Guess' Prospects Looking up With Spate of Offerings

By KATE BERRY
Staff Reporter

After several years of losses and fashion missteps, Guess Inc. has finally staged its long-awaited encore comeback.

An expansion into accessories and high-end boutiques, along with new inventory and reordering systems, are pulling the Los Angeles-based ready-to-wear house out of a retail slump. Even the sluggish wholesale business is reviving with sales increases in two of the past three quarters.

For long-time investors, it's a touch of the old days going back to 1982 when Guess launched the three-zipper, stoned washed jeans that turned the four Marciano brothers into fashion icons. Shares have jumped 135 percent in the past year, to nearly $16.

"This is the second turnaround for Guess," said Margaret Whitfield, an analyst at New Jersey brokerage firm Ryan Beck & Co. Inc., noting that several years ago the company lost male customers to Tommy Hilfiger Corp. and Sean John. "Part of the problem is they had backed away from the Guess collection and now they're starting to emphasize it again."

Sales at stores open more than a year rose 15.1 percent in the second quarter (though August same-store sales were up only 5.9 percent). Plus, after a string of quarterly losses, the company is making money, reporting second-quarter net income of $2.1 million, compared with red ink of $5.4 million for the like period a year earlier.



Controlling inventory

Of course, it's taken a while. It's been almost four years since financial cost-cutter Carlos Alberini was named president and chief operating officer. Fred Silny, who spent 10 years at IHOP Corp., was named senior vice president and chief financial officer in November 2001.

The pair came on board after a period of steady decline. Gross margins fell to 33.9 percent in 2001 from 44.7 percent two years earlier (they are now back to 38 percent), and the number of department stores carrying Guess products fell to just 900 from a high of 1,500.

"Two things happened when they stumbled," said Eric Beder, an analyst at JB Hanauer & Co. "They didn't have the management depth to run the company from an operational standpoint, and when they brought Alberini and Silny in, the business got too big for them to control."

One of the biggest investments has been in testing and reordering systems that allow Guess designers to see which clothes are selling and when. As a result, higher sales volume is possible with lower inventory.

Holly Guthrie, a retail analyst at Morgan Keegan & Co. Inc., said Guess began testing items such as sweaters and bathing suits earlier this year. The new allocation system determines how those items sold, including which colors or sizes. "The new systems give them a better read on the predictability of which items will sell better," Guthrie said.

Designers can add to new offerings by purchasing trendier items at the last minute, something Guess did last year with ponchos, which became a huge hit.

In addition, financial controls put in place in the last few years have helped the company cut its total borrowings by 25 percent, to $60.7 million as of June 26, 2004.

"It's definitely a turnaround, without a doubt," said Beder. "The story has really been operational discipline that most specialty retailers lack. Now they are reacting to how the customers respond to the product based on analysis, rather than just feel."



Pizza, models

At its peak in the 1980s, Guess was producing as many as 50,000 pairs of jeans a week, which made the company one of the larger employers in Los Angeles. Spago restaurant even had a pizza named after the Marcianos on its menu at the time.

Critical to the success of the four Marciano brothers Armand, Georges, Maurice, and Paul was an infatuation with Hollywood films and stars, which led them to create not just tight-fitting blue jeans that every woman had to wear, but glamorous ads featuring top models against California backgrounds looking young, tan and beautiful.

With their success came legal spats, union battles and even federal investigations. The biggest dispute, which became the subject of the 1992 book "Skin Tight," involved the sale of 51 percent of Guess, for just $4.8 million, to the Israeli-born owners of Jordache Jeans in New York. The six-year legal dispute ended in 1990 with Jordache returning its stake in Guess to the Marcianos.

Only two of the four brothers remain at the company. Armand Marciano, a former senior executive vice president, resigned in 2003 for medical reasons. Georges, the original creative force, resigned as chairman and chief executive in 1993 and ended up selling his 40 percent stake to his three brothers at the time for $220 million.

Now, with the stock at its highest level in four years, Maurice and Paul, co-chairmen and co-chief executives, plan to sell up to 1 million shares through the first quarter of next year. Maurice, who earned $1.4 million last year, owns 16.2 million shares or about 36.8 percent of the outstanding stock. Paul, who made $1.6 million, controls 12.4 million shares, or 28.1 percent.

Not that the Marcianos, or anyone else at the company, is talking. No Guess executive was made available for this story, a corporate reticence in dealing with the press that goes back years.

But the company is not shy about its aspirations.

Armed with a slew of designers poached from competitor Arden B., there are plans for three accessory stores, three factory accessory stores and five high-end Marciano stores that will carry the new re-branded Marciano line (formerly the Guess collection). Both an accessories and a Marciano store will debut at the Grove in October.

Analysts believe the accessories stores have the best chance of success, with the potential for 200 stores nationwide. The higher-end Marciano concept might be limited to 70 stores. Both will sell at higher price points than Guess retail stores, with denim trousers running $138, a floral-sequined dress $298, a silk chiffon clutch purse $98 and a rhinestone cuff bracelet $68.

Guess also has plans for the international market, where only a handful of its retail stores are company-owned. In addition, it is eliminating its eight kids stores, which had been a drag on earnings.

For reprint and licensing requests for this article, CLICK HERE.