GUESS HOPES TO RAISE ABOUT $200 MILLION AS IT FILES FOR IPO

Byline: Sidney Rutberg

NEW YORK--With the stock market continuing to blast off with apparel issues, the Marciano brothers have made their move to raise a little cash--about $200 million, give or take a few million.
The three brothers, who own 100 percent of Guess Inc., filed a registration statement for the company Friday to sell 9.2 million shares in the range of $2l-$23 a share, which seems to be the popular opening range for new apparel issues.
At $22 a share, the sale would raise $202 million before underwriting expenses. However, as has been the pattern in the current red-hot new-issue market, the price could go up before the stock reaches the market and the number of shares being sold could be increased.
As the offer stands now, the number of shares sold could go up to 10.58 million if the underwriters pick up their option covering over-allotments. This could increase Guess's take to about $230 million before expenses.
Maurice Marciano, chairman and chief executive officer, currently owns 44.8 percent of Guess stock; Paul Marciano, president and chief operating officer, owns 35.5 percent and Armand Marciano, senior executive vice president and secretary, owns 19.7 percent.
Each will get three-year contracts beginning with the effective date of the prospectus. Maurice and Paul will each receive a base salary of $900,000 and Armand will get a base salary of $650,000. Each will also be entitled to a bonus "with a minimum expected target bonus equal to 100 percent of base salary."
Most of the money raised from the offering will be used to repay the Marcianos for about $180 million-$190 million in profits earned previously that the Guess executives already paid taxes on, but left in the company. This includes two airplanes, valued at a total of about $10 million. One of the planes will be leased back to the company, but one will be owned outright by the brothers, according to the registration statement.
Prior to the plans to go public, Guess had been operated as an S corporation. This structure allows a closely held corporation to have the advantages of limited corporate liability, but it is taxed as if it were a partnership. In a standard corporation, profits are first taxed at the corporate level and then, when the gains are distributed to the owners, the owners are required to pay personal income tax. The S corporation eliminates this double taxation.
Any proceeds left over after the payout to the Marcianos will be used to pay down bank debt, which stood at about $40.8 million at the end of this year's first quarter.
Although the registration statement includes a wealth of information about past operations of the company, there are still lots of blanks that will be filled out later. The statement does not disclose what percentage of the company will be owned by the new investors and how much will be retained by the Marcianos, but does note that after the offering, the Marcianos will still have majority control.
According to sources close to the deal, the public is expected to have about 20 percent and the Marcianos will retain 80 percent.
The statement also leaves blank the extent of dilution public shareholders will suffer or the average cost of the stock to the current management. This will all be disclosed before the issue comes to market in roughly six weeks.
Operating figures for the past five years show relatively flat sales and earnings but a decline last year. In 1995, net earnings, after adjustment for corporate taxes, dropped 32.7 percent to $43.3 million, or 8.9 percent of revenues, from $64.3 million, or 11.7 percent of revenues. Net revenues, which include sales and licensing income, fell 11.1 percent to $486.7 million.
The company said wholesale volume declined from $396.9 million in 1992 to $270.9 million in 1995 as a result of its own merchandising decisions, the licensing of its boys' line among other licenses and the increased competition in branded denim apparel.
To deal with the decline in wholesale volume, Guess has embarked on a strategy to "deepen the company's product offerings, increase the number of shop-in-shops and increase sales to international distributors."
The company has also introduced the Guess Collection to selected department stores for the fall season. Additionally, Guess plans to broaden its men's and women's lines to include khaki and other twill products starting with holiday/resort.
In the first quarter of l996, Guess opened 18 shop-in-shops and plans a total of 75 in 1996 and 1997.
The company disclosed that 26 percent of its total volume last year came from three customers: Federated Department Stores, May Department Stores and Dillard Department Stores. Federated, including Bloomingdale's and Macy's, accounted for 11 percent of volume; May, 7.7 percent, and Dillard's 7.3 percent.
The backlog of wholesale orders at the end of this year's first quarter was down to $65.7 million from $69.5 million a year ago. The company explained that because of shipping schedules and seasonal factors, backlog figures might not necessarily indicate the volume of subsequent shipments.
Licensing income has been growing steadily, rising to $46.4 million in l995 from $28.8 million in l992. The company has 26 licenses, all of which are generating royalties. The four biggest--Guess Watches, Baby Guess, Guess Kids and Guess Eyewear--accounted for 48.1 percent of the license income last year.
In 1995, Guess's retail operations generated sales of $169.4 million, or 34.8 percent of total revenues. The increase in the retail percentage essentially reflects the sharp decline in wholesale volume last year. In the first quarter of this year, while retail sales soared 41.9 percent to $40.2 million, retail's percentage of sales dropped to 29.8 percent of the total.
At the end of the first quarter, the company operated 64 retail stores, including one in Florence, Italy, and 47 outlet stores. Same-store sales were down every year over the past four years, but in the first quarter of this year, comps were up 16.7 percent.
The registration statement explained that the company's retail management recently altered its strategy to improve productivity by setting up new models for optimum size, design and construction costs along with a better merchandise mix and inventory controls. Guess believes implementation of these initiatives contributed to the same-store sales increase in the first quarter.
In keeping with its expansion plans, Guess opened two new stores in the first quarter of 1996, will open five more and close one during the rest of this year and open 15 units in l997.
With its strong brand recognition, Guess plans to expand internationally. It noted that over the past four years, it and its licensees have spent more than $160 million for advertising. Currently its brands are sold in more than 70 countries, principally through licensees and distributors. It also grants licenses for the manufacture of Guess products similar to the company's outside its normal channels of distribution. Last year, 5.1 percent of its revenues came from international sales.
About 21 percent of the company's raw materials, labor and finished products were made in Hong Kong and other Asian countries and about 74 percent made in the U.S., all through independent contractors. The company noted that with Hong Kong slated to be taken over in July 1997 by China, the business climate there may change for the worse.
"The company believes it could relocate its production and sourcing facilities outside Hong Kong with merchandise produced elsewhere without a material adverse effect on the company's operations," the registration statement said. However, it added, "there can be no assurance that the company would be able to do so."
In a breakdown of sales by category, Guess said women's apparel last year accounted for sales of $210.9 million, or 47.9 percent of the total; men's sales were $194.9 million, or 44.3 percent; licensed products, representing sales of licensed products in the company's retail units, $31.9 million, or 7.2 percent, and discontinued apparel, 2.6 million, or 0.6 percent.
Underwriters for the issue are Merrill Lynch & Co. and Morgan Stanley & Co.

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