By  on April 18, 2007

With its sexy ad campaigns, a laser-like focus on product and a global network of stores, Guess over the past 25 years has grown into a $1.2 billion enterprise. Although it hasn't always been a smooth ride, the Los Angeles company in recent years has completely transformed itself from primarily a wholesale business into a retail-focused enterprise with 773 directly owned and franchised stores worldwide.The groundbreaking brand flew high in the Eighties and early Nineties on the back of a series of famously scintillating "Guess Girls," but then hit a wall in the late Nineties when price-cutting at department stores ate into its bottom line. The company suffered its first losses and retreated from wholesale, only to reemerge several years later as a retail powerhouse, with a multibrand portfolio that consists of Guess, Guess by Marciano, Marciano, Guess Accessories, Guess Footwear and its latest concept, G by Guess, a retail format of apparel priced between Guess stores and factory outlets.The evolution of Guess is the story of the four Marciano brothers (three born in Algeria, then a French colony, and one in Morocco), who worked together to build a successful wholesale company with tremendous attention to product, quality and cutting-edge advertising. Guess became the largest apparel manufacturer in Southern California. Along the way, there were legal battles, labor woes and family disagreements over strategy; as a result, three of the brothers, Maurice, Paul and Armand Marciano, bought out their brother, former chairman Georges Marciano, taking over his 40 percent interest, in 1993. Despite the ups and downs, Guess has managed to maintain its European styling, upscale image and better distribution, while many of the brands that originally competed with them have fallen by the wayside, or are selling to the mass channel.FRENCH LESSONS It all began in 1972, when Maurice and Georges opened their first stores in Marseilles, France, and started producing jeans under the M.G.A. label. A few years later, their brothers, Armand and Paul, joined the business, and they opened a 200-square-foot store in Bandol, France, in a former fish market."We had no money to remodel the store. We put the jeans in the fridge display counter," said Paul, vice chairman and chief executive officer of Guess. The jeans were designed by Georges and Maurice and were named M.G.A. after Maurice, Georges and Armand. "The logo also had an eagle. I always believed I was the eagle," quipped Paul. During the Seventies, they opened seasonal stores in French towns such as Cassis and Aix-en-Provence, and by 1977, they had 10 year-round and 15 seasonal stores.That year, Maurice, Georges and Paul went on vacation to the U.S. The trio planned to stay two weeks and ended up staying two months. The brothers found a location for an L.A. store and got a town house so they could all live together. They were all single at the time. As Paul recalled, "We walked around Beverly Hills and asked ourselves, 'Is this for real?' It was like a movie."They loved it so much that Maurice and Georges decided to stay in L.A., and Paul went back to run the stores in France with Armand. Maurice and Georges opened their first M.G.A. store in Century City, and then units in Beverly Hills, Palm Springs and New York. They imported jeans from France and carried lines such as MacKeen, an English brand, and Lily Farouche, as well as M.G.A.'s denim and corduroy jeansSoon after, Paul and Armand joined their brothers in the U.S., and they sold their stores in France.GOING WHOLESALEIn January 1982, Georges and Maurice started Guess while Armand and Paul continued to run the M.G.A. retail stores in the U.S. A few months later, Paul decided to join Guess and headed advertising. At the time, Georges was in charge of design and Maurice ran all the financial and manufacturing operations. Armand came on board in April 1982, and was put in charge of customer service, logistics and inventory control.In an ill-fated 1983 union, the Marcianos sold a half-interest in their business to the Nakash brothers of Jordache Enterprises Inc. After a highly publicized legal battle that lasted close to seven years, the Marcianos recovered full ownership when a jury found that the Nakash brothers had fraudulently induced the Marcianos to sell them a 51 percent stake in Guess.Although the Marcianos knew the ropes of the retail business, they had no experience in running a wholesale operation."We didn't know anything about the wholesale business. We had to learn everything," said Maurice, Guess chairman. He recalled that when they received their first order from Bullocks, the young sales rep came back with a handwritten order. "We packed the goods right away. It was two boxes and the rep went back to the store two hours later, and they refused it. We didn't know that we needed a purchase order," said Maurice, who added, "We didn't know what a factor was."According to Paul, the company name was born from an all-Marciano version of an Abbott and Costello bit. All four brothers drove downtown together every day along Olympic Boulevard, where they passed a McDonald's billboard that read "GUESS what's in the new Mac?" "Georges said, 'I know what the name of the company will be. Guess,' and Maurice kept trying to guess, and they went back and forth