Why Guess Looks Prepared For A COVID Recession

May 22nd, 2020 by Trefis Team
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Guess stock (NYSE: GES) has lost nearly 65% since the beginning of the year due to the outbreak of COVID-19. The retail industry was already on shaky grounds, with more than 9,000 stores closing down in 2019, and the outbreak has made conditions worse for the retail business. Guess has also faced the brunt of the outbreak of coronavirus. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in store remaining closed continue to take their toll on the apparel industry. With a number of retailers including J.Crew, JCPenney filing for bankruptcy protection for bankruptcy, the very survival of companies in the retail industry has come into question.

Trefis analyzes the potential impact of COVID Recession on Guess in an interactive dashboard with a focus on Guess’ liquidity reserves and concludes that Guess is in a strong financial position, and a COVID-19 recession will not materially impact the company’s cash reserves in FY2021 (ending January 2021). Although a COVID recession will impact the company’s revenues, cash flows, and ability to pay dividends, we believe the company has sufficient financial reserves to sail through this pandemic.

Impact On Guess’ Revenues 

  • We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $2.7 billion in FY2020 to $1.9 billion in FY2021.
  • If the outbreak gets worse, Guess will have to keep its stores closed until the situation improves. As a result, the company’s revenues could decline by about 40% in FY’21, on account of weaker demand, reduced mall traffic, potential supply constraints, and a reduction in discretionary spending.
  • Even with the slow reopening of the economy as lockdowns beginning to lift, social distancing measures may continue for months, which will impact store capacity for the company.
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Impact On Guess’ Cash Flows

  • Guess’ cash flows are likely to fall in FY2021 due to a steep reduction in revenues and a hit to profitability.
  • The company will have to offer merchandise at a deep discount to clear out the existing inventory.
  • Elevated fixed costs, coupled with lower revenues, will hurt the company’s bottom line.
  • However, Guess has taken a number of measures to mitigate the impact on its cash balance by raising $212 million under its credit facility and deciding to substantially reduce expenses across all operating heads, including store occupancy costs, capital expenditures, and reduced inventory purchases.
  • Additionally, the company has suspended dividends and is unlikely to make share repurchases.

Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $198 million in FY2020 to around -$92 million in FY2021. Also, with expected capital expenditures of $34 million for the year, FCFO-CapEx will be -$126 million in FY2021.

Cash Balance Impact

  • Taking all these factors together, we estimate that Guess will end the year with a cash balance of $372 million – higher than the figure at the end of FY2020.
  • This figure includes $212 million, which Guess has raised from external sources.
  • While the decision to stop dividends may be a disappointment for existing investors, these moves by the company are essential for its long-term survival.

 

Conclusion

To sum things up, Guess can successfully weather a recession through Q3/Q4 and a 40% decline in revenues by cutting Capex, share repurchases, suspending dividends, and raising $212 Million in the capital. For an alternative scenario with a 30% change in revenue, see our full analysis of the impact of COVID recession on Guess.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

While Guess is looking stable, a recession could wipe off more than $1 billion from peer Gap’s cash reserves.

 

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