guess/kanter/mike1st/mark2nd

LARRY KANTER Staff Reporter

When they sit down to write the history of the designer jeans giant Guess Inc., 1996 is not likely to emerge as one of the company's high points.

Dogged by problems with the U.S. Department of Labor, a bitter battle with an aggressive garment workers' union, a spate of negative publicity and a lackluster public stock offering, the company capped a troubled year last week with the announcement that it is moving the bulk of its production activities out of Los Angeles to Mexico and South America.

The news shocked many in Los Angeles, sparking fears that other local apparel companies may follow the lead of the region's largest garment manufacturer.

Guess characterized the move as an attempt to keep its edge in the increasingly competitive world of designer jeans and accessories.

"The landscape has changed, said Guess spokesman Michael Sitrick. "If you're going to remain competitive, you have no choice but to move to where the most competitive costs are."

But industry insiders say it's impossible to separate Guess' decision from the numerous problems the company has faced in recent months.

"With the constant oversight, finger-pointing and negative attacks, you start to look at your options," said Ilse Metchek, executive director of the California Fashion Association. "And Guess has other options."

Guess is not out the woods yet. In response to the company's decision to move about 65 percent of its production offshore, the apparel workers' union, Unite, filed unfair labor practice charges against Guess with the National Labor Relations Board. Unite is charging that the relocation is in retaliation for union organizing activities at Guess and its contracting shops.

Guess, for its part, has continued to insist that the move is unrelated to its labor troubles.

Guess has suffered from labor woes for the past several years. But the battle truly began to heat up about a year ago, when Unite began an aggressive organizing campaign at the company and its contracting shops.

In August, the union filed a class-action lawsuit against Guess and several of its contractors, accusing them of violating a number of labor laws, including non-payment of minimum wage and overtime.

Vigorously denying those charges, Guess fired back with a defamation suit against Unite and some of its officials.

The controversy couldn't have come at a more inopportune time.

On Aug. 8, just days after the Unite suit was filed, Guess issued its long-awaited initial public stock offering on the New York Stock Exchange. The offering already had been delayed twice, with the company reducing the sale from 9.2 million to 7 million shares and trimming the per-share price to $18 from original estimates of $21 to $23.

Labor woes, along with investors' diminished appetite for apparel IPOs, rendered Guess' entry into the financial markets a rather tepid affair. The stock opened at $18, climbed a bit to $18.25, then closed back at $18, on volume of 3 million shares on the first day of trading.

"The timing couldn't have been worse," Ryan Jacob, research director for IPO Value Monitor in New York, said at the time of the offering.

In the weeks to come, Guess' stock price fell as low as $11.50. It has spent much of its short life mired in the $13 range, closing at $13.62 on Jan. 16.

It wasn't just labor issues that kept investors at bay.

Some analysts also harbored concerns about the extremely lucrative compensation packages of the company's founder and chairman, Maurice Marciano, and his two brothers, Paul and Armand.

Controversy has followed the Marciano brothers ever since Guess burst onto the fashion scene in the early 1980s. Perhaps the Marciano's most infamous episode was the much publicized split between Georges Marciano, the company's former CEO, and his brothers over the direction in the company in 1992. That led to Georges leaving the company for good.

Nonetheless, the Marcianos were able to grow their company into the world's best-selling designer jeans brand with cutting-edge marketing and one of the industry's most lucrative brand names.

But in recent years, Guess has faced increasing competition from other designers. Calvin Klein's CK line now controls about 40 percent of the U.S. designer jeans market. Guess has about 20 percent and is being challenged by such relative newcomers as Tommy Hilfiger and Diesel.

But industry insiders caution against writing off the Marcianos just yet.

For the first nine months of 1996 the most recent numbers available Guess posted net earnings of $55.2 million, compared with $49.5 million for the like period of 1995.

"These guys are still pretty profitable," said Andrew F. Ebersole, an analyst with KDP Investment Advisors in Montpelier, Vt.

While the company is struggling in the United States, Ebersole said, it's expanding rapidly in the largely untapped and increasingly lucrative European and Japanese markets.

"I would never sell Guess short," said Richard Reinis, a Los Angeles attorney whose firm represents about 300 local apparel companies. "They're too good at what they do."

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