What Are The Factors That Helped Guess In Delivering A Robust Third Quarter?

by Trefis Team
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Guess (NYSE: GES) released its third quarter fiscal 2018 results on November 21st. For the third quarter, the company’s revenues grew by 3% to $554 million while its operating income grew by 33% to $36 million. As expected, Guess’ performance was boosted by its rising comparable store sales and e-commerce sales in both Europe and Asia. Though Europe witnessed a contraction in the operating margin in Q3 due to the costs incurred in opening of a new distribution center, this is expected to be a temporary setback and the margin expansion in both these markets is expected to continue in the future. Guess expects to build a major business in Asia and towards that end it is boosting its store and digital presence specifically in its most important Asian market, China. In the Americas, though Guess’ revenue decline continued, its margins experienced an improvement on account of factors such as store closures, rent reductions, and lower markups. We expect Guess to continue with the improvements in its performance through its region specific strategies, digital initiatives, and the building of its omni-channel capabilities. We have a $18 price estimate for Guess which is in line with its current market estimate.

Europe

Guess’ revenue grew by 19% to $221 million in Europe and the trend is expected to carry on in the coming quarters. The growth was propelled by a rise in comparable store sales, including e-commerce sales, and a host of store openings. It opened around 22 net directly operated stores in Europe in Q3, out of which 11 stores were located in Russia and Turkey, the fastest growing markets for the company. The e-commerce business in Europe was boosted by Guess’ own website along with the partnerships it forged with websites like Zalando. The European wholesale segment grew by double digits.

The only glitch in Guess’ European performance was the contraction of the operating margin by 320 basis points after four consecutive quarters of expansion. the reason behind this decline was the costs incurred in setting up the new distribution center at Venlo. A few months ago, 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 first quarter of next year, will help Guess further with its supply chain management in Europe. The margin expansion is expected to resume once the transition to the new center is completed.

 

Asia

The revenues in Asia grew by 17% to $74 million and like Europe, it was driven by a rise in comparable store sales, including e-commerce sales. The operating margin in the Asia business expanded by around 680 basis points making Q3 the fourth consecutive quarter for margin expansion. The company opened a total of 10 stores on a net basis in China during the third quarter. It is also building a strong digital presence in China through marketplace partnerships with Tmall and with its new partnership with VIP.com. Guess is growing its social media presence in the country through communication apps such as WeChat and Weibo.

Guess’ sales have been sliding in Asia since 2013, when its net sales rose by just 0.4% after witnessing significant growth over the prior years. In 2014, the company witnessed a 4% decline in its Asia revenues to $281 million, primarily due to the slowdown in China’s economy. Guess’s current CEO Mr. Herrero is known for his impressive leadership for Inditex in Asia where he built a $4 billion business from scratch. Mr. Herrero has increased his attention for Guess’s Asia business. In Q3 FY2016, the company hired a new Director each 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, Guess has doubled its capital allocation for the Asian stores and for the e-commerce business in Asia. Asia currently contributes a little over 10% to Guess’ overall revenue. Herrero plans on increasing the contribution from Asia to around 25% of the company’s total revenues.

Guess has recently started directly operating its stores in Australia and it will be including the revenues from this geography in its Asia revenues. Guess is well known in Australia through the presence of its distribution centers in the past.

 

Americas

Guess’ weakness in the Americas market continued as expected. Its Americas retail revenues for Q3 declined by 13% to $187 million driven by its comparative sales (including e-commerce) which fell by 10%. However, the company’s strategy of reducing footprints while increasing profitability in the region is working well as the operating margins improved by 240 basis points due to store closures, reduction in negotiated rents, lower markups, etc. Guess is enhancing its brands’ presence in the region through branding activities, digital initiatives, and celebrity endorsements. The company has further strengthened its omni-channel capability in Q3 by starting a ‘buy online pickup in store’ facility. Guess aims at achieving a 7.5% overall operating margin from the region in the long run.

 

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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