Los Angeles — At age 22, Guess Inc. is striving to regain footing in the fast-fashion market the founding Marciano brothers helped pioneer through a new contemporary division and accessories retail chain, a European business that is up 25 percent in the last year and a distribution formula emphasizing Guess’ signature stores.
Co-chief executive officers Maurice and Paul Marciano are literally putting their famous name on the line to show they can adapt to a rapidly changing marketplace. The strategies are already being reflected in the company’s bottom line.
Today is the official U.S. launch of Marciano, Guess’ first breakout division, which is opening a 2,000-square-foot store at The Grove shopping center here. The debut comes after a summer advertising campaign featuring the celebrity of the moment, Paris Hilton, who teased the arrival of the contemporary line from countless magazine ads, bus shelter posters and billboards.
“For the first time we are completely separating Marciano from Guess,” said Maurice Marciano, 55, in raspy, French-accented English during an exclusive WWD interview together with Paul, 52, at their corporate offices in Los Angeles.
While there have been times in the brand’s history when the family surname was positioned alongside Guess in labels and ads, the decision to use it as a stand-alone marquee comes as the brothers and the rest of the industry pursue the spending power of contemporary fashion consumers who are propelling one of the industry’s fastest-growing categories. L.A.-based competitors such as Bebe and BCBG have thrived in this market with their own stores. The Marcianos also tested the market in recent years with better items under the special Guess Collection label, selling $138 jeans alongside a Guess pair typically priced at $79.
Yet with the Marciano name sharing billing with Guess in many of the Hilton ads, some experts question whether the new division can forge an identity separate from its sibling line.
The Marcianos, however, insist any overlap effect will be short-lived.
Guess’ past and present are reflected in a headquarters conference room. A couple of glossy, 5-foot-tall photo boards of the fall ad campaign featuring Hilton lean against a wall. Nearby, on a stand, is one of the 20 engraved, century-old leather and pure silver saddles Paul Marciano acquired more than a decade ago when the brand went through its American West phase via vintage Hollywood (think of the 1961 film “The Misfits” starring Marilyn Monroe, Clark Gable and Montgomery Clift).
“We wanted the new division to have a completely new chain of stores, to have a completely new approach, a different hand and sensibility to the clothes,’’ Maurice Marciano said. “It is important to separate the two.”
With a 900-square-foot Marciano shop open as of late August in Marseille, the French port city where the brothers grew up, the two stores mark the start of what the Marcianos plan as a chain of 200 more retail outlets in the U.S. in the next three to five years. Another one or two doors will be added outside the country each year in a licensing or joint venture deal with distributors.
The Marciano division, more sophisticated in design and with products about 30 percent more expensive than the core brand, arrives as Guess Inc. has emerged from more than two years in the red, which the Marcianos said didn’t accurately reflect the company’s financial position.
Guess last year turned around a 2002 net loss of $11.3 million to net income of $7.3 million on sales that rose 9.2 percent to $636.6 million.
In the first quarter of 2004, the company surprised Wall Street when it reported a net profit of $800,000, or 2 cents a share, compared with a net loss for the same period last year of $5.8 million, or 13 cents a share. Second-quarter net profit this year was $2.1 million, or 5 cents a share, versus a loss of $5.4 million, or 13 cents, a year ago. The company reported August sales for its stores posted a 5.9 percent gain, less than the 7.4 percent analysts expected.
Standard & Poor’s, the credit-rating agency, boosted its outlook on Guess Inc. to stable from negative on Tuesday based on the company’s improved financial performance. S&P affirmed its BB- corporate rating.
Credit analyst Diane Shand said in a statement that the specialty apparel retailer’s performance in the past year is sustainable. Guess has had a strong product repositioning and the company’s operating margin went to 20.5 percent in the year ended June 26 from 14 percent the previous year, she said.
Guess Inc. shares fell 17 cents to close at $16.48 on Tuesday in New York Stock Exchange trading. The stock is down from a 52-week high of $19.58 in April. The company has been 17 percent public since 1996.
“We were never in trouble in terms of cash flow,” Maurice Marciano said. “We were experiencing losses….We were opening stores and distribution centers. So on paper we were losing money, but actually we were not. It was painful for the short term, but for the long term it was the right thing to do and we were going for it.”
Paul Marciano said he and his brother continued to invest tens of millions of dollars in advertising. “Find a year that we have not [advertised] in a magazine. Did we ever back down? Never.”
The Marcianos declined to comment on their brand advertising budget for this year, although the spike in multipage inserts and street ads since February and the Hilton campaign indicate a healthy boost. In 2002, the company said ad expenditures were $45 million in the U.S. and another $65 million worldwide.
From bumped-up advertising to rising net profits, the positive swing is attributed to managing inventory levels, developing products and implementing cost-reduction measures such as closing unprofitable doors. In the next several months, three Guess Kids stores will be converted to Guess or Marciano stores and two will be shut. Guess Kids posted a loss of $1.8 million on sales of $6.1 million in 2003. However, it will continue as a licensed concern. Four more Guess stores will be closed down next year.
The closings notwithstanding, the key to the company’s comeback has been in controlling its destiny through its signature stores.
Guess Inc. rings in 72 percent of net revenues from its own retail operations. There are 186 Guess-owned stores in the U.S. and Canada, in addition to 80 Guess-owned factory stores and three Guess Kids outlets. There are another 24 freestanding, licensed stores in Europe, and 19 on the way in the next year or so, including shops in Budapest and Prague, Paul Marciano said. Europe is the company’s fastest-growing territory and sales are anticipated to rise another 25 percent in the next year.
