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Quick Take

  • Guess is looking to expand in Asian markets as its growth in North America and Europe continues to suffer due to low store traffic and a tough economic environment.
  • We note that China, India and Japan are some of the key markets that offer good growth potential for Guess.
  • India and China will benefit from rising disposable income and increasing urbanization, which will fuel the demand for western apparel.
  • There could be more than 10% upside to our price estimate for Guess if the company steps up its expansion efforts in Asia.

Guess (NYSE:GES) has been struggling in its main markets for a while as its store traffic in North America remains low and Europe continues to face economic headwinds. However, its Asian business has done well growing at an average annual rate of 25% over the last five years. The main reason behind this growth is the success that the company is seeing in China, which offers tremendous potential for western apparel retailers. In addition to this, Guess is also entering India and Japan. We believe that growing middle class, rising income levels and increasing urbanization in these markets will fuel the demand for western clothing. In this analysis we’ll take a closer look at the potential that these markets have to offer.

Growing Urbanization And Rising Income Levels Are Fueling China’s Huge Market

China has seen robust economic growth over the past few years. Even when the global economy was reeling under the impact of the recession in 2008-2009, the country was able to sustain its growth with rising income levels and increasing urbanization [Apparel In China, Euromonitor, Apr 2012]. Growing labor cost is one of the primary reasons behind the increase in the region’s disposable income. At the end of 2012, about 53% of Chinese resided in urban areas, which was significantly lower than the proportion of urban population in the U.S. and Japan [China’s population – Peak toil, The Economist, Jan 26 2013]. There is a huge scope of urbanization and this figure could reach 65% by 2025 [United Nations, Department of Economic and Social Affairs].

These factors are driving China’s apparel industry. Prior to 2011, the region’s apparel sales were growing at an average annual rate of about 16% [From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011]. In 2009, the market stood at $110 billion and consulting firm McKinsey expects this figure to cross $200 billion by 2014. On the other hand, growth in the U.S. apparel industry has been relatively slow. This is why several U.S. apparel retailers including Guess are aggressively expanding in China. Over the past two years, Guess has grown its Greater China business by almost 75%. For the current fiscal year, the retailer plans to open about 50 stores in China and only 17 stores in North America [Guess’ Q4 fiscal 2013 earnings transcript, Mar 20 2013].

India’s $40 Billion Market Finds Support From Healthy Economic Growth & Increasing Proportion Of Branded Apparel

India has witnessed rapid economic growth over the past few years and is likely to become one of the fastest growing economies in the next decade [Indian Apparel Market: Current Status And Future Outlook, Confederation of Indian Textile Industry, Sept 27 2012]. A growing middle class, a large skilled and unskilled work force, improving education standards and substantial foreign investments can transform India to one of the largest economies in the world. 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 [India’s Fast-Growing Apparel Market, McKinsey & Company, June 2012]. This trend is directly influencing apparel industry growth in India.

India’s apparel market stood at $40 billion in 2011 and is expected to reach $120 billion by 2020. Rising urbanization is likely to be one of the key growth drivers as 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 the urban areas. Over the course of next 20 years about 300 million Indians will move into the urban population.

A big chunk of this urban population will comprise of youngsters who want trendy clothing to match their new lifestyle and higher discretionary income. A 2010 McKinsey survey suggested that about 62% of Indian buyers felt that their clothing should reflect on-going fashion trends. Also, 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. With increasing foreign exposure and influence of western lifestyle, the proportion of branded apparel sales is expected to go up to 35% by 2020 from 25% in 2011.

Japan’s $110 Billion Market Is Good For Affordable Brands

Although Japan’s apparel market stands big at about $110 billion, its growth has suffered due to a decline in consumer spending and weakness in the economy [Overview of the retail apparel market, United Arrows]. However, the situation is getting better with Japanese government’s Cool Biz campaign and the consumer shift to affordable products [Apparel In Japan, Euro Monitor, June 2012]. The government has urged companies to limit air conditioning and set warmer room temperatures, which has resulted in increased demand for casual clothing suited for such environment [Japan ‘Super Cool Biz’ Campaign Urges Businessmen To Shed Suits, Save Energy, Huffington Post, Jan 8 2011]. An encouraging sign for Guess is the growth in Japan’s Internet retail market despite a lull in distribution patterns and mass merchandising in 2011. Last year, Guess’ management stated that Japan will be the next target for the company after China, and it plans to open its first flagship store there by fiscal 2015.

What Is The Significance?

According to our estimates, Guess’ Asian operations constitute about 15% of the company’s value. As the retailer continues to expand in China, India and Japan, it will experience significant revenue growth in these markets. We currently forecast the retailer’s revenues from Asia to reach about $600 million within the next five-six years. However, if this figure grows to $800 million instead, 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.

Our price estimate for Guess stands at $30, implying a discount of about 5% to the market price.

Disclosure: No positions

Source: Asian Markets Hold Big Potential For Guess