After years of steady decline in both sales and earnings, jeans-maker Guess Inc. may be turning a corner.
For the first quarter ended March 27, the company reported net income of $11.5 million (27 cents per diluted share), compared with $8 million (19 cents) for the like period a year earlier. Results for the second quarter had not been released as of last week.
The stock also has been climbing sharply. Over the last 12 months, it has risen 266 percent from $4.13 per share on July 21, 1998 to $15.13 on July 21, 1999.
"The company instituted strategies in early 1998 to refocus on its product," said Chief Financial Officer Brian Fleming. "We revamped our approach to marketing by making more efforts to differentiate our product from that of our competitors by being more fashion-focused, and by concentrating more on our advertising."
The strategy appears to be bearing fruit. Net revenues from retail operations increased 30.2 percent in the first quarter from a year earlier, and net revenues from wholesale operations (sales to department stores) were up 12.8 percent.
Guess is looking to further boost sales by embarking on a large-scale expansion. There are plans to open 17 stores in the United States this year and another 18 in the coming years. Among the cities being considered are New York, Chicago and San Francisco.
"Their focus is on big metropolitan markets. I wouldn't expect them to open stores in smaller, mainstream markets," said John Golisch, a partner with Arthur Andersen who specializes in retail. "But there is the risk of diluting the brand name by opening too many stores, and they also might take away some of their own sales."
Simultaneous with its push to ramp up sales, Guess is looking to reduce overhead by outsourcing its manufacturing to third-party contractors across the border in Mexico. It also is planning to relocate its distribution operations from downtown Los Angeles to a new facility in Louisville, Ky.
"There were a number of reasons to move our distribution operations to Kentucky," said Fleming. "We'll be closer to our customers because 70 percent of our customer base is east of the Mississippi, and the facility will be a 15-minute drive from United Parcel's hub. In addition, because the new facility will be automated, our per-unit handling cost will be substantially reduced. We are also receiving state and local tax benefits to move our distribution operations to Kentucky."
Fleming would not comment on speculation that the company may have wanted to move part of its operation to an area with less of a union presence.
Guess' record for labor relations has been a source of criticism in the past. Just last week, it agreed to pay $1 million to settle a class-action lawsuit brought by workers who were denied overtime and minimum-wage pay. Those workers were employed by contractors that worked for Guess. Under terms of the settlement, the company did not admit wrongdoing, but stressed that it settled to avoid costly litigation.
In other cost-cutting measures, management has tightened its own belt, as well. Whereas Chairman and Chief Executive Maurice Marciano earned over $3 million in salary and bonuses in 1996, last year he was paid $900,000.
The aggressive retail and cost-cutting strategies have been met with approval from Wall Street. Merrill Lynch raised its 1999 earnings-per-share estimate to 80-85 cents from 78-82 cents (and up from 1998's EPS of 59 cents). For 2000, Merrill Lynch projects Guess' earnings will reach $1.05.
"I suspect that their stock growth can be attributed to their projected earnings," said Golisch.
But very little of that stock is held by the public at large. Of the roughly 43 million shares, 36 million are owned by insiders, specifically the Marciano brothers, Maurice, Paul, and Armand, who run the company. The relatively few shares available for institutional investors may be contributing to the price run-up.
While Guess is showing signs of new vigor, the company has a long way to go to regain the height of its glory days in 1994 when sales were $471.9 million and net income was $60.7 million. In 1998, sales were $471.9 million and net income was $25.1 million.
"They've gone through several gyrations," said Golisch. "They went through a period when they had a real following and very strong brand name. But there has been a shift away from expensive and upscale apparel in general. There was a simplifying of what people were buying, toward the type of merchandise that the Gap and Old Navy is selling."
In addition, Guess suffered from the fallout of the Asian financial crisis, as both its overseas sales dried up and the number of Asian tourists who purchase Guess merchandise dwindled.
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