WWD.com/business-news/business-features/paul-and-maurice-marciano-american-dreamers-5883300/
government-trade
government-trade

American Dreamers: Paul and Maurice Marciano on the Strategy Ahead

Three decades after its founding, Guess Inc. has an American foundation and a global future.

View Slideshow

Paul and Maurice Marciano sound like they’re just getting started.

Three decades after founding Guess, the American-flavored jeanswear line that would evolve into an international lifestyle brand with ongoing denim “cred” and 2011 revenues of $2.69 billion, the brothers maintain a long list of corporate objectives.

These include far deeper penetration of the Internet and social media; further expansion of their 1,559-store retail network in the U.S. and abroad; continuing development of the more youth-oriented, lower-priced G by Guess brand even as it continues to fine-tune the flagship Guess label; reentry into the Brazilian and Japanese markets, and perhaps new or revisited ventures in categories such as lingerie and home.

With Paul serving as chairman and chief executive officer and Maurice now in the role of non-executive chairman following his official retirement in January, the 30th anniversary will be anything but the only item on their agendas. The anniversary comes on the heels of what was by most measures an uncharacteristically difficult year for the Los Angeles-based company. Led by a 24.8 percent surge to more than $250 million in its expanding Asian operations, overall sales rose 8.1 percent to approach the $2.7 billion mark — more than quadruple the $636.6 million of 2003 — but net income, hurt by a settlement charge involving a European logistics provider, fell 8.3 percent to $265.5 million. It was the first decline since the company registered a net loss back in 2002, which was the firm’s only deficit in 15 years as a public company.

RELATED STORY: Timeline: Guess at 30 >>

Paul Marciano considers the 2011 numbers a minor stumble, indicative of efforts to maintain and even burnish the Guess brand amid challenging macroeconomic conditions. Even in a frantically bargain-oriented holiday environment, brand integrity remained the focus.

“We managed our resources carefully, especially on inventories, protecting our brand through the holiday season, avoiding much of the massive discounting in the malls,” he said on the company’s March earnings call. “Considering what Europe went through this past holiday season, we’re very pleased with these results.”

He was particularly pleased to be able to report that the four-year-old G by Guess unit broke even in 2011 and was expected to turn a profit in the new year.

Following Nancy Shachtman’s promotion to president of all North American operations in March 2011, little effort was spared to upgrade the firm’s women’s assortments, an initiative that officials inside and outside the company said met with considerable success. The same energy is expected to be invested in men’s wear and accessories this year, even as the company invests more heavily in off-line as well as online marketing to commemorate its anniversary and further elevate brand visibility.

Go to guess.com and there’s already a “30 Gifts in 30 Days” promotion in place to promote the firm’s “30 Sexy Years.” The same tag line appears on the anniversary ad campaign that reunited Guess with perhaps the best-known of the Guess Girls, Claudia Schiffer, and heralds a new capsule collection inspired by Schiffer and other actresses and models who’ve become synonymous with the brand and its all-American, California-sun-soaked image.

RELATED STORY: Claudia Schiffer Helps Guess Mark Three Decades >>

Even with, and partially because of, the big anniversary promotional push, Guess’s financial expectations for the year are modest. Revenues are expected to rise 1.9 to 3.4 percent to between $2.74 billion and $2.78 billion, and earnings, limited by increased marketing investment and unfavorable currency translation, are forecast to decline to between $2.50 and $2.65 a diluted share. That guidance, issued on March 14, sent the company’s shares down more than 10 percent the following day, to $32.97, and they’ve yet to regain the ground they lost, closing at $29.28, up 0.2 percent, on Monday. The stock hit a 52-week high of $45.73 on the last day of May 2011. The final price on Monday values the Marcianos’ 26.7 percent stake at about $818.5 million, $455.1 million for Maurice and $363.4 million for Paul.

The recent performance on Wall Street clearly isn’t something that pleases the Marciano brothers, who’ve felt Wall Street’s wrath before, but it’s hardly something that keeps them awake at night in the homes they occupy, within easy walking distance of each other, in Beverly Hills. Having been private and public, sole owners and partners, they take a decidedly more long-term view.

