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Guess Tempers Tariffs with Smart Sourcing, Invests in This ‘Underdeveloped’ Business

Guess Inc. has implemented a fresh sourcing strategy that CEO Carlos Alberini feels will shield the company from tariff fallout, while revamping operations and merchandise assortments to boost performance.

These actions led the company to upgrade its outlook for the fiscal year through January. On Wednesday, Guess said revenue is now forecast to grow between 3 percent and 3.5 percent, with an operating margin of 5.2 percent to 5.5 percent.

The company, which ended the quarter with 1,724 stores worldwide, projects earnings per share of $1.28 to $1.36 for the fiscal year. The new outlook came as Guess reported net revenue for the second quarter ended Aug. 3 increased 5.8 percent to $683.2 million. Net earnings in the quarter dipped 0.8 percent to $25.3 million, but operating earnings increased 44.2 percent to $46 million.

Sourcing and operations

Discussing with analysts the impact of the U.S.-China trade war on Guess’s business, Alberini said, “We have successfully mitigated the tariff risk in China through productive negotiations with our vendors and we expect minimal impact to this year from potential tariff increases, and for next year, we expect to reduce the estimated tariff risk from China production into the U.S. to only 12 percent of our total apparel production. We are still working on this to further reduce our dependency on China.”

In the area of logistics and distribution, he said the company now has one team overseeing the Americas and European businesses. This team is focused on assessing and optimizing the network in Europe, including productivity improvements through the adoption of some best practices learned from the more mature North American platform, he noted.

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“This is a high priority for us, as the cost can and should be significantly reduced here,” the CEO said. “Regarding sourcing and product development, we have assigned global oversight to our European leadership team. This team is working with our team in North America focusing on integrating common development and key fabrics, consolidating vendors and migrating sourcing into lower-cost countries of origin, particularly out of China.”

Guess has also decided to upgrade its e-commerce platform and implement Salesforce, which Alberini feels will deliver significant benefits and meaningfully impact conversion rates in the global e-commerce business.

Brand plans

Another key target for improvement is product development and distribution optimization, Alberini said. This relates to certain product categories, such as denim, accessories, Marciano and Manz.

“We have made progress with our assortments and are very pleased with our fall and holiday collections for the respective product lines,” he said. “We plan to install new denim presentations in 220 stores worldwide, and this will happen during the upcoming September-October months.”

Regarding Marciano, the North American line is now being fully developed by the regional team based in Los Angeles and the European collection is being conceived by the European team in Stabio, Switzerland, he said. The company feels the move should make the lines more effective for the local consumer preferences for each market.

Alberni said there three big opportunities he see for Guess brands and the company. The first is brand relevancy and attracting new younger customers.

“Guess is truly a global brand with distribution in 100 countries, which represents a significant competitive advantage,” he said. “Today, only 29 percent of our business is generated in the U.S. The Guess brand continues to gain relevancy both with our heritage customer and with the new emerging segments of younger consumers that love our brands. The celebrity partnerships, key collaborations and big experiential events we are driving to connect with those consumers are impacting our engagement and placing Guess at a different level in our space.”

The second is top line momentum and significant space to grow globally. He said, “A great example is Europe, where we are experiencing strong momentum across all channels and where several markets are still underdeveloped compared to our brand potential.”

The opportunity for global growth for Guess particularly applies to e-commerce, which the CEO said is “very underdeveloped compared to best-in-class companies in our space,” adding that “we are in the process of ensuring that we have the right tools and capabilities to deliver a great omnichannel experience.”

The third area is operating earnings growth and margin expansion opportunity, where Alberini sees opportunities to increase productivity, reduce overall costs and increase efficiencies.

“As we execute on these opportunities and capitalize on the revenue growth potential that we have, we see a clear path for operating margin expansion which should position us to reach double-digit operating margins,” he added.