trying to figure out the name he had in mind," said Paul.Because it seemed confusing to so many people when they said the name was Guess, the Marcianos added the Inc. and became Guess Inc.When they first started out, the big jeans brands were Sasson, Jordache, Bonjour, Calvin Klein and Jou Jou. As Paul explained, they were all doing the same dark denim, five-pocket jean. Guess introduced a tight-fitting, stonewashed three-zip ankle jean called "the Marilyn.""Stonewash had just come out in Italy, and nobody had heard of it here. We went to the laundry and developed it with them. Nobody knew anything about it here. The challenge was to put [the Marilyn jean ] in front of the buyers," said Maurice. "We started to be very frustrated."Guess Inc. had only two reps, one each in New York and Los Angeles, whom Maurice eventually called and asked for a list of all the department store buyers. "They gave us the names of the buyers and we sent them two pairs of jeans by FedEx, with a letter saying that we just started our company." A buyer at Bloomingdale's was the first to respond. "He ordered 24 pairs of jeans, and this time, we waited for their purchase order. We shipped it by air. They sold out of the 24 pairs in a few hours, and they reordered 120 pairs and sold it over the weekend," said Maurice. "They then ordered 600 pairs and it went crazy." After the success at Bloomingdale's and another early account, Fred Segal, Guess opened accounts with Bergdorf Goodman, Bonwit Teller, Neiman Marcus and Saks Fifth Avenue in the first year. The company also expanded upon the Marilyn jean into colored denim and overdyed jeans in turquoise, green, fuchsia and orange.At that time, department stores were filled with lines such as Sergio Valente, Jordache and Sasson. "There were these designer jeans all selling for $26 when we came out at $48. We were higher than everybody else and we were confident," said Maurice. The reason for their confidence? They were already selling M.G.A. jeans in their own stores for $55, and doing well with them.DIFFERENCES IN STRATEGYThings went well for the first 10 years, until the brothers began to disagree. In August 1992, Maurice left Guess because he and Georges did not agree about the direction of the company, and Maurice did a stint working with Pepe Jeans' Lawrence Stroll and Silas Chou. He returned the following year after Georges resigned, buying his brother's interest in the company with Paul and Armand."We had big differences in strategy. Georges, at the time, was thinking that department stores will not survive, and we shouldn't rely on department stores, and we should start selling the mass market. It was so counter to our strategy. He was really pushing that on his own, without our agreement," said Maurice."We were trying to build a great brand with a great image and not throw everything in the gutter," he continued. "He was going to buy us out, but we ended up buying him out." The three brothers paid Georges $240 million in cash and public bonds for his 40 percent share of the business.GUESS GOES PUBLICIn 1996, Guess went public, listing on the New York Stock Exchange."At the time, we had the public bonds," recalled Maurice. "We had to report like a public company, and we had all the headaches of being public without being public. We thought, 'We might as well go public.' We can cash out some of the money and then we can have access to public funds."Furthermore, many of Guess' competitors at the time were publicly traded companies. "When you want to attract talent, we couldn't offer them equity by being a privately held family business. Now you could offer stock options and restricted stock and all the vesting. It was a great incentive to hire talent and retain talent," said Maurice.PRICE CHOPPERSUntil the mid-Nineties, everything was made in Los Angeles, and Guess became the largest apparel manufacturer in the city. But when faced with competitive pressures from Calvin Klein Jeans, Polo Jeans and Tommy Jeans, Guess had to move production to Mexico and China, because the line was getting too expensive. "Now we were competing with real designers at the upper end of the market. Most were selling for $48 and at the time our opening price point was $68. We had to come down $20, which is a lot," said Maurice. Guess was doing well but "we definitely got a hit," recalled Maurice. "When we came down in prices, we regained part of our market share." But the gain was not without its own problems. The company's decision to move about 65 percent of its production to Mexico in 1996 sparked another flare up in the labor woes that had been simmering since 1992, when Guess contractors were cited by the U.S. Department of Labor for unfair wages. The apparel workers union UNITE filed unfair labor practice charges against Guess with the National Labor Relations Board, charging that the move offshore was in retaliation for union organizing activities. Later that year, UNITE also filed a class-action lawsuit against Guess and several of its contractors, claiming they violated numerous labor laws. Guess, for its part, has vigorously denied all such charges, responding with a defamation suit against UNITE.Added to this, business became increasingly challenging as the status brands started a cycle of big promotions and price wars. "Soon enough, for back-to-school