Guess to step up store opening drive in Europe and Asia, closures announced in USA
How to fix the Guess business in America? It is a formidable challenge for group CEO Victor Herrero and his team. In the last fiscal year, closed at the end of January, Guess sales were stable at $2.21 billion, but business was especially weak in the USA, Canada, Mexico and Brazil, where direct sales fell by 5%, to $935 million.
And, crucially, the group's profitability plummeted in the region. Operating losses amounted to $22 million, even before accounting for impairment charges related to some of Guess' retail assets. The wholesale business in America actually appears to be in a slightly more reassuring shape: wholesale revenue fell by 13% to less than $91 million, yielding however an operating income of just over $22 million (though this was down 18% compared to the previous year.)
The picture is wholly different in Europe, where the group posted growth in both sales (+9%) and operating income (+3%). Faced with dwindling footfall in America, the senior management has now decided to invest in Europe, and trim down its domestic market operations.
"The US retail business has fallen significantly short of our performance expectations, and as a result our plans have clearly changed. We will reduce our structural footprint and costs in the USA. This market currently accounts for 38% of our business and its size will decrease, though it will become more profitable, said Guess’ CEO talking to financial analysts. In terms of rental costs reduction, while we have renegotiated leases for 72 out of our 339 directly-operated stores in the USA, we are keen to streamline our network more vigorously, and we decided to close down 19 stores. In the last two years, we have already closed down 62 stores, 10 of them in the last quarter."
For the current fiscal year, Guess is actually planning the closure of 60 shops in the Americas region, including the 19 it has already identified. The forecast is for this decision to generate an additional $16 million in operating income every year. The Guess and Marciano networks are the most likely to be affected by the closures, as the group emphasised the satisfactory performance of G by Guess and of its outlet stores. Herrero also indicated that in the USA the group enjoys a certain amount of medium-term flexibility, since half of its stores have lease agreements ending within the next three years.
Guess' strategy in Europe is exactly the opposite. The group has opened 56 stores in the last fiscal year, 15 of them in the last quarter, bringing the number of directly-operated stores in the region to a total of 336. "We plan to open another 60 stores in Europe this year. We are satisfied with the stability of our wholesale business in the region, where retail accounts for 55% of our sales, said Herrero. What is extremely important is that our adjusted operating margin has risen by 80 base points in the last quarter.” The group is also pursuing an expansive strategy in Asia, though its business in the region is not yet profitable. Guess opened 54 stores in the region, doubling the number of directly-owned shops, notably with inaugurations in Shanghai and Beijing, as well as in some second-tier cities, and it intends to open another 35 this year.
The retail efforts, combined with boosted online sales, accounting for approximately 10% of the total business, and especially with a sourcing overhaul, with suppliers from Bangladesh, Cambodia and Pakistan, are expected to allow Guess to improve its margin performance in the coming quarters.
In the last fiscal year, the group's operating margin, before impairments and restructuring costs, was 2.9%. The senior management's long-term objective is to bring it back to 7.5%.
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