By LARRY KANTER
Its models may turn heads on the fashion runways, but when it comes to performing in the financial arena, Guess Inc. has been a wallflower.
Since the company began trading on the New York Stock Exchange in August 1996, Guess’ stock has plummeted from its $18 offering to about $5 a dizzying 72 percent drop.
The company’s most recent quarterly results were similarly disappointing. For the fourth quarter ended Dec. 31, Guess reported a net loss of $2.1 million (five cents a share) compared with net income of $11.5 million (28 cents a share) for the like period a year ago. Revenue was $118.7 million vs. $139.2 million.
For the year, Guess reported net income of $37.5 million (87 cents a share), compared to pro forma net income of $66.7 million ($1.23 a share) a year earlier a 44 percent decline. Revenues in 1997 were $515.4 million vs. $551.2 million.
Guess’ fiscal woes can be attributed to a number of factors including sluggish performance at the company’s retail stores, lower-than-anticipated revenue from Asian markets, and a relentless campaign being waged by the national garment workers union.
But perhaps most damaging to Guess’ bottom line has been a significant realignment in the $1 billion high-end denim market.
Although Guess helped define that business when it introduced its tight-fitting, super-faded jeans in the early 1980s, the company has been losing market share to new, fast-growing competitors including Tommy Hilfiger Corp. and Polo Ralph Lauren Corp.
“It’s a whole different competitive market and that’s one of the major reasons we had a loss,” said Terence Tsang, vice president of finance, corporate controller and treasurer.
To keep up with its rivals, Guess not only cut the prices of its famous denims by as much as $10 a pair, it also launched an ambitious expansion of its retail division, adding 26 new stores in 1997. It also tried to branch out from its core business of denim jeans to riskier, more fashion-oriented items.
“The competition drove us to be more ambitious than we should have,” Tsang said. “We sort of lost our focus.”
In 1998, Guess intends a return to its fundamental business of designer denims. It plans only three new retail stores for the year including a 10,000-square-foot flagship in South Florida’s trendy South Beach district and will close seven under-performing stores. In October, the company cut 170 employees, 6 percent of its workforce, in an effort to reduce administrative costs cuts that will result in $9 million in annual savings, said Tsang.
“We’ll be a leaner, meaner operation,” said Tsang, who expects first-quarter earnings of 15 to 20 cents a share.
Nonetheless, with Guess’ new fiscal year barely underway, the company already is facing a new array of challenges.
On Feb. 24, a group of disgruntled shareholders filed a suit in Los Angeles Superior Court, alleging that the company misled investors in its 1996 initial public offering by not disclosing matters that would hurt Guess’ financial results making specific reference to the firm’s ongoing troubles with the Union of Needletrades, Industrial and Textile Workers and the National Labor Relations Board.
Guess General Counsel Glenn Weinman said the suit was “without merit.
“We will vigorously defend ourselves,” he said. “It is the standard suit filed by the standard attorneys.”
On another legal front, the NLRB has issued three new complaints against Guess, charging the company with unfair labor practices. An earlier complaint is scheduled for trial before an administrative law judge March 30.
The well-publicized labor problems have taken a toll on the company’s stock, said Michael Belluomo, publisher and editor-in-chief of Sportswear International, a New York-based trade publication.
“I don’t know how much it’s affected retail sales, but for investors, it certainly has had a negative impact,” he said.
Meanwhile, Guess has seen several of its top executives including its chief financial officer, president of retail merchandising and president of worldwide sales leave the company since last summer. Although Tsang said the departures were for personal reasons, they have not gone unnoticed by Wall Street.
“The looming issue for the entire industry is that growth in supply is outstripping growth in demand,” said Todd D. Slater, an analyst at Lazard Freres & Co. “For Guess, this larger industry supply problem is compounded by management changes and union issues. What already is a very difficult environment is being compounded by (the company’s) internal issues.”