EUR 850.00 For Business Accounts Only

Morningstar | Guess Should Benefit From Strong International Growth and Recovering Profitability in U.S. Retail

Guess has had a rocky road since its heyday in the 1980s. Originally known best for its denim collection, the company began to face intense competition from Gap, Calvin Klein, Diesel, and other premium jeans brands. In our opinion, the brand lost its strength as it became less relevant to younger generations--the basis for our no-moat rating--and its challenge now is to remain true to its roots but do so in a more modern way.Past difficulties with a tired brand and intense competition were compounded by leadership trouble with control and feuding among the Marciano brothers. However, we think the shift in leadership toward non-family members (Victor Herrero was appointed as CEO in 2015, and was suceeded by Carlos Alberini in February), has been a promising change. We think Alberini’s is a strong candidate for the job, given his extensive knowledge of Guess’ operations (he had served as its president and COO from 2000 to 2010 and played a key role in building out the firm’s operations abroad). However, we think the list of issues needing to be addressed is long and execution will be time-intensive and difficult.The firm's strategic initiatives stretch across sourcing, manufacturing, merchandising, retailing, and branding. The three-year plan (announced in fiscal 2016) was predicated on growth in e-commerce, new store openings (about 50% growth in the store base), and comparable sales increases across all concepts, with flat licensing and wholesale revenue. We had immediately thought that these goals were aggressive and, by the end of fiscal 2017, management was already walking back some of these. We think management's initiative to shrink the U.S. store base instead of expanding it is the right one, given mall traffic declines, and we are encouraged by the success the company is seeing in its focus on Europe and Asia, with six quarters of consecutive revenue growth. That said, we think exposure to the U.S. retail market (around one third of sales) will continue to pressure profitability and don't see management reaching its 7.5% operating margin goal (versus 3.6% at the end of fiscal 2018) until exposure to this market is minimized.