Guess?, Inc.

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Guess?, Inc.

founded: 1981

Contact Information:

headquarters: 1444 s. alameda st.
los angeles, ca 90021 phone: (213)765-3100 fax: (213)744-7840 url: http://www.guess.com

OVERVIEW

Quality, innovative design, attention to detail, and ingenious marketing campaigns helped brothers Maurice and Paul Marciano build a fashion empire on a foundation of raw denim. Combining an appreciation of the American lifestyle with European flair, the company they founded in 1981, Guess?, Inc., rocketed to the top of the fashion charts in the 1980s with its upscale jeans, casual apparel, sportswear, and accessories. With 1997 sales of about $515 million, Guess was still one of the top U.S. jeans makers. Guess products are sold in more than 100 company-owned stores, as well as through department stores and more than 270 other stores around the world, which are owned by licensees and distributors. The company also brought in substantial revenues by licensing its name for a variety of product lines, including Guess Watches, Baby Guess, Guess Kids, and Guess Eyewear. By the end of the 1990s, however, Guess's reign seemed to be coming to an end. Changing tastes in fashion led to slumping denim sales, and the company's bottom line suffered with 1997 sales dropping more than six percent from 1996.

COMPANY FINANCES

After seeing its 1995 sales plummet to $487 million from $548 million in 1994, Guess appeared to bounce back in 1996 with sales of $551 million. The recovery was short-lived, however. Net 1997 revenues fell 6.5 percent to $515.4 million, and they continued to fall in fiscal 1998, with net revenues for the first quarter at $110.8 million, compared to $135.7 million for the comparable period in fiscal 1997. The story was even worse from an earnings point of view; net earnings for the first quarter of 1998 were $8.0 million, compared to $14.1 million the year before. Between 1993 and 1997 the company's net earnings dropped from $103.5 to $37.5 million. Basic per-share earnings in the first quarter of 1998 were $0.19, versus basic net earnings per share of $0.33 in the prior year.

Also impacting the company's financial results are the general seasonal trends of the apparel and retail industries. Wholesale operations normally do better in the first and third quarters, while retail performance is usually stronger in the third and fourth quarters.

ANALYSTS' OPINIONS

From a marketing perspective, Guess has been a trendsetter in the fashion industry. Its signature black-and-white print advertisements, as well as color print advertisements, have received numerous prestigious awards from the advertising industry, including Clio, Belding, and Mobius awards for creativity and excellence.

As an investment, however, the company has seemed less solid. Its continued emphasis on jeans has forced it to deal with increased competition in a shrinking market. As Kurt Barnard, president of Barnard's Retail Trend Report, said in an analysis of the textile industry, "People are getting tired of jeans." While companies like Levi Strauss and The Gap moved to take advantage of the burgeoning khakis market, Guess responded by introducing higher-quality, more distinctive jeans.

HISTORY

With its origins in the French Riviera, it is perhaps no surprise that the company's eventual success was based on a combination of European chic and supermodel glamour sprinkled with a liberal dose of rugged American individualism. The company began humbly enough in the 1970s with a jeans boutique owned by Georges Marciano in St. Tropez, France. In 1977 Georges, along with brothers Maurice and Armand, moved to Los Angeles where the three founded Guess?, Inc., in 1981. A fourth brother, Paul, joined the firm that same year and it was under his direction that the company launched its famous marketing campaign using supermodels such as Claudia Schiffer and Naomi Campbell. This advertising method was one of the leading factors responsible for making Guess a major brand name.

Guess jeans were met with some skepticism in the early days of the company. One of its premier products was the 3-zip Marilyn jeans, which were aimed at individuals who wanted to make their own fashion statement and express their own sense of style and attitude. According to the company, "After much resistance, Bloom-ingdale's agreed to sell some two dozen pairs of the Marilyn 3-zip jeans as a favor to the Marciano brothers—within hours, the entire stock sold out."

In 1983 the brothers sold 50 percent of their interest in the company to the Nakash brothers, who owned the Jordache company. A year later the Marcianos tried to buy out the Nakash brothers, arguing that Guess designs had been stolen in order to create a new style for Jordache. The two companies battled in court for five years before finally reaching an out-of-court settlement. The long court battle proved to be a major financial drain; in 1994 the Marciano brothers paid $23.2 million to the law firm that represented them against the Nakashes. The Marciano brothers resumed ownership of Guess, and in 1998 they controlled about 80 percent of the company's shares.

