Guess? Expansion in Russia, to Stop Stagnation

The company has presented rather disappointing results, despite its good performance in Europe.

Abel Amón. 22/12/2016

The Guess brand opened, in early December, its first store in St. Petersburg, specifically at the Pulkovo Outlet Village shopping center, according to the shopping center’s press service. At the inauguration he presented a collection of clothing, handbags and accessories from the brand of Marciano brothers (founders of Guess in 1981) with discounts of between 30 % and 70 %.

Pulkovo Outlet Village

The large shopping center, Pulkovo Outlet Village, was completed last year and is located on the outskirts of the city, next to the airport of the Russian capital of the North. It contains stores of brands like Tommy Hilfiger, Calvin Klein, Lacoste, Nike, Levi’s among others.

During the 80’s the company was able to launch very original collections of denim clothing, apart from creating a brilliant combination of designer clothing along with jeans that changed the perceptions of fashion that was offered at the time. Today, Guess has become a global brand, with collections that focus, according to the brand itself in young men and women who love bright and beautiful life. Guess Girl – elegant, sexy and daring, while the men’s collections are designed in casual street style.

Guess. Click to buy

However, the company does not go through its best moments and has presented poor results in its third fiscal quarter, not so much because of a certain stagnation in sales, as the considerable fall in margins and the excessive accumulation of inventories. We will see if the last quarter corresponds to the optimistic forecasts of its CEO, Spanish Victor Herrero, who arrived in the group in 2015 from Inditex.

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Small growth in the third quarter.
In the third quarter of 2016 Guess total sales increased 2.9% to $ 536.3 million, largely due to double-digit sales growth in Europe and Asia. The company also reported a decline in retail sales in the Americas, as well as a decline in wholesale trading volume. Guess introduced in the third quarter of its fiscal year 2017 earnings per share of $ 0.11, ($ 0.15 in fiscal Q3 2016).

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Víctor Herrero commented: «While I recognize the challenges we face in the Americas, I am delighted that due to our various revenue enhancement initiatives, third quarter revenue increased 3%. We have enjoyed strong growth of two Digits in Europe and Asia, and we remain focused on improving our profitability in North America. As we reach the end of our transition year, I expect fiscal year 2018 with tremendous anticipation and excitement. Third-quarter earnings ended in the low range of our guidance. Overall, we are satisfied with the performance of our international business. In Europe, revenues increased 16% driven by new store openings. Increased by 16% in Europe, marking the second consecutive year of growth in the European wholesale business. Asia’s revenue grew to 10% driven by new store openings in China.»

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It is precisely this expansion in Asia, with considerable investments in that continent, which has led to negative operating results, offset by the good performance in terms of the margins that have given the operations in Europe. Guess’s strategy to improve its margins will be based on four key points:

  • Continue to negotiate rent reductions whenever possible.
  • Close unprofitable stores upon lease kick-out or expiration unless new rent terms make them profitable.
  • Continue to implement supply chain initiatives including vendor consolidation, fabric platforming and source country diversification.
  • Enhance their digital capabilities to help set themselves  apart from other retailers.
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Although there was an increase in the online sales of the company in these 9 months, the impact of the same still very limited. However, the optimism of Victor Herrero’s team is not supported by analysts or by the behavior of the stock, which, as we see in this graph, leads a cumulative 32% drop in 2016, and its performance has been well  below the sector as we can see in this graph.

Source:Charts ByZachs

Results for the nine-month period.
For the nine months ended October 29, 2016, the Company recorded net income of $ 16.2 million, a decrease of 52.5% compared to $ 34.1 million for the nine months ended October 31, 2015. Earnings per Stock were down 52.5% to $ 0.19 for the nine months ended October 29, 2016, from $ 0.40 for the prior year period. Net income. Total net revenue for the first nine months of fiscal year 2017 decreased 1.0% to $ 1.53 billion, from $ 1.55 billion in the prior year period. In constant currency, net income decreased by 0.4%.

Guess. Click to buy

Excessive inventories.
On the other hand, indicate that although the company has a fairly sound balance sheet, with a very low debt ratio, there is a drop in liquidity ratios. Although the current liquidity ratio is well above two, the acid test has gone from 2.06 to 1.55 in just nine months, due to an excessive accumulation of inventory that has grown 37% in the period . Bad indicator.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text has been written freely expressing their own ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.

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