‘FIVE-POCKET HERITAGE’

“What we have done in the last 30 years is build a lifetime asset,” said Paul. “Maurice and I, coming to the U.S. from France, had a vision of something American, a brand that was young, sexy and adventurous, and we’ve never changed that vision. It was based on denim, with the authenticity of denim. It’s our five-pocket heritage, what made the brand Guess. With what you attach to that image, you create something permanent and lasting.

“It takes a long time to do that and yet it’s very easy to destroy,” he added.

While “young, sexy and adventurous” are the three adjectives ascribed to the brand, nouns immediately flow forth when the subject turns to the corporate attributes they most admire, emulate and value in the Guess corporate culture. “Vision, discipline and consistency,” Paul contributed, to which Maurice quickly added, “Execution.”

“What I actually think is different about us as we enter our 30s is the value of consistency, about not jumping around so much,” Paul said.

A recent round of litigation hasn’t altered the ceo’s established admiration. Considering the time and expense spent defending itself against charges of trademark infringement filed three years ago by Gucci America, leading up to a trial that ended only last month and for which a verdict is still pending, his choice of role models is a bit surprising.

“Domenico De Sole,” he fired off without hesitation, speaking of the former president and ceo of Gucci Group. “To do what he did — take a brand that was nearly extinguished, apply his vision and then bring in Tom Ford, a designer with the same kind of vision — is just extraordinary. Together, they built back Gucci from the ashes in the Nineties, and it was consistency and execution that did it. He’s a real architect.”

They offer similar expressions of admiration for Lew Frankfort and Reed Krakoff’s work as brand resuscitators at Coach, as well as for the many brand-building successes of Ralph Lauren. Kismet brought the brothers together with Lauren on a European airline flight in 1985, leading not only to a high-altitude brainstorming session but to subsequent meetings with Lauren in New York. Paul called Lauren “the person I respect most in the industry” and his work “legendary.”

VISIBILITY AND CONFLICT

Guess has amassed some significant accomplishments of its own in its 30 years, emerging as the dominant survivor of the status jeans craze of the Eighties that presaged the premium jeans boom of the last decade.

Paul took the lead in marketing the product, forming Guess Advertising in the company’s inaugural year and quickly establishing a consistent creative approach that produced some of the fashion industry’s most iconic and enduring advertising imagery. Even as the young company struggled through the twists and turns of the fashion denim business, the sensual black-and-white advertisements garnered numerous Clio awards, including seven in 1996, and helped to launch or invigorate the careers of Guess Girls including Anna Nicole Smith, Paris Hilton, Naomi Campbell, Eva Herzigova and future French First Lady Carla Bruni-Sarkozy.

RELATED STORY: Game Changers: Guess Girls and Photographers Look Back >>

By the turn of the century, brand messaging was of necessity taking a back seat to the company’s viability in the marketplace.

By the time its higher-priced stonewashed denim jeans in flattering fits began to catch on, first at Bloomingdale’s and later at such better specialty stores as Fred Segal, Maurice, Paul and their brothers Georges and Armand already were veterans of European and then American retailing. Seeking expertise in wholesaling, the four brothers had sold half their business to Jordache Enterprises’ Nakash brothers in 1983, and the legal fight to regain ownership took the better part of a decade to resolve, finally ending with a jury’s determination that the Nakashes had fraudulently induced the Marcianos to sell them a 51 percent stake. The jury returned full ownership of the company to the founders.

No sooner was that conflict settled than cracks began to appear in the bond between the brothers themselves. The Marcianos’ own M.G.A. stores were experiencing strong sell-throughs on their own higher-priced, fashion-focused Guess jeans as well as some of the French imports they carried even as department stores were promoting heavily and trading down and a number of brands were moving into the mass channel.