In 1990, the company decided to license its name to other manufacturers, such as Revlon, which marketed perfume using the Guess logo. Within a short time, the company had issued licenses for eyewear, footwear, jewelry, knitwear, and legwear. By 1998 nearly 10 percent of company revenues came from licensing royalties.

Following a disagreement regarding the future of the company, Georges Marciano sold his 40 percent share in the company to his brothers. Georges wanted to take the company mass-market, while the other brothers wanted to remain purveyors of up-market clothing. Soon after the break, Georges launched his own rival company, Yes Clothing.

In 1995 Guess continued with its international expansion and opened its first stores in Spain (in Barcelona and Madrid). In 1997 the company began moving its factories out of the United States to Mexico, blaming the difficulties caused by allegations of unfair and illegal labor practices. The company fought a protracted legal battle with the Union of Needletrades, Industrial & Textile Employees (UNITE), which accused the company's contractors of conducting illegal homework operations. UNITE's confrontation with Guess was carried out through the media as well as in the courts. Consequently, Guess' name was tarnished and the company was forced to defend itself against accusations that its factories were sweatshops. Finally, in April 1998, Guess entered into a settlement agreement; the company admitted no liability and was not found guilty of violating any laws.

STRATEGY

When the Marciano brothers first decided to manufacture denim products, the general consensus was that jeans were outdated and wearing them was no longer considered a fashion statement. But Guess confounded its critics with an ad campaign that portrayed denim as sensual and chic, and this marketing tactic took the public by storm. The company's approach was a radical re-imaging of denim that changed the way a whole new generation looked at jeans. That vision helped spur the trend towards designer jeans that dominated the 1980s and turned Guess into a clothing giant that, for years, set the tone in the denim industry.

Another key element of Guess' merchandising strategy was its "shop-in-shop" merchandising format. This was an exclusive area within a department store that sold only Guess products and used Guess signs and fixtures. At the end of 1997 there were about 1,270 shop-in-shops, and the company planned to add or remodel approximately 60 shop-in-shops by the end of 1998.

In the 1980s Guess had given new life to denim, making it fashionable and chic. By the mid-1990s, however, jeans were once again losing ground as young people turned away from fashions worn by their elders, and different materials—especially khakis—began to grow more popular in the casual clothing market. While competitors like Levi Strauss and The Gap reduced their emphasis on jeans in favor of the newly-popular khakis, Guess continued to push its jeans. As Maurice Marciano commented in a company press release, "In response, we continue focusing on our core business by expanding our denim and denim-related product offerings."

FAST FACTS: About Guess?, Inc.

Ownership: Guess?, Inc. is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: GES

Officers: Maurice Marciano, Chmn. & CEO; Paul Marciano, Pres. & COO; Armand Marciano, Sr. Exec. VP, Assistant Secretary & Director; Terence Tsang, VP, Treasurer, & Corporate Controller

Employees: 2,800

Principal Subsidiary Companies: Guess' principal subsidiaries include: Viva Optiques, Pour le Bebe, Sweatshirt Apparel U.S.A., DML Marketing Group, Charles David, and Callanen.

Chief Competitors: Guess' principal competitors include: Levi Strauss; Bugle Boy; Calvin Klein; Chic; Donna Karan; The Gap; J. Crew; Jordache Enterprises; Lands' End; Tommy Hilfiger; VF Corp.; Warnaco Group; and Yes Clothing.

INFLUENCES

Thanks to the keen business sense and creativity of the Marciano brothers, Guess has managed to keep up with trends and styles as well as devise innovative forms of advertising throughout most of its history. Each brother played a key role in Guess' growth. Maurice was the chairman and chief executive officer and, at the same time, oversaw the design direction and was the inspiration for the company's spirited and successful expansion since 1982. The company credited Guess' president, Paul Marciano, "with the vision that is the essence of the Guess image—one that has created some of the most innovative and ground breaking images in the history of American advertising." Armand Marciano was responsible for overseeing retail, processing, and customer relations for the entire corporation. Together, the complementary skills and affectionate loyalty of the Marciano brothers helped make Guess a clothing giant.

