Are those $200 jeans just shy of being too tight? You might be wearing Guess? (NYSE: GES). A pioneer in the designer jeans industry, the company makes a variety of fashion-conscious men's and women's clothing. You can find Guess? in over 350 retail stores through out the U.S. and Europe, not to mention popular department stores like Macy's and Bloomingdale's. The company also distributes its clothing through its website.
A pioneer in the designer jeans industry, Guess? was one of the most popular denim brands of the 1980s. The company ran into a few issues, however, during the 1990s: namely pricing pressure from department stores and a trend towards baggier jeans. The latter is decidedly at odds with Guess' more European style. As Guess? struggled to adjust to changing market conditions, competing brands like, Polo Ralph Lauren, Tommy Hilfiger, and Calvin Klein were poised to capitalize on the company's weakness.
In an effort to turn around its flagging fortunes, the company has begun a major push into Europe. The company's presence on the continent continues to grow rapidly; its European revenues which increased by a factor of 9 from 2003 through 2006  and it expects to increase its number of European retail stores by more than 33% by the end of 2007. Guess? is also focusing on improving its margins by shifting its jeanswear business towards retail and concentrating on trendier(read higher-priced) offerings.
Guess? divides its business into four main segments: wholesale, retail, European, and licensing.
Over the past few years, Guess? has shown steady and substantial growth across its business segments, leading to a 63% growth in net revenue over the past three years.. Part of this growth comes from the company's shift to a trendier and more upscale design aesthetic across its brands, resulting in higher margins: for example, the cost of an average pair of women's Guess? jeans has doubled in just the past few years. The company is further testing this strategy with the 2004 launch of its "Marciano" brand, which targets older female consumers with a higher price point.
Business has been particularly strong in its Europe, where Guess? is growing rapidly. In 2006, the company opened 125 new stores outside of the U.S. and Canada(up from 315 at the end of 2005), with plans to open over 100 more in 2007.. The company furthered capitalized on its European growth when it purchased its Italian denim licensee in 2005, which accounted for $100M of net revenue growth that year.
Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase and/or license from companies like Guess?. As a means of increasing market share, companies have also sought to differentiate themselves from the competition by demanding exclusive contracts and store-specific private labels (e.g. Ralph Lauren's "American Living" line for J.C. Penney).  Such dealings could weaken the control Guess? has over its brand's image.
In addition, a series of mergers and acquisitions in the industry (e.g. Federated Department Stores' 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with Guess?, thereby lowering profit margins. For example by 2002, department stores had forced brands like Guess? to slash their prices, reducing the average price of a pair of jeans by over 50%. However, Guess? may be less vulnerable to such changes as it has increased its retail operations and is now less dependent on wholesale business.
Trends in the fashion world tend to change very quickly. Consumer tastes can vary widely from one season to the next, leading to large swings in a company's profits. As Guess? seeks to increase earnings by producing cutting-edge styles, it opens itself up to the significant risk that comes with following trends. Guess? has already experienced this firsthand, when its extremely popular jeanswear failed to transition from the skinny denim silhouette of the eighties to the baggy, urban fit of the nineties.
As over two-thirds of Guess? revenue comes from its North American operations, its bottom line is susceptible to shifts in the region's economy, especially in the United States. As rocky economic forecasts tend to damper consumer spending, the company's recent rapid growth could decline. However, as Guess? seeks to expand its growth abroad, the brand's significant international business may serve as a hedge against decreases in domestic consumer spending. With the dollar at record-low levels against the euro, the company's strong European earnings may look even attractive on its U.S. balance sheets for some time to come.
Guess? competes with a variety of brands that seek the business of the 18-35 demographic, albeit with differing strategies. While Guess? focuses more on trendy, fashion-forward apparel, competitors like Gap base their business on providing wardrobe basics. Brands like Polo Ralph Lauren supply consumers with a fuller range of both wardrobe staples and trendier apparel.
Within the denim business, Guess? faces fierce competition from very popular brands like Seven For All Mankind, True Religion, and Diesel. Guess? is increasingly following the industry trend towards higher-end jeanswear as it increases both the quality and the price of its denim.
|Guess?||Gap||Polo Ralph Lauren||Levi Strauss & Co. |
|Net income (ttm)||$157.71M||$759.00M||$387.30M||$239.00B|
|Quarterly revenue growth (yoy)||48.20%||-0.10%||11.30%||-|
|Gross margin (ttm)||44.82%||35.33%||54.12%||47.00%|
|Operating margin (ttm)||16.78%||7.57%||14.22%||15.00%|
|Change in same-store sales ||16.2%||0%||7.9% ||-|