Retail in Asia and the Mideast, and Latin America, which boast 172 and 38 non-company owned stores respectively, is restructuring. Many stores may go from licensing and franchise control to a partnership with the Marcianos. There are 14 shops in South Africa and Australia.
Twenty-two percent of the company’s revenue comes from wholesaling, and the remaining 6 percent from licensing, Guess executives said. The 70 to 30 ratio is the mirror image of the company’s retail distribution structure a decade ago, when Guess was considered primarily a manufacturer.
“Any transition between business models does not exist without growing pains,” Paul Marciano said. “I mean, it is not that easy to go from 80 percent wholesale and 20 percent retail to the complete opposite.”
He said the shift was “more complicated and capital-intensive,” particularly in terms of human resources, since it meant a major increase in the workforce — 5,400 now, with 4,500 of those employees in retail, compared with 1,200 a decade ago. “We analyzed where the market was going, where this business was going,’’ Paul Marciano said. “And we decided that as a brand, we needed to be in control of our own distribution. This is to protect our future destiny.”
Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, the New York-based global management consulting firm specializing in retail and consumer products, said: “These are people who love to control their own destiny and they’ve been very consistent in that respect.
“As department stores have become much more careful about handing out their real estate, going from landlords to merchants, manufacturers have moved into the direction of balancing their portfolio with their own stores,” Aronson said. “Why have to fight for the front of the floor when you can own control?”
As part of that strategy, the first Guess accessories shops will launch this month. The category, all licensed as Guess-branded handbags, luggage, eyewear, jewelry and watches, accounts for 20 percent of retail business, Paul Marciano said. “The challenge we’ve encountered with the success of accessories is that it’s become so strong in the last two and a half years that we do not have the space we need in our [apparel] stores,” he said. The first 900-square-foot door opens Sept. 24 at The Grove.
Footwear, also licensed, will continue to be sold through Guess apparel stores, where the category is better served as an impulse-sale complement to the clothes.
The Marciano concept was formulated based on two decades of lessons learned, the brothers said.
While Guess will continue its distribution via department stores, Marciano will be sold in its own shops as well as Guess stores worldwide. During the next year, two Marciano shops will open in Florence and Rome and another 10 are slated to debut in the U.S.
“We want to keep the flexibility, to not be restrained by department store deadlines,” Paul Marciano said. “With our stores, we can do what we feel at the time based on the needs of our customers.”
The spare Marciano stores contain brushed steel fixtures and finishes, varnished concrete floors and frosted plexi-light casing. Eggshell blue and chocolate color the simple, scripted “M” logo and the elegant shopping bags, ribbon and boxes.
Marciano doors are expected to fetch sales of about $500 per square foot, competitive with rivals such as Bebe and BCBG, according to an analyst who declined to be identified. Guess stores average about $336 per square foot.
Although the company has long billed the Guess brand as young contemporary, it has tended to sell in the junior areas of department stores, while its prices have long straddled both classifications. For years, a group within the brand called Guess Collection has flirted with the more contemporary styles and higher prices that define Marciano, with its $248 beaded party dresses and $498 rabbit fur coats. Formation of the division means that one of the only places the GC logo will remain in the product portfolio is on the successful licensed watch collection.
“We want to make sure that the two lines do not overlap at all, especially with the Marciano line in the Guess stores,” Paul Marciano said. “You do not want to trade off one line for the other as far as sales.”
But the decision to have Hilton in print ads for Marciano and Guess runs the risk of confusing consumers, said Sharon Lee, co-founder of Look-Look, a multiservice agency based in Hollywood that consults on product, media and promotional development.
“Whenever you do a line extension, you have the challenge of distinguishing it from the masterbrand,” she said. “Guess is a firmly established brand with this history of using up-and-coming and sometimes sensational personalities as their Guess girls. It’s going to take some conditioning before consumers see it as separate from the masterbrand.”
Lee noted that publicity surrounding Hilton’s hiring referred to her as the new Guess girl, joining stars such as Drew Barrymore, Anna Nicole Smith, Eva Herzigova and Claudia Schiffer. “There’s some cachet to being a Guess model,’’ Lee said. “Marciano doesn’t mean anything to anyone at this point.”
Paul Marciano, who has been creative director for every campaign over the last 20 years, acknowledged that Hilton initially expressed interest in being the next Guess model. Hilton appears in ads for Marciano and Guess, and has been picked up for the campaign’s second round targeting the holiday season. WWD got an exclusive first look at the latest ads.
Some of the promotion for the fall and the holidays spell out “Guess by Marciano” — a point that challenges the brothers’ insistence the two will become separate entities. The juxtaposition is only for the launch, the Marcianos said. And they noted that Hilton appears mostly as the new Marciano model.
Paris or not, the consumer will ultimately determine whether Marciano succeeds without the Guess association.
“Distinguishing the merchandise by having a new name always helps gain consumer acceptance, but of course, the product has to be to their liking,” said retail analyst Walter Loeb of Loeb & Associates in New York. “And the company will need to be consistent with its new designs and respond quickly to the marketplace. That’s the key: excitement and newness.”
The brothers acknowledge the challenges. Still, they appear almost giddy over the new ventures and growth possibilities. A scent for Guess is on their to-do list for 2005.
“We have a lot of work ahead of us,” Paul Marciano said. “But honestly, after being at this company for 22 years, we are all so pumped up about so many new facets of the business. We know that even with what we know, there is no guaranteed solution. This is the fashion business. But I can tell you that we are giving it everything we have.”