Clothing Retailer GUESS (NYSE:GES) has suffered long term sliding sales and plummeting profit, however it may be an interesting turnaround candidate after the board appointed Victor Herrero the new CEO in August 2015. Guess’ Co-founder and former CEO Paul Marciano took over as Executive Chairman of the Board.
New CEO Background
Prior to joining GUESS, Victor Herrero worked for world’s largest clothing retailer Spanish company Inditex for 13 years. Inditex has been pioneering the fast fashion trend that has changed the world of fashion, with the popularity of stores like H&M, Zara, and Forever 21. Even lagging retailer GAP is trying to convert to a fast fashion retailer to stay relevant. Herrero was previously the head of Asia Pacific and a managing director of the subsidiary chain Zara in Greater China. He oversaw markets such as Mainland China, Hong Kong, Macau, Taiwan, South Korea and India. Since Zara opened the first store in Shanghai in 2006, it has grown to more than 170 stores in China and has successfully boosted revenue to $19.7 billion in less than 10 years. Zara has led fast fashion around the world.
Victor Herrero has full of hands-on experience on developing business and managing relationships with local government officials and partners to win suitable locations as well as his understanding of the Chinese consumer. He is also an expert at executing Zara famous vertically integrated supply chain. Zara’s secret is its fast stock turnover rate in the clothing retail industry. From the original design to deliver to the local stores, Zara needs just two to four weeks, comparing to 3-6 months of other major competitors such as Dior. It appears likely that Guess will transform into a fast fashion brand with the addition of Herrero.
Asian Market Key For Guess’ Turnaround
For GUESS, Asia would be crucial for its future turnaround. Based on the geographic analysis of GUESS sales, North America, Europe, Asia and Licensing segments accounted for 49.6%, 34.2%, 11.6% and 4.6% of its revenue respectively. At Inditex, Asia segments accounted for 21% of sales, while for GUESS, it was only 11.6% of sales.
Mr. Herrero appointed Jose Blanco, as Country Director of China and Lander Isasi, as Managing Director for the Middle East, India and Southeast Asian regions. Both of them had been ex-colleagues of Mr. Herrero at Inditex. Jose Blanco was Managing Director of West China and IT Manager, with full experience of e-commerce in China. Lander Isasi was Managing Director of South East Asia and China.
After the announcement, GUESS doubled capital allocation to Asia’s market. It ramped up e-commerce business in Asia through websites such as Tmall, JD.com, and Guess.cn. Based on the latest quarter report, it experienced strong comparative store sales in Asia. This trend is expected to continue the rest of the year.
Improving Guess’ North America Segment
Mr. Herrero made a series of initiatives recently. His top priority is to train staff with product knowledge and emphasize to maximum the best-selling products and categories. The company hired a Social Media Director to interact with existing customers and attract new customers through digital marketing and social media. It planned to boost replenishment speed to move merchandise from stock room to store very quickly and communicate to headquarters efficiently. Based on the latest quarter results, E-commerce and comparative store sales grew strongly while wholesale revenue lagged behind.
GUESS top institutional shareholders are Fidelity (14.98%), Black Rock (11.37%) and State Street (6.15%). After the appointment of new CEO, all three of its top shareholders continued to add shares. For valuationconsideration, P/B 1.4, P/S 0.6 and P/E 16.7, were close to the ratio levels the company saw in 2008 and were significantly lower than its key competitors. It also offers high dividend payout ratio 5.15%. GUESS has positive free cash flow with reasonable debt level ($500M), debt to equity ratio 0.6. Meanwhile, it has remaining of $495.8 million stock repurchase plan going forward. Although China is facing an economic slow down, we believe the revival of Asian business and weak dollar trends will significantly raise GUESS valuation in the near future.