Research firm Piper Jaffray announced this morning that it was upgrading Guess? (GES +0.00%) from neutral to overweight, prompting a jump in the company's shares. The analyst argued that the European market is finally starting to stabilize for Guess?, which should help the entire company. While that's probably true, it's not enough to return the clothing retailer to its position of power, and the company has a long way to go before it looks like a winner again.
The fickle, cyclical market
Guess? has had an up-and-down decade and a boring two years. It's a reflection of the company's fashion and its heavy reliance on a strong economy to drive sales. Piper Jaffray's note highlights the company's reliance on Europe for 30% of its revenue -- it makes close to 45% of its revenue in North America. The European economic outlook is turning rosy, which should mean good news for Guess?.
The problem, and the reason that Guess? isn't going to jump out of the gates, is twofold. First, Guess? still hugely relies on the North American market, where it has been unable to capitalize on a return to economic strength. The company's North American comparable sales dropped 3.8% in its first quarter, driving home the fact that Guess? is not the hottest thing in town anymore.
Second, the retailer's European problems have moved from being an economic issue to being a brand issue. While the company will no doubt see a slight sales increase as consumers get their hands on more cash, there's no reason to think people are going to be kicking down the doors for Guess? clothing. European sales fell 8.1% in local currency last quarter.
The rise of the European market
Even though the brand isn't carrying its weight, Europe is on the rebound. Many analysts have called for a return to growth in Europe and have predicted a jump in earnings for European corporations in the near future. Piper Jaffray is betting that the good news for Europe will be good news for Guess?, even if it's not the hottest brand in the box.
It's not the craziest prediction in the world, but Guess?'s return to strength is by no means a given. If you look at the state of fashion, it's clear that Guess is playing catch-up. It can make a come-from-behind run, but I think investors would be better served by looking at companies that are already out in front.
I've been impressed with the groundwork that Nordstrom has laid over the last two years, turning its online business into a major part of its overall plan, bringing in brands such as Topshop and Bonobos, and generally working to gain a foothold in the younger, affluent market. That has already supported an increase in comparable sales at Nordstrom. Instead of waiting for the market to rebound, as Guess? seems to be doing, Nordstrom is going out and making itself appealing. It's a strategy that more businesses could learn from.
