Guess? Inc. (GES), a designer of western contemporary apparel with a market cap of $2.91 billion, recently appointed Sandeep Reddy to be the company’s new CFO. Paul Marciano, GES CEO, cited that Reddy’s “deep European and North American business and finance experience” and “excellent track record” from his most recent position as the CFO of the GES Europe Finance Board will help diversify the company’s market strategy.
Investors hope that the new hierarchy change will bring about new growth stemming from a better focus on emerging markets outside the sluggish American and European retail industries.
ASIAN DEMAND EXPLODES
GES’ Asian businesses reported 25% annual growth during the past half-decade and 75% growth in the past two years mainly due to increasing urbanization and additional disposable income in China which analysts predict will continue to drive demand.
Chinese markets are attractive to western companies like GES because even with the U.S. market recession in 2008-2009, China was able to maintain its economic growth with factors like increasing income levels and a population shift to cities and suburbs.
At the end of 2012, an estimated 53% of Chinese lived in urban areas, and this prediction could reach 65% by 2025. The heightened disposable income available in the country is a result of increased labor costs from higher-quality jobs that are found nearer to the city. The Chinese retail industry collected $110 billion in 2009 and is predicted to reach $200 billion by 2014, a good sign for GES which plans to open 50 new stores in that country as opposed to only 17 in the North America.
INDIA TOO
Another major growth opportunity lies in India, which is expected to be the fastest-growing economy in the world with its compounded annual growth rate (CAGR) of 9.8%, a rising middle-class population, improvements in standards of education, and increased foreign investments.
In 2005, a study showed that of the 210 million households in India, roughly 21 million had a salary higher than $4,000 a year, a financial characteristic that designates the consumer portion of the population. A report estimated for this figure to triple by the end of 2015, and the amount of available income in the middle-class is directly proportional to the growth of the retail industry in the country. In 2010, only 29% of India’s population lived in urban areas, but over the next 20 years, analysts project that approximately 300 million people will move closer to major cities. An increase in urbanization is a key market growth driver as urban customers will purchase a variety of clothing for multiple purposes and events. A study found that 38% of Indian consumers are likely to spend money for special events compared to 5% Brazilians, 3% Russians and 6% Chinese. India’s retail market was valued at $40 billion in 2011 and is estimated to be at least $124 billion by 2020 based on urban population growth. Also, the proportion of retail sales is predicted to rise from 25% in 2011 to 35% by 2020 due to increasing western influence.
The third most important emerging market for the apparel industry is in Japan. Its retail industry is valued at $110 billion though its growth has been slowed by a decrease in consumer demand and a weak overall economy. Nonetheless, the efforts of the Japanese Ministry of the Environment’s “Cool Biz” campaign is reducing electrical spending on air conditioning and indirectly increasing worker demand for comfortable, casual clothing. Japan’s increased online retail activity is another positive sign for companies like Guess despite the dip in mass-production in 2011. Last year, Guess management officials said that the Japanese marketplace will be the next major opportunity for the company after it solidifies its holdings in China, and it plans to start constructing stores in Japan by 2015.
GES’ increasing investments in strong Asian marketplaces is a lucrative indicator of future success and is a solid counter to the stagnant demand in the company’s western holdings. Though the company’s Asian operations compose about 15% of the company’s value, the emerging markets in China, India, and Japan will soon become a larger portion of GES’ revenue. Analysts predict that Asian revenue for GES will be $600 – $800 million within the next 5 to 6 years.
MY TRADE
Selling the GES August 34-33 Bull Put Spread for $.40 credit Risk: $60 per 1 lot Reward: $40 per 1 lot Breakeven: $33.60
