Retail Focus Answers the Turnaround Question at Guess?

A move to standalone retail stores has sales and margins rising.
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Listening to Maurice Marciano talk about


(GES) - Get Report

is a turn-on.

"Everything is very young and really sexy," Marciano says of the company he founded with his brothers.

The slither tube top


sexy. The velvet tube dress with fur neckline


sexy. And the stretch animal-print pants, well, they practically



This would all be a big marketing come-on, except Guess?'s numbers are sexy, too.

For the third quarter ended Sept. 25, sales at Guess? retail stores open at least a year climbed 21%. And department store orders for the holiday, spring and early summer seasons are running 60% ahead of where they were last year at this time. The stock, meanwhile, is trading just above 16 and is up 240% this year.

With Guess? in hot demand, analysts are upping their earnings estimates for the current fiscal year, ending in December, to $1.06 a share from 83 cents. Should Guess? meet that target, it would mark its first year-over-year profit growth since 1996.

"This is a turnaround," says a money manager who owns about 185,000 shares, but asked to remain anonymous.

It's also a transformation. Guess? sells merchandise wholesale through department stores and through its own stores. But recently, its retail arm has been growing like a teenager in the throes of puberty. For the most recent quarter, retail operations accounted for 55% of sales, up from 23% in 1993. Marciano expects retail to continue outpacing wholesale growth, as the company plans to add some 250 stores to a base of 135 over five years.

That could change the way investors value the company. Investors typically award wholesalers lower multiples than higher-growth specialty retailers.

"If, as we expect, Guess? continues its strong retail expansion, it will in time be compared to other specialty retailers such as

Abercrombie & Fitch

(ANF) - Get Report

that cater to the same Generation X and Y consumer,"

Tucker Cleary

analyst Margaret Whitfield wrote in an Oct. 6 research note. "While GES is currently trading on par with the depressed valuation accorded companies in the apparel manufacturing sector, the valuation is at a sizable discount in comparison to other specialty retailers." Whitfield rates Guess? a strong buy, and her firm hasn't underwritten for the company.

Competition Knocks

Guess? was founded in 1981 by the Marciano brothers -- Maurice, CEO, Paul, chief operating officer, and Armand, senior vice president -- and they control roughly 83% of the company today. For the first 15 years, the brothers built a brand known for trendy clothes, but perhaps most of all for sex appeal. Think Guess? and an image arises of

Claudia Schiffer

, hair mussed up, looking like she just awoke from a siesta in the back of a pickup. What's more, Guess? had the luxury of little competition in the junior jeans market during its adolescence.

As Guess? was preparing to go public in 1996, competition knocked. Designers like

Tommy Hilfiger



Polo Ralph Lauren

(RL) - Get Report

, which had previously stuck to their upscale knitting, began targeting a younger audience by launching jeans lines of their own.

"We made the mistake of not anticipating" their entrance, Marciano says. "As we started to lose market share, we went into reaction mode." When Tommy Hilfiger launched a line of basic jeans that undercut Guess? prices, Marciano matched his rival on price rather than trying to differentiate Guess?. "We were paying more attention to what the competition was doing than to what Guess? was all about."

Guessing Game
Guess? shares' recent rally only pulls them back near their IPO price

Source: BigCharts

Customers noticed. After peaking in 1996 at $552 million, sales declined 14% to $472 million in the most recent year. Earnings were sliced in half, to 59 cents a share, over the same period. The stock, which went public at 18, traded as low as 3 and change.

Two years into the decline, in January 1998, Marciano gathered his top 24 executives at Guess? Los Angeles headquarters for a strategy session. "I asked them to tell me how we would take back our market share," the CEO recalls.

A Simple Plan

The first move was to regain focus by eliminating 35% of Guess? products. Then Marciano reshuffled his design team, giving himself final say on which items appear in Guess? stores and which hit the cutting-room floor.

To minimize the risk of selling trendy clothing, Guess? added a fashion basics category, which now accounts for 35% of its business. The idea was to pick one or two classic items a season and sell them at a competitive price. For fall it's a three-quarter-sleeve, high-necked, ribbed sweater for women priced at $54.

Next, Marciano focused his attention on selling. Sales clerks now undergo extensive product training and work on a commission basis.

The result: Sales per square foot, an important measure of a retailer's productivity, climbed by $80 over the past year to $400, which is still well below other high-growth chains like Abercrombie that boast more than $600 in sales per square foot.

"It takes a long time to kill a strong brand," says Candace Corlett, a partner with

WSL Marketing

, which hasn't done consulting for Guess?. Even as sales declined, Guess?'s sexy image remained intact, which made it easier to revive sales once the clothes were back on track, she says.

Now Guess? is looking to expand. Next year, it plans to open 25 regular stores and 10 outlets. It will also launch a Guess? kids retail store for the first time and plans to have 10 open in the next 12 months. The company launched

last March and is taking an aggressive stance with e-commerce. (


looked at Guess?'s online efforts in a separate


"This stock could trade in the 20s next year," the money manager says.

Now that's sexy.