Guess? (NYSE: GES ) continues to surprise investors with outstanding sales and earnings growth. If recent remarks by company executives at the CIBC World Markets Annual Growth Conference are any indication, now's not the time to bet against the company.
In this edition of "Fool on the Street," we'll highlight key points made in this conference, particularly regarding the company's retail expansion opportunities and its plans to maximize profitability.
Retail stores galore
In the past decade, Guess? has radically transformed its business model from a wholesale focus to a retail approach. The results have been fantastic, with accelerating top- and bottom-line growth alike. Happily, Guess? plans to stick with its winning strategy.
President and COO Carlos Alberini took time to address the company's retail opportunities. At the end of the first quarter, the company has 336 stores in operation across its three major brands: Guess?, Marciano, and G. For the year, it plans to open 48 stores, representing roughly 5% unit growth. Alberini believes this is "just a small part of what the opportunity lies ahead."
The management team estimates that the domestic market can hold more than 800 stores for the three major concepts, with Guess? and its factory outlets representing roughly 500 of this total. The company estimates an opportunity for more than 100 of its higher-end Marciano stores, compared to the 29 currently in operation. Its latest concept, G by Guess?, has 17 stores up and running right now, with management expecting it to become a "multi-hundred opportunity store."
Internationally, the company has 461 stores open outside of North America, with the bulk of these functioning as licensed operations. The company and its partners plan to open 108 more just this year. To give one example of the potential here, Guess? by Marciano hauled in $345 million in Europe over the past 12 months. Management believes this brand can soon hit a range of $600 million to $800 million in sales.
And what about China? The company has opened its first flagship store in Shanghai. Alberini did not elaborate further on the projected opportunity there, but given that country's burgeoning middle class, I think it's safe to say that the company's opportunity in China falls somewhere between "very large" and "ginormous."
I 've long been a fan of Guess?, both as an investor and a loyal customer, and Alberini's remarks on the company's growth opportunities hardly changed my mind. In the past few years, Guess? has successfully broadened its concepts to tackle key demographic groups. Its newest brand, G by Guess?, is strategically situated to compete with Abercrombie & Fitch (NYSE: ANF ) , Gap (NYSE: GPS ) , and Polo Ralph-Lauren (NYSE: RL ) Rugby stores. This frees up Guess? and Marciano to target higher-end concepts Banana Republic (by Gap), REUHL (by Abercrombie & Fitch), and Ralph-Lauren.
It's one thing to take aim at the competition, but quite another to beat them. As a frequent shopper at these major concepts, I believe Guess? and its edgier, sexier designs will help differentiate it from its many rivals.
Beyond store expansion opportunities, the company is continually trying to broaden its merchandise offerings. Accessories (including watches and handbags) and footwear were two categories management emphasized during the discussion. Expanding these areas allows Guess? to be more productive with its current square footage, essentially squeezing more sales from each store.
CFO Dennis Secor viewed this "retail sales productivity," as one of the key ways to increase profitability. Secor asserted that Guess? stores operated at $465 a square foot over the trailing 12 months. The management team has set a near-term goal of $500 per square foot. In 2004, the company generated $369 per square foot, according to its most recent 10-K. To meet its $500 target, Guess? will need to introduce additional accessories and footwear while expanding its current product lines.
The company also seeks to expand profit margins with a "mark-down optimization solution" to better manage markdowns, increased leveraging of its purchasing power, and an expansion of its outsourcing capability in Hong Kong.
Strong sales + stronger margins = a kick-butt investment
The math representing this retailer's success over the past several years is very simple: Accelerating sales growth, added to expanding profit margins, produces greater profits. Guess? went from a net loss of $0.13 per share in 2002, to a $0.33-per-share gain by 2004, all the way to $1.34 per diluted share profit in 2006. That's called a winning investment.
With significant retail growth opportunity ahead, as well as continued chances to improve profitability, nothing from this conference suggests that Guess?'s "good old days" are anywhere close to over.