Guess’ (NYSE: GES) Americas segment has seen its revenues decline at a compounded annual growth rate (CAGR) of 2.5% from over $1 billion in 2017 to $997 million in 2020, and we expect these revenues to further decline to $898 million in 2021 (down $178 million from 2017). To break this down, America wholesale business revenues grew at a CAGR of 10% between 2017 and 2020, whereas the America Retail business declined 5% during this period. A major reason for this slowdown in retail revenues has been low brand loyalty among buyers in the U.S. apparel market. Every apparel retailer is trying to outsmart the other one with a broader and deeper set of products, and as a result, people have been readily shifting to the brands that provide relevant fashion at the best affordable prices. On the contrary, over the last few years, Guess saw huge potential in its Europe segment which saw revenues grow strongly at a CAGR of 16% from $792 million in 2017 to $1.2 billion in 2020. And, we expect these revenues to rise slightly in 2021, incrementally up $470 million from 2017.
Even though the revenue share of the Americas segment has shrunk from almost 50% in 2017 to around 37% in 2020, and will continue to shrink over coming years, thanks to strong growth in Europe and Asia segments – we believe that it still remains an important part of the company’s business model as we detail in our interactive dashboard, Guess Revenues: How Does GES Make Money? Guess’ shifting approach toward omnichannel retailing across its directly operated network of more than 1046 retail stores in the Americas, Europe, and Asia, with an additional company-operated 524 stores, along with digital-first initiative, this will help the company boost its top line and profit margins once the Covid threat abates.
Guess is a specialty retailer that designs, markets, distributes, and licenses collections of contemporary apparel and accessories for men, women – mostly in the 18- 32 age demographic – and children. Some of the company’s most popular brands include GUESS, G by GUESS, and MARCIANO. The Europe segment has been key to the growth in the company’s stock price over recent years. Going by our Guess Valuation, with an adjusted EPS estimate of around $2.30 and P/E multiple of 13.6x in fiscal 2021, this translates into a price of $31, which is 40% above the current market price. We discuss Guess’ valuation analysis in full, separately.
Europe Contributes Nearly Half Of Guess’ Revenues
Europe has been the company’s fastest-growing geographical segment with its contribution to total revenues significantly increasing from 36% in 2017 to 47% in 2020. This was largely driven by an increase in store count, higher shipments in the wholesale business, and rising comparable sales growth. That said, nearly all of Guess’ incremental revenue growth of $469 million has come through Europe since 2017 – more than making up for the company’s declining American retail business. While Guess Europe contributes almost half to the total revenues, Guess’ competitors, namely Tapestry, Gap, and Ralph Lauren, have a much lower percentage of revenues coming from Europe – 7%, 4%, and 26%, respectively.
Overall, e-commerce growth in Guess will be the driver of margin expansion where technology will play a major role in the marketing side of things. Guess definitely has momentum on its side after going through its recent first-quarter numbers. In Q1, the company’s revenues were $520 million, down 3% y-o-y, driven by sales momentum in the European wholesale and e-commerce channels, as well as the global licensing business, offset by permanent store closures and negative same-store sales as a result of pandemic related traffic decline. These permanent store closures are accretive to profitability, representing about $10 million of incremental operating profit in the first quarter. In addition, the retailer saw sequential momentum in its e-commerce business, which was up 61% for the quarter in North America and Europe. This compares to 38% in Q4, 19% in Q3, and 9% in Q2. Looking ahead, the company expects full-year revenues to be down mid-single digits versus the calendar year 2019 and operating margin to reach approximately 8.6%. The expectations for the full year assume no Covid-related shutdowns past the second quarter and a return to a normal cadence of product development and shipments for its European wholesale business.
E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.