revenues from the region. However, Guess’s recent performance in the region has been far from satisfactory. In Q3, Guess suffered a 5% y-o-y decline in revenues in its Americas retail business along with a whopping 417% y-o-y decline in its operating income in the same region. Guess’s Americas retail sales declined mainly due to the reduction in the per unit price of the product even though the number of orders remained the same as Q3 FY 2016. We had revised our stock price estimate for the company downward by 25% post its earnings in the third quarter of FY 2017 and its performance in Americas was one of the major reasons for the downgrade.

The company has laid down a four-point plan to improve performance in the region. These include:

  • Rent Reduction: It is estimated to gain a savings of around $9 million through lease negotiations
  • Store Closures: It has closed 52 stores since 2015 and aims in closing 50 additional stores by the end of 2017. The gain in operating income through this move is estimated to be around $11 million
  • Cheaper Sourcing Networks: Forming sourcing networks in low cost regions such as Bangladesh and building relationships with high quality suppliers
  • Better Digital Initiatives:  To boost sales in the region

Guess’ Asia Focus Is Reaping Benefits 

Asia had been a region where Guess experienced significant growth for several years till 2013 when the business started to struggle. In mid-2015, when Victor Herrero assumed the position of Guess’s CEO, one of his strategy initiatives included more focus on the Asia Pacific business. Mr. Herrero, who was erstwhile associated with Inditex, built a $4 billion business from scratch for Inditex Asia. His dream is to replicate the same growth for Guess in Asia. Asia contributes around 10% of Guess’s revenues currently and Mr. Herrero aims to increase the contribution to around 25%. Hence, in Q3 FY2016, the company hired a new Director for China and a new Director of the Middle East, India, and Southeast Asia. Both the directors are Mr. Herrero’s ex-colleagues from Inditex. The company also doubled its capital allocation for the Asian stores and the e-commerce business in Asia was strengthened by a greater presence in websites like Tmall, JD.com, and Guess.cn. Guess’s Asia division had shown the maximum quarter-over-quarter improvement in Q3 FY 2017 in performance and this trend might continue in Q4 as well as in the future.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Guess

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Relevant Articles
  1. Flat Since The Beginning of 2023, What’s Next For Guess Stock?
  2. Is Guess Stock A Buy At $21?
  3. What To Expect From Guess’ Stock Post Q2?
  4. Can Guess Stock Return To Pre-Inflation Shock Highs?
  5. What’s Next For Guess’ Stock?
  6. More Room For Growth in Guess’ Stock?

Get Trefis Technology