What Does The Indian Market Offer Guess?

| About: Guess? Inc. (GES)

During the last two years, Guess (NYSE:GES) has struggled in Europe and North America due to a weak economic environment, a decline in store traffic and a lack of fashion newness. However, its Asian business remained strong with annual revenues growing from $120 million in 2008 to $290 million in 2012. The retailer is further planning to increase its presence in key Asian markets such as China, Japan and India. In this analysis, we’ll look at what India has to offer the retailer.

India is the second most populous country in the world. The region’s apparel sales have grown at a rapid pace historically, and the trend is likely to continue due to increasing urbanization and women employment. Moreover, the influence of western lifestyle and foreign exposure along with the growing middle class will result in higher sales for branded apparel. Guess’ Asian business constitutes about 15% to the company’s value, according to our estimates.

India's Long-Term Economic Outlook Is Promising

India currently stands 12th in the list of the world’s largest economies. Over the past few years, the region has witnessed rapid economic growth and is likely to become one of the fastest growing economies by 2020. India’s GDP is expected to grow at a compounded annual growth rate of 9.8% through to 2020. A growing middle class, skilled and non skilled work force, improving education standards and substantial foreign investments can transform India in to one of the largest economies in the world over the next decade. In 2005, out of the 210 million households in the country, about 21 million earned more than $4,000 a year, which is defined as the consuming class by consulting group McKinsey. A McKinsey report suggested that this figure will triple by the end of 2015.

Rapid Growth in India's Apparel Market

India’s apparel sales increased from $25 billion in 2007 to $40 billion in 2011. The figure is expected to reach $120 billion by 2020, as the buyers in emerging economies tend to spend more on apparel products as compared to the developed markets.

This growth will be further complemented by increase in urbanization. Urban consumers often want different clothes for different purposes and events. A study by McKinsey stated that about 38% of Indian buyers are likely to shop for special events compared to 5% Brazilians, 3% Russians and 6% Chinese. In 2010, only about 29% of the country’s population resided in urban areas. Over the course of next 20 years, about 300 million Indians will move into the urban population. Youngsters in their twenties will form a significant chunk of the urban population and will want trendy clothing to match their new lifestyle and higher discretionary income.

In addition to this, only about 20% of Indian women living in urban areas are employed. Hence, their wardrobe is limited to traditional home wear and special occasion wear. As more women move to cities and gain employment, female customers will increasingly shop for professional attire, casual wear and party wear.

Increasing Proportion of Branded Apparel

Branded apparel accounted for about 25% of total apparel sales in 2011 in India. However, this figure is likely to increase going forward, with increasing foreign exposure and influence of western lifestyle. An improvement in the level of education, employment and rising disposable income have resulted in increased foreign trips in form of study, work and tourism. This has increased the exposure of Indians to western fashion resulting in a rise in demand of western apparel. A large portion of Indian buyers has been influenced by the western lifestyle through television, movies, advertising and Internet. Moreover, American style mall shopping has gained tremendous popularity, which has boosted the demand of western brands. A 2010 McKinsey survey suggested that about 62% of Indian buyers felt that their clothing should reflect on-going fashion trends.

Due to these factors, the proportion of branded apparel sales is expected to reach about 35% by 2020, which will help western retailers such as Guess gain market share.

Will There Be an Impact

As Guess continues to expand in lucrative Asian markets of China, India and Japan, it stands to see significant revenue growth in these markets. We currently forecast the retailer’s Asian revenues to reach $600 million within the next five-six years. However, if a healthy contribution from China and Japan, and success in India drive the revenues to $800 million, there could be 10% upside to our price estimate. We believe the optimistic case is very much possible given the huge potential of these markets and the retailer’s efforts to establish itself in growth markets. Our price estimate for Guess stands at $27, implying a premium of about 5% to the market price.

Disclosure: No positions.