Guess (NYSE:GES) is expected to release its Q4 fiscal 2013 earnings soon. The European business, which is the most important segment for the retailer, is likely to remain under pressure due to a weak economic environment. However, some specific markets have performed well and we’ll keep an eye out for them in this quarter. The retailer’s North American results have improved over the last three quarters, but the weak holiday season is likely to limit the recovery. The most encouraging trend for Guess is the rapid growth in its Asian business which is likely to continue.
Europe Will Continue To Remain Weak
Guess’ revenues from Europe have decreased at an average rate of 11% during the first three quarters of fiscal 2013 due to sluggish economic growth. As most of the retailer’s operations are situated in southern Europe, the weak macroeconomic situation in countries such as Spain, Italy and Greece makes its business vulnerable. We do not expect any significant improvement this quarter.
Nevertheless, it is worth noting that Guess’ growth is encouraging in some European markets such as Russia and Germany. Last quarter, revenues from Russia registered more than 100% growth and orders in the fourth quarter were about 50% higher. Additionally, with more promotional activities in Q3 fiscal 2013, Spain and Italy generated positive comparable sales. The revenue contribution from these markets is relatively small and growth of Guess’ overall European business will still be determined by the broader state of the economy.
Weak Holiday Season Will Offset North American Recovery
Guess’ North American operations have remained weak over the last two quarters due to a decrease in the number of tourists and poor performance from its accessories business. The effect was prominent in Q2 when the retailer stated that its accessories were missing fashion newness, which had a mitigating effect on its store traffic. This was further impacted by Guess’ strategy to increase full-priced sell through and reduce the number of markdowns and discounts.
However, despite the revenue decline, Guess showed some signs of improvement in Q3. It reported an increase in the number of tourists and better performance from the accessories business which did well during the Black Friday weekend. The retailer also plans to revamp its focus on product designs to elevate its brand image. Moreover, improving women’s apparel products was a major focus for Guess in fiscal 2013.
The efforts paid off as women’s apparel remained the strongest category in Guess stores. The company has also shortened the development cycle of women’s apparel by 50%. As women’s fashion changes more frequently than men’s, a shorter development cycle will help it attune better to changing trends. Also, Guess has worked on improving its product offerings in men’s apparel and accessories, which performed well during the third quarter. We expect these efforts to have helped Guess’ performance in the fourth quarter as well.
However, the U.S. witnessed its weakest holiday season since the recession due to Hurricane Sandy and the payroll tax increase. This troubled a number of retailers and Guess was no different. We believe that this might have hindered Guess’ already slow recovery and its Q4 results are likely to reflect that.
Rapid Growth In Asia Will Continue
During 2008-2011, Guess’ revenues from Asia grew at an average annual rate of 30%. The healthy growth continued during the first three quarters of fiscal 2013 due to good results from China and South Korea. China is the second largest apparel market in the world with its huge population and rising disposable income. McKinsey expects the total apparel sales in the region to reach $200 billion by the end of 2014. Moreover, limited competition from the U.S. counterparts such as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) should work in Guess’ favor. As a result, we expect the retailer’s growth to continue in the region.
Our price estimate for Guess stands at $28, implying a premium of about 15% to the market price.