CURRENT TRENDS

For years its innovative advertising and eye for the latest trends and fabrics helped keep Guess on top of the designer-jeans heap. The company's most famous ads were those that featured black-and-white photos of models and celebrities. The ads were provocative, powerful, eye-catching, and sexy—an irresistible combination that was right on target with Guess' customers.

However, not even the slickest advertising can convince consumers to buy what they no longer want, and by the mid-1990s Guess and its rivals in the fashion industry were forced to confront the fact that consumers seemed to be losing interest in fashion. As a Hoover's industry analysis noted, "Americans' propensity for dressing down is a trend still shaping the apparel industry." However, added Hoover's, "too many T-shirts and jeans have translated into threadbare profits." Khakis were the new thing and, according to Kurt Barnard of Barnard's Retail Trend Report, khakis were capturing a share of the jeans market. In 1997 sales of men's khakis increased 21 percent over 1995 levels to $2.8 billion, while sales of women's khakis increased 36 percent to $1.5 billion during the same period. Sales of men's jeans, on the other hand, shrank 6.2 percent between 1996 and 1997. Rather than expand into other areas of the apparel market, Guess' response to this competitive trend was to try to capture a larger share of the shrinking jeans market by introducing in 1998 a new line of high-end jeans called Premium Denim. According to Guess, the innovative design and exclusive ring-spun denim will make these jeans "stand alone in the saturated industry of denim jeanswear."

PRODUCTS

Guess has long been known for fashionable products that are not only well made but are also chic and comfortable. The Guess line of clothing includes blue jeans, blouses, dresses, jackets, shirts, skirts, and shorts. Guess also licenses its name for lines of eyewear and children's clothing, as well as various accessories—some of the most popular lines being watches, footwear, and home furnishings. Guess uses several trademarks to distinguish its products, including Guess?, Guess? U.S.A., and Triangle Design.

GLOBAL PRESENCE

While the majority of Guess' business was concentrated in the United States, where the company operated 87 retail and 49 factory outlet stores at the end of 1997, the company also operated on a global level, with 269 retail and outlet stores operated by licensees and distributors. Plans were underway to open about 30 new stores in 1998. Guess also owned and operated a flag-ship retail store in Florence, Italy. Guess products were sold in over 70 countries, bringing in sales of approximately $34 million in 1996. In May 1997 Guess formed a joint venture in Europe called Maco Apparel, S.p.A. to manufacture and sell Guess jeanswear products throughout Europe.

CHRONOLOGY: Key Dates for Guess?, Inc.

1981:: Georges Marciano, with brothers Maurice and Armand, establish Guess?, Inc.
1983:: Brothers sell 50 percent of their interest in company to the Nakash brothers, who owned the Jordache company
1984:: Marciano brothers try to buy out Nakash brothers but fail; engage in a five-year court battle before reaching an out-of-court settlement
1990:: Markets company name to other manufacturers
1995:: Opens first stores in Spain (Barcelona and Madrid)
1997:: Begins moving factories out of the United States to Mexico

EMPLOYMENT

Throughout the 1990s Guess was plagued by labor-related problems. Most of these problems involved the company's sub-contractors and were not directly related to Guess itself. Guess regarded its own employees as "one of its most valuable resources." At the end of 1997, 2,800 people were directly employed by the company, with 900 of them working in wholesale and the rest in retail. According to its publicity material, Guess is committed to protecting workers' rights to fair wages and a clean and safe workplace. It has also pledged to be "100% Sweatshop Free" and has initiated a subcontractor compliance program that it calls the most aggressive in the apparel industry.

These measures were initiated after a series of lawsuits were filed against Guess, arising out of the company's relationship with its independent contractors, charging Guess with unfair labor practices, violation of state wage and hour laws, wrongful discharge, and breach of contract. Guess denied all wrongdoing and fought to salvage its image by pointing out that it was the first company to voluntarily sign an agreement with the U.S. Department of Labor to monitor the compliance of its contractors with federal and state labor laws—an agreement Labor Department officials hailed as "truly historic" and "an industry model." The cases were eventually settled, with Guess admitting no liability and being found not guilty of any violations of state or federal law.

Guess offers several programs for its own employees, including various classes, workshops, and training seminars; a Service Awards Program to recognize employees for long-standing service; and a Corporate Recognition Program to honor employees who make an extra effort. None of Guess' employees are represented by labor unions, and the company has never experienced any interruption of its operations due to labor disputes.