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Why Guess Will Nearly Double China Sourcing Next Year

While most companies have decreased their imports from China as the trade war with the U.S. has dragged on and tariffs take their toll, Guess Inc. is going against the grain.

CEO Carlos Alberini said the company has negotiated production costs with vendors that “remain committed to China sourcing, but are willing to offer very compelling prices in spite of potential tariff increases.”

“As a result, our expected percentage of China-sourced apparel product may increase from 12 percent to 23 percent for next year,” Alberini told analysts on a conference call. “This increase will have no negative impact on our costs if the new tariffs get enacted.”

Diversity seems to be the key for Guess sourcing, as Alberini further commented, “We continue to make good progress in reducing our dependency on China sourcing and mitigating potential tariffs risks, without compromising the quality of our products, while improving cost performance.”

During the quarter, Guess continued to manage inventories effectively, he noted, ending the period with a 5 percent reduction in global inventory versus last year and is on track to end the year with a decrease of inventory in the double-digit range.

“Our product development and sourcing teams are doing a phenomenal job with this, and I believe that their work will have a significant long-term impact in our infrastructure and in our product capabilities regarding quality, speed and cost optimization,” Alberini said.

Guess raised the low end of its EPS guidance by 3 cents due to a third quarter that beat expectations, while maintaining the high end of guidance. The CEO noted that this was despite revenue softness in Americas Retail and Asia, and is a credit to positive momentum this year in Europe and Americas wholesale, coupled with effective expense management.

That’s not to say that the U.S.-China trade conflict hasn’t negatively impacted business, notably on the Asian retail side.

“The issues we faced earlier in the year in our three major markets of Greater China, South Korea and Japan still persist today,” he said. “Similar to the Americas retail business, we believe that some of the factors impacting our business here are macro-driven and not in our control.

“These include specific regional issues such as the Hong Kong protest situation and the China trade war development,” Alberini added, “but there is a lot of our product assortment and styling, our inventory levels and our promotional cadence that are totally in our control, and we can impact going forward to improve on our current trends.”

With that said, the company continues to believe that the Guess brand and product offerings are relevant to the Asian consumer, Alberini said, and that the long-term opportunity in this region is “very compelling and remains intact in spite of the current challenges.”

Guess is monitoring the situation in Asia closely and has adjusted its investment plans for the region based on the current trends and medium-term expectations.“In terms of marketing, we believe that we can do a better job partnering with local celebrities and influencers, while leveraging social media platforms and livestreaming capabilities to market to consumers more effectively,” Alberini told analysts. “Regarding our promotional cadence, the Chinese market is very competitive and we have an opportunity to adjust prices for certain products where local brands have been very aggressive with fast development and sharp pricing to capture share.”

It was all good news in Europe, where revenues were up 9 percent and operating earnings skyrocketed 163 percent for the period.

On the product side, Alberini said Guess has made good progress with denim development and expanded product presentation in stores and online. There’s also been progress with the Marciano brand, both in North America and Europe, with strengthened design teams and refocused merchandising efforts.

Alberni announced that the company has identified an opportunity to develop and leverage a single factory outlet line to serve North America and Europe instead of the two separate lines that operate today.

“It is clear that the assortments and styling between both lines are very consistent and offer a big opportunity for consolidation,” he added. “This will yield even more brand consistency across both regions, improved product quality and significant cost savings, as we leverage the scale of the buys and we reduce development costs.”

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