We reaffirm our Neutral recommendation on Guess? Inc. (GES). While the company has been delivering solid quarterly results, low comps at the North American retail stores remain an overhang.
Why the Reiteration?
Guess? posted better-than-expected results in all the last four quarters. Strong brand portfolio, expansion strategies and strong online business have remained the company’s strong points. However, consistent low traffic at North American retail is hampering top line results of the company.
Guess? is one of the leading player in casual and fashionable apparels and accessories in the U.S. and Europe. The company commands a portfolio of well-recognized flagship brands, including Guess? for Women and Guess? for Men line of apparels that appeal to customers of the young and aspiring age group. Moreover, the acquisition of Marciano, an American fashion brand, in fiscal 2013 has added a new concept of fashion stocks to Guess? that aims slightly older customers aged between 25 to 40 years.
Guess? has a strong international presence that helps it to keep margins afloat amidst macroeconomic headwinds. Guess?’ European segment has grown very fast over the last three years after the company first forayed into the region. It currently represents 35% to Guess’ total revenue. The Asian business has also grown considerably over the last fiscal year and it sees ample opportunity to expand its store base in the region.
Mainly, the company plans to expand into emerging markets like Brazil, Germany, Russia, Japan and India and expand G by GUESS? concept both domestically and internationally during fiscal 2014. Moreover, the company is set to debut in Latin America and is seeking a joint venture in Brazil in fiscal 2014.
Moreover, Guess? has a strong e-Commerce business and is emphasizing on online business. Social networking sites where the company advertises and markets its products, have boosted sales over the past several quarters. Guess? launched its website – Global World of Guess – in the first quarter of fiscal 2013. The site has reported strong customer visits throughout fiscal 2013.
However, the company has reported declining revenues in all the four quarters of fiscal 2013, due to lower store traffic in North America. Tough retail conditions combined with inclement weather have negatively affected Guess? resulting in lackluster traffic and conversion rates. Though the company has undertaken initiatives to improve the traffic in North America, we do not expect any visible improvement in the near term.
Moreover, soft macroeconomic condition in Greater China, which is presently experiencing a slowdown, is slowing the company’s growth in Asia. Lower consumer spending owing to uncertain economic environment along with falling exports and slow growth in industrial production, retail sales and construction activity is denting the sales growth. This sluggish development might slow down Chinese growth in the fourth quarter of fiscal 2013, especially if the central bank scales back liquidity measures.
Guess? Inc. currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks to consider in the wholesale sector include Columbia Sportwear Company. (COLM), Gildan Activewear Inc. (GIL) and Micheal Kors Inc. (KORS). All these stocks carry a Zacks Rank #2 (Buy).