Why Europe Is The Backbone Of Guess’ Business Model

by Trefis Team
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Guess (NYSE: GES) has seen decent growth in its top-line and steady profits the past several years.  This growth has been driven by its rising comparable store sales and e-commerce sales in both Europe and Asia (especially China), growth through digital initiatives, its well-positioned customer-centric strategies, and the building of its omni-channel capabilities. While the company’s American retail business has struggled, Guess’ Europe division has grown considerably to become the largest operating division of the company. Trefis highlights the importance of its Europe segment for Guess in an interactive dashboard. You can modify any of our key drivers to gauge the impact changes would have on Guess’ valuation. Additionally, you can find more Trefis Textiles, Apparel and Luxury Industry Data here.

Why Is Europe The Most Important Division For Guess?

#1 Europe Contributes Nearly Half Of Guess’ Revenues

  • Europe has been the company’s fastest-growing geographical segment. Europe has added roughly $420 million to total revenues since 2016 at an average annual rate of 16.5%.
  • As a result, Europe’s contribution to Guess’ revenues has increased from 33% in 2016 to roughly 45% in 2019.
  • This growth can be primarily attributed to an increase in store count, higher shipments in wholesale business, and comparable sales growth.
  • We expect this segment to continue its growth trajectory, with revenues increasing at a rate of 5.5% to $1.2 billion in FY ’20.

#2 Europe’s contribution to the top line of Guess’ competitors is much lower, and ranges from 5% to 25%

#3 Guess’ Europe Division Has Outpaced Growth In The Company’s Total Revenue

  • Guess has added $425 million to total revenue since 2016 at an average annual rate of 6%.
  • On the other hand, Europe alone added $420 million to Guess’ total revenue at an average annual rate of 16%. Nearly all of Guess’ incremental revenue growth has come through Europe since 2016 – more than making up for the company’s declining America retail business which has lost more than $150 million in total revenues since 2016

#4 Europe Segment Has Been Operating At A Higher Margin Too

  • Guess Europe’s three-year average operating margin was 7.6%, marginally ahead of Guess’ total adjusted operating margin of 7.3%
  • Although, Europe’s operating margin declined to 5% in FY’2019 as a result of $45.6 million fine imposed by the European Commission, Europe division is poised to achieve much higher profits than the rest of the company over coming years.

#5 Average Revenue Per Store In Europe Is Almost 30% Higher Than The Consolidated Figure For Guess

  • As of 2019, Guess Europe was operating more than 730 stores, with average per store revenue of $1.6 million
  • On the other hand, Guess’ total store count stood at 2,142, generating average per store revenue of $1.2 million – almost 30% less than that of Europe’s.

Conclusion

  • Europe is Guess’ fastest-growing division – accounting for most of the company’s growth.
  • With growth fundamentals remaining strong for the company in Europe, we expect the segment to be pivotal for the company’s long-term revenue growth, profitability improvement and enhanced shareholder returns going forward
  • Moreover, the company’s focus on linking brick-and-mortar stores, e-commerce, and mobile sales to improve online operations should further support the segment’s growth
  • Finally, Guess’ second-largest segment, America Retail, has struggled over the last couple of years – increasing the importance of the Europe segment to Guess’ long-term growth.

Starting with our forecast for Guess’ revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2020 is to be around $1.25. Using this figure with our estimated forward P/E ratio of 17x, this works out to a price estimate of $21 for Guess’ stock

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