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South Korea Provides Hope For Guess' Asian Business Despite A Slowdown In China

Posted
12/19/2013 1:14:00 PM
By: Trefis
Referenced Stocks:AEO;ANF;ARO;GES

Quick Take

After growing at a healthy pace for over four years, Guess ' ( GES ) growth in Asia has stalled, mainly due to weak results from its core market in the region, China. During the last two quarters, the retailer's Asian revenues declined by 6% and 4%, respectively, (on a constant currency basis) as Chinese buyers spent more cautiously. This is not a good sign for Guess as it has already been struggling in its main markets - Europe and North America - and was relying on Asia to provide some respite.

However, there were some positives for the retailer in the form of growth in South Korea. In the previous two quarters, Guess' revenues in South Korea increased at a modest rate, which had an offsetting impact on the weak Chinese results. Although the company is not well-established in South Korea, the region's high growth potential makes it an important market from a long-term perspective.

Our price estimate for Guess stands at $35 , implying a premium of 10% to the market price.

See our complete analysis for Guess

Growth In Asia Hits A Roadblock

Guess' Asian revenues have grown at a tremendous pace historically, but have declined by 4% in Q2 fiscal 2014 mainly due to weak results from China. The company stated that the recent pullback in consumer spending in the region was the main reason for this dismal performance. The scenario somewhat worsened in Q3 as Guess' revenues fell by 6%. Though the region's apparel market is set to boom in the long term, the near term outlook is fairly challenging.

The salary growth of Chinese consumers is slowing down, which is directly impacting the region's consumer spending. This is hampering retail market growth, which in turn is weighing on China's economic growth. The region's GDP growth rate decelerated to 7.5% in Q2 from 7.7% in Q1, and the outlook for the year was lowered to 7.5%. This is China's slowest economic growth since 1990. Hence, Guess's Asian business is likely to struggle in the near term. The company itself expects a mid-to-high single digit revenue decline in Q4.

However, South Korea Holds Long Term Promise

South Korea's apparel industry witnessed strong growth in 2012 despite weak consumer confidence. This was fueled by the increasing popularity of specialty apparel brands and growing demand for outdoor wear and sportswear due to rising consumer awareness of health and well-being. Specialty retailers who offer good quality products at affordable prices are prospering due to increasing demand for value-added products. With frequent changes in fashion styles, international specialty retailers have performed well since 2007. Even domestic retailers are now focusing on product design and variety to add to their brands' international appeal. This trend bodes well for Guess as it is one of the popular global brands.

Additionally, Internet has emerged as a strong shopping channel with several department stores and apparel retailers adding e-commerce to their business. Retailers are also focusing on the m-commerce channel as smartphone penetration in South Korea is on the higher side. Going forward, mobile commerce is likely to become the key to online retailing as it offers maximum convenience to shoppers. Guess can take advantage of this trend if it launches some useful mobile apps along with retail store expansion.

Despite the weak economic growth outlook, the South Korean apparel market is expected to grow at a robust pace due to the aforementioned factors. Therefore, it makes sense for Guess to continue investing here along with its expansion in China, Japan and India.

But There Might Not Be Any Significant Upside

Guess still relies heavily on Europe and North America for a bulk of its revenues. The Asian business accounts for a little over 10% of the company's value, as per our estimates. We currently forecast Guess's revenue growth in the region to pick up next year and take annual sales to $480 million by the end of our forecast period. Even if recovery in China, rapid growth in Japan and India, and expansion in South Korea push this figure to $650 million, the upside to our price estimate will be less than 5%. However, growth in these markets is essential for Guess as its future in Europe and North America isn't looking too bright.

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