Guess’ Performance For Q2 Fiscal 2018 Showed Considerable Improvement On Account Of Region Specific Focus And Adjustments

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Guess released its Q2 fiscal 2018 (fiscal year ends in January) on August 23rd, and in line with our expectations, the company continued with its strong growth in the European and Asian markets while its earnings remained soft in the American markets where it is gradually trying to reduce its footprints and increase profitability. With this region specific strategy, the company is making a healthy recovery in its performance with each successive quarter. For the second quarter of fiscal 2018, Guess’ top line grew by 5% to $574 million which is a considerable recovery from its 3% revenue decline in Q2 FY 2017. Even compared to its Q1 fiscal 2018 top line growth of 2%, the second quarter’s revenue growth was significantly higher. The company is currently striving to connect more closely with the millennial buyers through its products. Along with this, it is improving its digital presence and upgrading its omni-channel capabilities. Guess’ revenues in Europe grew by 20% and in Asia it witnessed a 17% growth. These growths were primarily due to the opening of new stores, a healthy growth of the wholesale business, and a positive comparable store sales. Its Americas retail revenues decreased by 11% where it is currently shutting down stores since footsteps have been declining in the brick-and-mortar stores in the region.

The adjusted operating margin and earnings per share for the company for Q2, surpassed the high-end of the management’s expectations. Guess’ GAAP operating earnings for Q2 rose by 49% y-o-y to $23.2 million, while the GAAP operating margin grew by 120 basis points to 4.1%. The adjusted EPS for the second quarter was $0.19 compared to $0.15 in Q2 FY 2017. For the full fiscal 2018, the company has adjusted its earnings expectations upwards in view of its recent success. Now, it expects revenues to grow between 6% to 7.5%, while its adjusted EPS is expected to fall between $0.52 to $0.60.

Guess Opened A New Distribution Center And Nine New Stores, As Its Margin Expansion Continued In Europe

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Guess’ 20% y-o-y growth in the European markets was driven by a rise in comparable store sales, including a 5% growth in e-commerce sales, and also a double-digit growth in the wholesale business’ revenues. Guess’ wholesale business in Europe continues to grow though it has not significantly increased the number of wholesale dealers over the past year, implying an increase in profitability in the wholesale business.

In Q2, on a net basis, the company opened 9 directly operated stores in Europe in regions such as Italy, Spain, UK, Netherlands, Switzerland, Russia, and Poland. Additionally, it also opened its first owned and operated stores in Norway and Greece. The adjusted operating margin continued for the fourth consecutive quarter with an 150 basis points expansion in Q2. This was mainly achieved by maintaining a strong discipline in the control of costs. The company opened a new 625,000 square-foot distribution center in Venlo, in the Eastern part of the Netherlands. The distribution center, expected to be fully operational by the end of fiscal 2018, will help Guess further with its supply chain management in Europe.

Guess Is Well On Its Way In Building A Major Presence In Asia

The company’s 17% y-o-y growth in the Asian markets was driven by a rise in store openings and comparable store sales, including a 7% growth in the e-commerce sales. The adjusted operating margin in the region expanded by an impressive 920 basis points, thus making it the third consecutive quarter of margin expansion.

When Victor Herrero assumed the position of Guess’ CEO in mid-2015, one of his strategy initiatives included more focus on the Asia Pacific business. Herrero, who had a tremendous success story of building a $4 billion business from scratch for Inditex Asia, wanted to replicate the same growth for Guess in Asia. Towards that end, in Q3 fiscal 2016, 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. Further, the company 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 Is Accelerating The Decline Of Its Footprints In The Americas 

The company is currently accelerating the reduction of its footprints in the U.S. markets which currently contributes to less than 36% of Guess’ global sales. The Americas are expected to represent only 25% of its business in the future. In Americas, the wholesale business is doing better than the retail (driven by both U.S. and Mexico), though it has a bigger presence in the latter. The wholesale business revenues grew by 7% in Q2, while the American retail business revenues fell by 11%. The comparable store sales, including e-commerce declined by 10%, as well. However, the comparable store sales decline showed sequential improvement as the decline was around 15% in Q1 FY 2018.

Guess is striving to create a better balance between the American retail and wholesale businesses to reap more benefits from this changing trend. The company closed 18 stores in the U.S. and Canada in Q2 and it plans on closing a total of 70 stores in the Americas by this fiscal year end. It is boosting its digital presence and is integrating its retail and e-commerce channels in the Americas. For an increased online reach, it is also undertaking marketing initiatives like hiring social media influencers and using celebrity endorsements, such as collaborations with A$AP Rocky, Joe Jonas, and Camila Carrillo. Guess plans on achieving a 7.5% overall long term operating margin in the Americas.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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

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