Guess's Sales Will Continue To Stumble Amid Sluggish Economic Environment

As specialty apparel retailer Guess ( GES ) comes out with its Q4 fiscal 2014 earnings on March 19, we expect its struggle to continue. Over the past few quarters, the company hasn't done well in any of its main markets and this trend is likely to continue in the fourth quarter as well. In the U.S., a huge decline in foot traffic, weak consumer sentiment and fierce competition from fast-fashion brands will weigh on Guess's results. However, the retailer's competitively priced products can slightly offset this impact.

In Europe, sluggish economic growth is likely to translate into another weak quarter for the company. Guess's revenues from the region have declined consistently over the past seven quarters and the company has projected low-to-mid single digit comparable sales decline for the fourth quarter. After flourishing for a couple of years, Guess's growth in Asia has stalled lately due to weak consumer spending. During its last quarterly earnings call, the retailer stated that it expects mid-to-high single digits revenue decline in Asian revenues in Q4 on account of an uncertain economic environment and lower shipments to licensee partners.

Our price estimate for Guess stands at $35 , implying a premium of less than 20% to the market price.

See our complete analysis for Guess

Bleak Holiday Season Will Prolong North America's Misery

From 2009 to 2012, the proportion of Guess' North American retail business in its overall revenues decreased from 46% to 42% despite continued expansion. Fiscal 2013 (CY 2012) was particularly weak for the company as its revenues declined by 0.1% mainly due to low store traffic. This is attributable to a decrease in the number of tourists, lack of prevailing fashion trends and poor performance from accessories business. The impact was further intensified by Guess' strategy to increase full-priced sales and reduce the number of markdowns. The retailer's problems continued in fiscal 2014 (CY 2013) due to several macroeconomic factors that were challenging for the entire U.S. apparel industry. Consumer confidence was low due to increased taxes, slow job growth, higher healthcare costs and gasoline price inflation. Also, buyers preferred spending on products such as cars and houses to take advantage of low interest rates. Subsequently, they held back spending on items such as apparel and accessories.

Moreover, fast-fashion brands such as Gap Inc ( GPS ), Urban Outfitters' ( URBN ), Forever 21, H&M and Zara were able to attract U.S. buyers with their popular merchandise. This fashion-conscious buying impacted the sales of a number of retailers such as American Eagle Outfitters ( AEO ), Aeropostale ( ARO ), Abercrombie & Fitch (ANF), and also Guess. As a result, Guess' comparable store sales in North America declined by 9.8%, 2% and 5%, respectively, during the first three quarters of fiscal 2014. The company expects this trend to continue in the fourth quarter on account of a lackluster holiday season for the U.S. apparel market.

Pressured by several macroeconomic factors, U.S. buyers were cautious about spending during the holiday season of 2013. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to the same month last year. Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak's earlier prediction of 1.4% decline. Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season.

However, Competitively Priced Products Can Partially Offset The Revenue Decline

Despite Guess's stumbling sales, there are a few product categories that have performed well. Towards the end of 2012, the company revamped its merchandise mix by increasing its denim offerings and iconic styles at the entry level prices of $75-$95. Interestingly, Guess's $79 denim has become one of its most popular merchandise lately. The company reported that its $79 denim delivered positive results in the first quarter and its sales trend improved in the second. During Guess's third quarter earnings call, COO and executive vice president, Russell Bowers, said that Q3 sales of $79 denim was much better than Q2. This improvement continued in November with double-digit comparable sales growth at full priced stores with denim. Considering the fact that November wasn't the best month for the U.S. apparel industry, this performance was pleasing.

Comparable sales growth at full priced stores indicates that $79 denim is improving every month and its price points are more appealing than its design. This is evident from the fact that other categories such as dresses have also done very well at opening price tier. Although these products form a small part of Guess's overall portfolio, they can have a slight offsetting impact on its revenue decline in North America.

Sluggish Economy Likely To Suppress European And Asian Results

Guess's revenues in Europe declined by 7% in fiscal 2013, and 13%, 3% and 7% (local currency), respectively, during the first three quarters of fiscal 2014. The company has been unable to perform well in the region as most of its markets are still reeling under the impact of economic crises due to sluggish consumption. Since household final consumption rose by just 0.1% in eurozone and 0.2% in EU in the fourth quarter of 2013, we expect the retail market to have remained weak. Therefore, it is unlikely that Guess's results in the region will be any different from its historic trends.

During Q2 fiscal 2014, Guess's Asian revenues fell by 1%, primarily due to disappointing results from China on account of unfavorable economic headwinds. In Q3, the magnitude of revenue decline rose to 6% as the region's economic growth remained slow. Since China's GDP growth rate touched a six-month low of 7.7% in October-December quarter, Guess's results likely remained suppressed.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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