By  on June 6, 2007

Guess Inc. is now a global brand — and it wants to be even more of one.

With an established North American presence, an expanding European operation and more businesses throughout Asia, growth at Guess is on fire, with a 71.9 percent jump in first-quarter earnings.

"After 25 years, we feel that we have a brand new life that has started again," Paul Marciano, vice chairman and chief executive officer, told WWD.

He disclosed that product extensions and overseas initiatives are fueling the company. "Europe has been incredible for the last three years. We now just started expanding in Asia. I just came back from China for the opening of a flagship in Shanghai, and before that I was in Seoul for a grand opening there, and I will be in Japan next month. Now, the company is more international than U.S.-based, as far as [our] earnings are concerned," Marciano said.

On Tuesday, Guess reported first-quarter income of $35.5 million, or 38 cents a diluted share, from $20.7 million, or 23 cents, in the same year-ago period. Total revenues rose to $377.9 million from $265.7 million, which included a 42.3 percent climb in sales to $357.6 million from $251.3 million and a 41.5 percent gain in royalty income to $20.3 million from $14.3 million.

Based on first-quarter results, the company raised fiscal 2008 guidance to between $1.75 to $1.80 a diluted share, from previous diluted earnings per share estimates of $1.65 to $1.70. For the second quarter, diluted EPS guidance was estimated at between 31 cents and 33 cents.

By segment, the company's retail stores in the U.S. grew 19 percent to $179.5 million in the first quarter, with same-store sales gaining 13.6 percent. Wholesale sales rose 77.4 percent to $59.2 million, while revenue from the firm's European business jumped 77.2 percent to $118.9 million.

"Our first-quarter results not only clearly reflect the vitality of the Guess brand across all regions and categories, but also reflect the execution of our global strategy with discipline and consistency," Marciano told analysts during a late-afternoon conference call.

"All of our businesses reported both increased revenue growth in the double digits [percentage-wise] and significant earnings growth. The international businesses were very strong, with Europe up 77 percent in revenues, due in part to the acquisition of Focus Europe," said Carlos Alberini, president and chief operating officer, in a telephone interview.The company said in January that it acquired the majority stake in Focus Europe Srl, which held the license for Guess by Marciano in Europe, the Middle East and Asia, and in Focus Spain SA, which distributed the brand and the Guess line on the Iberian Peninsula.

Guess' first licensees were in Mexico and Argentina 20 years ago. Since then, to control the brand's destiny, it has taken back several key international licenses, such as in South Korea, Canada, China, Mexico and Eastern Europe, as well as in Europe. It currently has licensing arrangements in three countries, in South Africa, Australia and the Philippines, and none is considered "significant," Marciano said.

The company has had a strong presence in the Middle East since 1991, and was one of the first American brands in the region. It now has operations in Saudi Arabia, Kuwait, Bahrain, Dubai and Lebanon. Still to come will be the world's two most populous countries: China and India.

"In India, we opened 16 stores last year, and will open another 10 this year. In China, we will have by the end of the year 28 stores combined in China, Hong Kong and Macau," Marciano said, disclosing that new stores are likely to open in other parts of Southeast Asia, such as in Singapore and Taiwan.

The company ended its first quarter on May 5 with 461 stores in 58 countries.

"Our organic growth has been pretty significant, as well, for our ongoing operations in Europe. The wholesale business in South Korea drove Asian revenues higher and [helped] our overall wholesale sales rise 77 percent," Alberini explained.

According to Alberini, denim represents 25 percent of the total product mix. In the North American stores, 25 percent of the merchandise mix is for men, 22 percent for accessories, 5 percent for footwear and the balance for the Guess line for women. Some sites have selected Marciano products in the stores, but that is essentially a concept targeting a slightly older contemporary customer between the ages of 25 to 35. It is a concept that has its own freestanding stores and that the company is committed to growing.G by Guess, the newest concept, is still taking its first baby steps. The company operates just 17 stores, and Alberini said it remains in testing mode, needing both greater critical mass through more stores and performance during back-to-school to determine how to fine-tune the business. "So far, the margins of the business are healthy and sales are in line with what we had expected," Alberini said.

And, while execution of the overseas businesses has been strong, gains in the company's North American operation haven't plateaued. The quarter's North American retail results, in which Guess operated 336 retail stores in the U.S. and Canada, represented the company's 17th consecutive quarter of growth at retail, Alberini said.

So what does Guess do for U.S. growth?

"Footwear is something I see as an opportunity. There is a huge gap there. You have these very expensive shoes made in Europe or these moderate shoes. We plan to be right in the middle of that," Marciano said of the company's next major initiative.

The company has a footwear license with Marc Fisher. While shoes are already in the Guess stores, the newest concept initiative will house footwear only. About five to eight units are slated to open in North America over the next 12 months. The average price point for footwear is between $120 and $250 a pair. Some styles open lower, at $90, but the average at a Guess store is between $120 and $130, and at a Marciano store, between $220 and $260.

"I don't know if it is because we are from Europe, but we don't see it as a challenge to extend the brand across the globe. We see it as an opportunity. Now, the exhibition [of the brand and how it is showcased], that's the part that is hard work," Marciano said.

Gabrielle Kivitz, analyst at Deutsche Bank, initiated coverage of Guess on Monday with a "buy" rating.

"Over the past several years, Guess Inc. has undergone significant transformation, evolving from a single, domestic and largely wholesale brand into a global portfolio of brands with stronger market positioning, established retail distribution and a global licensing network," she wrote in her research note. "Management has gained credibility for strong execution of an elaborate strategy with great success over the past few years. Looking ahead, management continues to provide a clear and, in our opinion, realistic strategy to drive continued strong growth globally, leveraging the work that has been done over the past few years."Last month, analyst Christine Chen of Needham Co. initiated coverage of Guess as a "strong buy," with an investment thesis based on expectations of long-term growth fueled by "international opportunities, licensing and U.S. retail square footage" gains. She also wrote that, while Europe is likely to continue to drive earnings surprises, there is also the potential to double the North American store base with four concepts over five years.

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