there were special promotions at $39. A few years later, Tommy started at $29. And it wasn't just jeans. It was knitwear, too," Maurice said. "Everything got to be price point, price point, price point. There's no secret in this business; it has to affect the fabric and where you make it."The war raged on as the millennium rolled around. "We were holding in there, but we got to a point where I didn't like what I was doing," recalled Maurice. "Everything was about price point, and we were no longer talking about great creativity, fabrics and denim. I said, 'We can't continue like that. We don't stand for who we are anymore.' Our brand was getting killed. We didn't mean anything to the customer. It was all about price point."RETURN TO RETAIL"I thought we had to do something drastically different, and we decided we were going to accelerate the opening of our own retail stores. We have to control our own distribution, and we have to control the product," Maurice said.At the time, Guess was getting little price resistance in its own stores. "We gave the customer who knew what she was looking for great quality. We decided to go back to our roots and go into a cycle of creativity and innovation," said Maurice, noting they began using better denims from Italy and Japan and more expensive washing techniques. "We knew it was going to be kind of painful. We went from selling jeans for $48 in department stores to selling jeans for $60 in our own stores. Everybody thought we were crazy and we would lose our market share, and we did lose quite a bit, but I was so convinced that it was the right thing to do."Slowly, we regained our position in the market and rebuilt all the prestige of the brand. It took us a good three years for the whole strategy to be in full motion. We opened quite a few stores," said Maurice.Since Maurice and Paul controlled 80 percent of the shares of the company, they were able to redirect the entire organization. According to Paul, "Wall Street didn't like it. We went down to $3 a share from a high of $32 in four months. Every conference call was, 'How is your wholesale business?' and we'd answer, 'Shrinking' and they'd say, 'Thank you.'" At its peak in the U.S., in 1996 and 1997, the wholesale business was doing $500 million. Today, it sells mostly to Federated and does around $146 million. "We're happy to have a partner that understands the Guess strategy, who we are and what we're looking for long-term," said Paul.Once Guess decided to make the shift in its business, it had some tough years. "It was painful for the first two and a half years," said Maurice, reflecting on the company's poor financial performance during 2001 and 2002. In 2001, Guess' earnings fell 62 percent, to $6.2 million, while net revenues declined 13 percent, to $677.6 million. The company's wholesale division lost $11.2 million on sales of $260 million. In 2002, the company spilled red ink for the first time, reporting an $11.3 million loss on net revenues of $583.1 million. The wholesale division lost $44.9 million on revenues of $159.6 million.Fast forward four years, and with the new strategy fully implemented, the company is completely refocused on the identity of the brand. "Now our retail business has grown tremendously, and for the first time this year, we are passing the $1 billion mark. Now, in hindsight, for everybody, we're like a visionary. At the time, we were the dumbest people on Earth. Now we're a more exclusive brand. Not only are the price points higher, but our markdown rate is lower," Maurice told WWD in an October 2006 interview.For 2006, earnings soared 109.4 percent, to $123.2 million from $58.8 million in 2005. Revenues increased 26.6 percent, to $1.19 billion from $936.1 million, driven by strong results in all business segments. The wholesale segment posted a 20.8 percent gain, to $146.3 million from $121 million, and the European division had a 64.1 percent jump, to $252.4 million from $153.8 million. (See financial story, page 8.)"I would like to continue to build [the wholesale business], but only the right way," Maurice said. "In life, you make a mistake once, but you don't want to do that again. I never want to rebuild it at the expense of the brand, only if we can run the business the way we want to run the business. If a store is a really good image brand, such as a Nordstrom or a Neiman Marcus, I'd be very open to do it in the right way, as long as it could enhance the brand."IMAGE CONTROLAccording to Maurice, Guess never deviated from its core customer, women between the ages of 16 and 23. Their male customer is 18 to 24, although the women's and men's products can be worn by people 13 to 60. "Our core customer is really a young customer. If you look at the marketing campaign, it was not really about the product. It was about the imagery and the feeling to create this kind of lifestyle, this girl being very sexy. Also it's about a guy who likes to go out and look good and be daring," said Maurice.A cornerstone of Guess' success has been its groundbreaking advertising campaigns and consistently strong, recognizable image of sexy, healthy-looking women and men."I never worked with an agency," said Paul. "I truly believe we continue to project the right image for the company. That's been my passion since Day One. We had a lot of disagreements with my