It’s no new news that the EuroZone is undergoing a severe reorganization –contraction, really – with reports Friday morning that “The European Central Bank now sees the euro zone economy contracting by 0.5 per cent this year, slightly worse than its original projection of 0.4 per cent,” with the new 2013 forecast for the 17-nation group showing another .3 per cent contraction for next year.
While this is obviously terrible news for the recession-ravaged region, it represents a significant setback for American retailers, particularly those banking on growth in the European markets to redeem a now increasingly-bleak-looking 2013.
Look for these 3 retailers to slink further into under-performance, post-holiday season.
GAP Inc: I’ve said it before and I’ll say it again: the market’s wrong to be bullish on Gap Inc. A temporary blip of success does not a turnaround make; the land-grab in the world of millennial fashion for retail giants is over, and instead of managing it like the growth company like it was in the ’90s, GAP should instead be focusing on operations and sourcing more than expansion. Instead, with European sales totaling more than 5% of overall revenue and a recently-announced increase in focus on expansion the Chinese market (which is set to experience it’s own version of contraction in its middle class in 2013), GAP’s revenues are set to take a hit next year.
Abercrombie & Fitch: Despite recent analysis that all’s well at A&F after a (relatively) successful Black Friday (and Cyber Monday), general trends for the retailer suggest a tough 2013 and beyond. While the company “has been closing stores in an effort to improve margins in its U.S. business,” the truth is that “Abercrombie has shown weakness in recent quarters amid disappointing sales in Europe and an increase in markdowns.” Most importantly, with sales in Europe totaling more than 30% of A&F’s 3rd quarter sales, further contraction in the region next year will hit the soft porn-styled retailer peddling $30 t-shirts in a $10 t-shirt economy.
Guess Inc.: Things have been tough for this iconic American retailer the past few years. Over-priced denim and expensive accessories have forced Guess to the Millennial sidelines as high-quality, fast-fashion Zara has usurped the retailer’s trendy pedestal. Experts note that “with the persistently weak economic conditions in the European market, Guess’ revenues are likely to be under pressure” in 2013, while the retailer’s 3rd quarter numbers show that “European revenues increased 2 per cent in local currency; declined 8 per cent in US dollars.” Despite a shake up in senior management in its European division earlier this year, Guess’ “net earnings for the nine months ended October 27, 2012 were 106.2 million dollars, a decrease of 43.3 per cent compared to adjusted net earnings of 187.2 million dollars for the nine months ended October 29, 2011,” with a significant portion of the losses coming from the shrinking Euro market.
Consequently, while the market toasts what it expects (wrongly) to be a successful holiday season, look for the crisis in Europe break on American retail shores in early 2013.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]