Changes at Guess Bring the Company Back Into Fashion

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It was the year that saw Guess Inc. become fashionable once again.


Shares jumped nearly 200 percent in 2005, topping $37 and catapulting the company into the ranks of best performing stocks in Los Angeles (excluding those with share prices below $10).


The turnaround is all the more striking given that Guess stock traded in early 2003 at a low of $3.30 a share. That’s been a boon to value investors who have been singing the company’s praises for two years and have seen the shares rise 10-fold.


Despite the run-up and high valuation Guess trades at roughly 22 times its projected 2006 earnings of $1.49 per share analysts generally remain bullish. “I really believe they’re at the beginning of their turnaround,” said Erin Moloney, an analyst at Merriman Curham Ford & Co. in San Francisco.


There is some evidence that the stock may have hit its peak. Founders and co-chief executives Paul and Maurice Marciano have been big sellers over the past year. In the third quarter alone, insiders sold $68.7 million of Guess stock, the highest level of selling in five years, according to Thomson Financial.


Still, to position the company for further growth, Guess has made several strategic moves, including the outsourcing of its manufacturing operations to vendors in Asia and Mexico. Guess buys nearly 90 percent of its finished products from outside the United States, and this is likely a heavy contributor to stellar gross profit margins of 43 percent.


Guess also got a nice boost early last year when it bought the 90 percent that it didn’t already own of Maco Apparel S.p.A., the Italian licensee of Guess jeans in Europe. That purchase gave Guess a nearly $100 million bump in revenue in 2005 and the ownership of 10 Guess stores in Europe. Paul Marciano, co-chairman and co-chief executive, said at the time of the purchase that the company’s growth depended on its retail and wholesale businesses in Europe.


To that end, Guess wants to expand its two high-end U.S. retail concepts Marciano and Guess Accessories to Europe and Asia, where it plans an even larger push.


With 305 stores already in North America, Guess recently hired a new senior vice president who will be responsible for long-range planning and international business development in Asia and Latin America.


Like fashion itself, Guess has always been an erratic performer. In 2004, it missed out on the premium denim resurgence, which is ironic given that the Algerian-born Marciano brothers became fashion icons with the introduction of stone-washed jeans in 1982. However, the company has come back strong this year with a fuller lineup, and that has been reflected in its pricing.


Analysts say the retailer sold mostly at full price this past season, an improvement from 2004 when merchandise was often marked down because of a bloated inventory, according to Vera Van Ert, vice president of research at Wedbush Morgan Securities.


The retailer made a particularly strong showing during the back-to-school season, throwing off same-store sales of 12.3 percent in October and 15.8 percent in November.


“Guess is a standout in that it didn’t have to ‘buy’ its same-store sales increases using promotions,” wrote Jeffrey Klinefelter, a senior research analyst at Piper Jaffray Co. in a recent report. The analyst has a $38 price target on Guess shares and expects 25 percent earnings growth for the next few years.


In the third quarter, Guess reported a 75 percent jump in net income of $20.7 million, on a 34 percent jump in revenues to $265.6 million. Same-store sales rose 8 percent in the third quarter.


Another factor contributing to the retailer’s success: the cost-cutting expertise of Carlos Alberini, Guess’ president and chief executive, and Fred Silny, senior vice president and chief financial officer. In addition, there have been heavy investments in improving the system for tracking the color, size and type of items sold. “They’ve been managing the inventory better and implemented new computer systems to track inventory, so there are some tangible improvements to help manage the business,” said Van Ert.


Perhaps more critical is increasing revenue from retail operations and licensing, while de-emphasizing sales to department stores, currently the laggards of retail. Guess’s retail operations now account for 71 of revenue, while wholesale makes up 22.4 percent and licensing 6.5 percent.


Guess posted an 18.3 percent jump in retail sales in the third quarter of 2005 despite a 9.3-percent drop in its wholesale sector, where its clothes are sold in 930 department stores owned by Federated Departments Stores Inc., May Departments Stores Co. and Dillard’s Inc.


“The department stores are challenging and it will continue to be a difficult part of the business because of consolidation,” Moloney said.

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