Balance Sheet in Order, Guess Finds Consumers Unresponsive

Corporate Focus
by Anthony Palazzo

What do you do when a restructuring plan is put in place and carried out as envisioned, but the marketplace doesn't cooperate?

That's a question executives at Guess Inc. are seeking to answer.

A recovery remains elusive, despite a two-year restructuring effort that's brought in fresh management blood, tidied up the balance sheet, streamlined operations and rationalized the product assortment of the storied L.A.-based jeans maker.

Paul Marciano, co-chairman and co-chief executive, has even made the ultimate show of faith digging into his own pockets for about half a million dollars to buy 100,000 company shares in August and September, according to filings with the Securities and Exchange Commission.

Yet the stock has only gone backward. It traded recently at $3.70, down more than 50 percent on the year.

The problem is sales. Despite a resurgence in the popularity of denim the fabric with which the Marciano brothers wove their clothing empire same-store sales fell by 4.3 percent in September, and 5.4 percent for the third quarter overall. Guess has had to lower its earnings guidance more than once this year, most recently on Oct. 2.

"In light of current trends, we are monitoring our inventories and expenses very carefully as we head into the holiday season," said Carlos Alberini, president and chief operating officer, in a statement accompanying the latest warning.

Financial overhaul

Analysts agree that Alberini, a finance-oriented executive brought in two-and-a-half years ago from retailer Footstar Inc., has done a fine job in terms of financial management, planning and control. Inventories have been reduced, debt is down and the company recently entered into a new, $85 million secured, asset-based lending facility that it says is more attractive than the one it replaced.

But no amount of cuts and operating improvements will make up for slowing sales.

"What Carlos can't control is the consumer market, and what's lacking is top-line growth of significance," said Margaret Whitfield, a Brean Murray analyst.

For Guess, shifting consumer trends and a nagging retail slowdown present a puzzle the company hasn't yet been able to solve.

Some apparel companies are doing well in this environment, but Guess is "a high-priced brand in an era when consumers are increasingly looking to cut back and looking for value," said Dorothy Lakner, a CIBC World Markets analyst.

Where a pair of Guess jeans marketed mainly to women ages 18 to 30 typically sells for $89, a customer can walk into a Limited or Express outlet in the same mall and pay $29 for two pair, Whitfield said.

As bad as sales have been in Guess's own stores, they've been worse at department stores, which have been squeezed from both the high end and the low end over the past several years.

At the high end, smaller, more specialized shops offer better service than the department stores can, and at the low end, consumers have flocked to buy cheap, yet current-looking clothing at discount retailers like Target Corp. and Wal-Mart Stores Inc.

Marketing weapons

Department stores have cut back on how much clothing they'll keep in stock. It's an element of the business that's difficult for Guess to control.

Several years ago, Guess was very much in demand, Lakner said. "Department stores couldn't get enough of them. They were giving them more space, more sections."

But department stores are notorious for being aggressive with hot brands, and then pulling back just as aggressively. "When you're selling to a department store, you're not the master of your universe," she said.

Guess does have some weapons. It has made adjustments in its product lines, selling different clothing in its own stores than in the department stores. In a bow to price-consciousness, it has come out with a $69 jean. Recently, the company hired back its head of wholesale sales, Nancy Shachtman, who had briefly left the company. Shachtman has good relationships with department store buyers, said Whitfield.

Whitfield thinks Guess can increase licensing revenues by putting its brand on more products, as it does with watches, and exploit international opportunities by reducing its reliance on licensing in those markets.

But there are limits to how far the company can, or should, bend with the times.

"You have to be who you are," said Lakner. "To take an upscale brand and say, 'Times are tight right now, let's do something different,' is not necessarily the right path to take."



Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at tpalazzo@labusinessjournal.com.

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