Guess’s Earnings Miss Estimates But Online Growth And European Recovery Show Promise

Specialty apparel retailer Guess (NYSE:GES) continued to struggle in Q4 fiscal 2014 as its revenues and earnings per share fell by 7% and 13% respectively. While the retailer’s revenues at $768 million were slightly better than analysts’ estimate of $762 million, its EPS ($0.71) fell short of expectations ($0.79). This is attributed to 9% decline in Guess’s gross profits as its margins shrunk by 150 basis points driven by higher markdowns and the deleveraged impact of negative comparable store sales growth.  However, an improvement of 40 basis points in the company’s SG&A rate had a marginal offsetting impact. Contributing to this improvement during the quarter were lower store selling expense, lower selling and merchandising costs, and lower spending on advertising. ^[1]

Although Guess’s revenues and comparable store sales in North America continued to decline, its e-commerce sales recorded robust growth, powered by several omni-channel initiatives. We believe that such initiatives will help the company gradually improve its store and web traffic, which should positively impact its comparable store sales. The success of Guess’s entry level products can also enhance its same store sales going forward.

Interestingly, the retailer registered a marginal positive comparable sales growth in its retail operations in Europe for the first time in the last 10 quarters. Guess performed particularly well in France, which is one of its mature markets in the region. Moreover, early first quarter sales trends in Italy, France and Spain have been positive, which somewhat indicates the resurgence of Guess’s European business.

Our price estimate for Guess stands at $35, implying a premium of less than 20% to the market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Guess

Omni-Channel Initiatives Will Help Sales, Both Onlin And At Stores

During the fourth quarter of fiscal 2014, while Guess’s comparable store sales in North America declined by 4%, its e-commerce revenues surged by 35%. The retailer stated that its online growth was propelled by the success of several omni-channel initiatives. About a year back, Guess introduced its “reserve in store” service which allows customers to reserve merchandise online and pick them up at stores. ^[1] During the second quarter of fiscal 2014, the retailer began the fulfillment of its online orders through store inventory. By the end of the third quarter, more than 100 of its stores were fulfilling e-commerce orders. ^[2] Additionally, Guess has deployed other initiatives such as iPad kiosks in select stores and mobile optimized sites.

More recently, the retailer unveiled a new mobile app for iOS and Android devices to strengthen its customer-company interactions. The state-of-the-art mobile app is intended to augment customer service, fashion promotion and provide a seamless multi-channel shopping experience. This app offers a new loyalty program where customers serve as brand ambassadors by promoting the products within their peer group through various social media websites. In return, they are awarded additional discounts and rewards that can be redeemed at stores. The company believes that this app will create high visibility and bring customers a lot closer to the company by engaging them in a highly interactive and personalized manner. ^[3] Along with developing its omni-channel platform, Guess is revamping its supply chain by building partnerships with key strategic vendors, improving transit time to optimize currency mix, counter sourcing for cost savings, and reducing cycle times to refine fashion responsiveness. ^[1] These efforts should further help the company develop its omni-channel platform since a strong supply chain is the pre-requisite of multi-channel retailing.

We believe that by strengthening its omni-channel platform, Guess will be able to garner significant customer attention over the Internet, and subsequently divert its web traffic towards its stores. Over time, this can help the company improve its store sales and better anticipate customers’ tastes. Moreover, with almost all the retailers moving towards this retailing concept, it will allow Guess to remain competitive.

Key Markets In Europe Appear To Be Coming Out Of Their Slump

Guess’s revenues in Europe declined by 7% in fiscal 2013, and by 13%, 3% and 7%, respectively, during the first three quarters of fiscal 2014 (in local currency). Although this trend continued in the fourth quarter with 8% decline in revenues, retail comparable sales improved marginally. The company saw high single digit positive comps in Spain, and low-single digit positive comps in France. Even though Italy’s comparable sales growth remained negative in Q4, it turned out to be positive during the early part of Q1 fiscal 2015. ^[1] Historically, Guess has been unable to perform well in the region due to the economic crises in its mature markets – Italy and France. However with their improving performance, recovery of the retailer’s European business appears to be under way.

Due to the economic slowdown, the apparel market in France has remained stagnant for the past four years. As purchasing power has declined due to high unemployment and low wages), French shoppers have been holding back their spending on apparel. Despite this, men’s apparel category showed some encouraging signs in an otherwise weak apparel market in 2012. According to Euromonitor, French men are highly particular about what they wear in terms of clothing, fragrances and cosmetics. Moreover, they tend to spend more on apparel products compared to women. There has been a change in the shopping trend in the region as more men are buying apparel for themselves, while (historically) women used to shop for them. ^[4] We believe that Guess can leverage this trend to facilitate the sales of its men’s products in the region.

Additionally, fast-fashion and affordable brands have become a viable option in France which is evident from the success of Vivarte, KIABI Europe and Hennes & Mauritz. Guess can keep its sales humming by remaining responsive to changing fashion trends and offering products at competitive prices. Also, online retailing continues to grow at a robust pace despite the lull in the overall apparel industry. With online shopping becoming easier, and as buyers have access to a greater variety of products, French shoppers are making more purchases through e-commerce websites. ^[4] We believe that Guess can leverage its omni-channel platform to take advantage of this trend. Lately, French economy ($50+ billion apparel market) has shown some signs of improvement with renewed consumer confidence. ^[5] In the second quarter of 2013, the country’s economy expanded by 0.5% which was its best gain since January 2011. ^[6] During the fourth quarter, France’s GDP grew by 0.3% as compared to the preceding quarter. ^[7]

In Italy, apparel sales still suffer due to high taxes, increasing unemployment and low consumer confidence. Average monthly spending by an Italian on clothing has come down from €142 in 2009 to €126 in 2012. Amid such an environment, Guess’s improving performance looks very pleasing. According to Euromonitor, the key to survive in Italian apparel market in the future is e-commerce and discounting. ^[8] If Guess can effectively enhance its strength on these fronts while staying on top of changing fashion trends, it can generate better revenues from the region.

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1. Guess’s Q4 fiscal 2014 earnings transcript, Mar 19 2014 [↩] [↩] [↩] [↩]
2. Guess’ Q3 fiscal 2014 earnings transcript, Dec 4 2013 [↩]
3. Fashion Retailer Guess Rolls Out State-Of-The-Art Mobile App For Customers, Powered By MicroStrategy Alert, 4-Traders, Jan 13 2014 [↩]
4. Apparel in France, Euromonitor International, Sept 2013 [↩] [↩]
5. Apparel Retail In France, Market Research, Feb 27 2013 [↩]
6. Germany and France haul euro zone out of recession, Reuters, Aug 14 2013 [↩]
7. France and Germany Lead Euro Zone to Higher Growth, The New York Times, Feb 14 2014 [↩]
8. Apparel in Italy, Euromonitor, Nov 2013 [↩]