brothers that the product wasn't dominant in the ads. The image was more important than promoting a specific style. That's why when you think about Guess, you think about Claudia Schiffer and the bustier. You can't even see the denim." (See advertising story, beginning on page 12.)Creative, Paul said, remains his key focus. "Everything evolves around the brand and the image, and if we lose that, we lose who we are."EARNINGS SET RECORDSToday, the business is run by Maurice, Paul and Carlos Alberini, president and chief operating officer, who came on board seven years ago. Armand left Guess in 2003 after taking a leave of absence for health reasons. He eventually joined ABS in Los Angeles as a partner. Georges is reportedly involved in real estate.Recently, the company has had 14 consecutive quarters of earnings growth, attributable to booming sales in Europe and significant gains in both the wholesale and retail businesses."Global expansion is just the beginning for us," said Paul. In the next three years, Paul expects the business to grow substantially on a global scale. "We can open with confidence, over the next three years, 200 to 320 new stores. We'll pass $1.3 billion in 2007. We're looking to increase between 15 and 20 percent this year," he added."The acceptance and demand in Europe has surprised us a lot. To have the number-one market in Europe be Italy; that's the most difficult market to penetrate," said Paul. He said he didn't know why Guess is so popular there. "They just love Guess. We have over 50 freestanding stores in Italy, and we are opening new units in Milan, Rome and Venice," said Paul, adding that he finds the Venice unit, with its 100-foot windows, the most beautiful."We have not touched northern Europe or Eastern Europe. We're opening aggressively in Asia. We just started a direct operation in [South] Korea. It's already way above expectations. We've been present in the [South] Korean market for 18 years as a licensee," said Paul. "Now the product you find in Milan and Paris, you find in Seoul. That's a big difference."Paul attributes the brand's success overseas to several factors, among them that Guess has been advertising abroad since 1986, and it has a design team based in Florence. The company does $500 million in Europe. Although there are many trendy jeans brands competing for consumer wallets, Paul believes "very few brands are comparable to what we do as a lifestyle brand, with 800 freestanding stores."Perhaps the most significant move was the acquisition in January 2005 of its European jeanswear business, which gave Guess a significant platform from which to expand its European operations.Increasing the business through licensing has also been an essential part of the company's growth, and today, accessories — which run the gamut from watches to eyewear and handbags — account for $800 million in wholesale volume. Licensed accessories-only stores have been opening at a fast pace, and the company, along with licensee Marc Fisher, is embarking on a Guess Footwear expansion. (See accessories story, page 28.)Today, Guess employs 9,000 people, and including all the distributors and franchises, it has 15,000 people working for the brand worldwide.Paul said the Marciano brand, a contemporary label launched in 2004, would have a big push over the next three years. "Where we are right now is, we're addressing the 20- to 40-year-old with edgy, sexy cocktail styles. Some people wear it at night, others can wear it during the day, depending on their lifestyle."Analysts believe the international market remains untapped for Guess.Eric Beder, vice president at equity firm Brean Murray, Carret & Co., said, "The international business really just started. It's in the second or third inning in Europe, and the game hasn't started in Asia. They've got a tremendous appetite for American brands. From 2008 and beyond, Guess has a lot going on there."On the domestic front, "the real wild card is the G by Guess concept," he said.Thirty G by Guess stores will open this year. "If it works, it can be a 400-plus store chain. It's 20 percent more expensive than the factory outlets and 30 percent cheaper than Guess. It's potentially a great growth story," said Beder.AN AMERICAN TALEWhen they started their company 25 years ago, Maurice said he never imagined this kind of success."Not in my wildest dreams. When we started in 1982, to put everything in perspective, our goal was to be able to manufacture 5,000 units a week. At one point, we were producing 500,000 units a week in Los Angeles and we were the biggest manufacturer in L.A. Today, we're doing more than two million units a month."The fun has returned to the business, as well. "We are now having a good time. I'm really enjoying what we're doing," Maurice said. "I don't live for today or tomorrow, but we look at where we're going long-term. You want the brand to be here in 20 to 30 years."Maurice believes it's never wise to get too comfortable."We never want to be overconfident or complacent. We have to be careful with that. That's the biggest challenge. We have to keep the focus on every single detail," he said. Still, he almost needs to pinch himself sometimes when he thinks about what Guess has achieved."I am living the American dream. Only in America."

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