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WIKI ANALYSIS
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 [1] 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.
Company Overview
Breakdown of Holdings
Guess? divides its business into four main segments: wholesale, retail, European, and licensing.
- Retail: The bulk of the company is based in its retail operations, which have consistently accounted for about two-thirds of net revenue. This segment is comprised of the company’s North American retail stores, its factory outlets, and online sales. Although retail sales have decreased as a percentage of net revenue, revenue from the retail segment is actually up $274M from 2003-2006.[2] In addition, Guess? includes retail from overseas in its European operations, thereby making the retail segment appear smaller than it would otherwise.
- Wholesale: Guess? has contracts to sell its apparel and accessories with companies like Macy’s and Dillard’s. This segment significantly expands the visibility of the brand, placing Guess? product department and specialty stores worldwide.[3]. However, wholesale revenues have remained stagnant in recent years, and have actually decreased as a percentage of total net revenue (from 20% in 2003 to just over 12% in 2006). This decrease comes as the traditional department store industry experiences lagging sales and decreasing market share. Guess? has acknowledged the potential risk a decrease in wholesale business could pose to the company's bottom line, especially since it's wholesale business is concentrated within a relatively small group of big customers.[4] Over the past few years, Guess? has accordingly altered its strategy for growth to expanding its own network of retail stores.[5]
- European: Although only 15% of net revenue comes from its European business segment, it is one of the fastest growing areas of the company: European sales brought in over ten times the revenue in 2006 as they did three years prior. As in the retail segment, growth is in part the result of the company's move to trendier and more expensive designs. The company is taking steps to increase development abroad with new stores and international licensing agreements. Outside of Europe, Guess? is seeking to expand into Mexico, the Middle East, and Asia.[6]
- Licensing: A significant but much smaller percentage of revenue comes from Guess? licensing agreements, where the company allows others to utilize Guess? logos and images in products in exchange for some portion of the proceeds. The company currently has 21 domestic and international licenses for a variety of accessories, including watches, handbags, and jewelry. Guess? also uses license agreements to penetrate previously untapped markets, such has Africa, South America, and Australia.[7]
Recent Earnings
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.[8]. 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.[9] 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.[10]. 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.
Guess? 2Q FY 2008 earnings were particularly strong as well. Net earnings were up over 80% on strong same-store sales and international growth.[11]
Trends and Forces
Dependency on Department Stores
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). [12] 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%.[13] However, Guess? may be less vulnerable to such changes as it has increased its retail operations and is now less dependent on wholesale business.
Volatility of Fashion Trends
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.
U.S. Economic Conditions
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.
Competition
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. [15] | |
|---|---|---|---|---|
| Revenue (ttm) | $1.47B | $16.03B | $4.54B | $4.19B |
| 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] | 16.2%[17] | 0%[18] | 7.9% [19] | - |
- ↑ Guess? 2005 10K (released March 13, 2006) p. 7 and Guess? 2006 10K (released March 1, 2007) p. 7
- ↑ Guess? 2005 10K (released March 13, 2006) p. 7 and Guess? 2006 10K (released March 1, 2007) p. 7
- ↑ Guess? 2006 10K (released March 1, 2007) p. 3
- ↑ Guess? 2006 10K (released March 1, 2007) p. 16
- ↑ Guess? 2005 10K (released March 13, 2006) p. 7
- ↑ Guess? 2006 10K (released March 1, 2007) p. 5
- ↑ Guess? 2006 10K (released March 1, 2007) p. 3
- ↑ Guess? 2006 10K (released March 1, 2007), p. 7
- ↑ "How Guess Got Its Groove Back, BusinessWeek (December 18, 2006)
- ↑ Guess? 2006 10K (released March 1, 2007) p. 5
- ↑ Guess? news release on 2Q FY2008 earnings (released September 4, 2007)
- ↑ "Top fashion designers go down-market", USA Today (published September 25, 2007)
- ↑ How Guess Got Its Groove Back, BusinessWeek' (December 18, 2006)
- ↑ Unless otherwise noted, these figures were taken from Yahoo! Finance.
- ↑ Data from the company's 2006 10-K(released February 13, 2007)
- ↑ Figures compare Q2 2007 sales to Q2 2006 sales.
- ↑ Guess? press release: "GUESS?, INC. REPORTS RECORD SECOND QUARTER 2008 REVENUES", (released September 4, 2007)
- ↑ Gap press release: "GAP INC. REPORTS SECOND QUARTER EARNINGS PER SHARE OF $0.19", (released August 23, 2007)
- ↑ Polo Ralph Lauren Wikinvest article
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