Georges, who owned 40 percent of the company, voted “mass” while Maurice opted for “class” and, in 1992, left the company, working briefly with Lawrence Stroll and Silas Chou. Georges attempted to acquire all of Guess but instead wound up selling his stake to his three brothers for $240 million in cash and bonds, effectively valuing the company at $600 million and bringing Maurice back into the fold in the process. (Armand would leave for medical reasons in 2003 and later become Allen Schwartz’s partner in A.B.S. by Allen Schwartz.)

Because the bonds used in the acquisition of Georges’ stake were public, Guess began reporting numbers like a public company and, in 1996, became one with a listing on the New York Stock Exchange under the ticker GES. The move coincided with the firm’s decision to begin to shift the bulk of its production outside the U.S., where its wage and labor practices had attracted the scrutiny of UNITE as early as 1997. UNITE filed an unfair labor practice charge against the company in 1999, which was dismissed the following year but appealed by the National Labor Relations Board and finally settled in 2003.

REINVENTING THE CONCEPT

No longer neophytes in the world of wholesale as it turned 15 as a public company in 1997, Guess found itself again besieged by competitive pressures, this time from a new wave of designer jeans lines that, like the status jeans that preceded them, wound up becoming heavily promoted loss leaders for department stores intent on generating traffic.

“It was all promotion, all about the lowest price,” recalled Maurice, without trying to hide a look of disgust. “Jeans became a commodity. It was no longer about creativity.”

As devoted to their adopted country as the four Marciano brothers, all born in north Africa before emigrating from France, have become, Maurice waxed a bit nostalgic when discussing the tendency of European firms to remain focused on fashion despite the market-driven pressures of supply and demand.

“Europe is good for brands,” he stated. “There’s a lot of creativity in the U.S., but it’s there consistently in Europe. The jeans companies there, like the luxury companies, are very creative, very design-driven.”
Paul noted, “The department stores here were pitching at each other. It was literally a war. But in 1999 it was Maurice who decided that our future, to survive and grow, was to create and build our own network of stores and distribution.

“We were the first ones to turn around at the time and just say, ‘Enough!’ We already had a network of 80 stores, unlike anyone else, and this gave us the ability to be independent,” Paul said.

“It was very painful when we did that,” said Maurice, “and we knew it was going to be painful, but we also knew it was the absolute right decision for our survival and the longevity of the brand.”

The pain lasted for several years and exacted considerable toll on the company’s stock as the investment in retail worked in tandem with the erosion in the wholesale business. Net income, up to $51.9 million in 1999, fell 68.2 percent in 2000 and another 62.2 percent, to $6.2 million, in 2001 before evaporating completely into a $11.3 million loss in 2002. Meanwhile, wholesale revenues declined by almost $90 million, to $159.6 million, from 2000 to 2002, while total revenues contracted to $583.1 million from $779 million during that same time frame, some of it attributable to the drop-off in business after the 9/11 terrorist attacks.

But 2003 would prove to be a turnaround year for the company. Its shares, at $21.75 on Dec. 31, 1999, closed at $4.19 on the last day of 2002 and spent much of 2003 below $4. Analysts and investors, at first skeptical about the retail strategy, warmed markedly to the stock as results improved and profitability returned, lifting the stock that year to $12.07, 188.1 percent above its final 2002 level. Shares were up 4 percent in 2004, as profits quadrupled; up 183.7 percent in 2005, when net income nearly doubled, and up 78.2 percent in 2006, when it more than doubled. Even with the decline last year, profitability was more than twice the 2006 level.

“Retail was our background before Guess, and we were much more comfortable in a retail environment than we were in a wholesale environment where there’s no control over what is presented and how it’s sold,” said Paul. “Once you control those things, you really control your brand, your message and your product.”

Controlling expenses, however, can prove more difficult. The brothers noted that there have been numerous demands brought to bear by the transition into a retail-focused organization, including the capital intensity of opening and operating stores and numerous benefits and compliance issues. “A wholesale operation can function with something like 200 people,” noted Maurice. “This is now a 14,300-person organization.”

A powerful force from outside the family was an integral part of the transformation of the company. Carlos Alberini served as president and chief operating officer for 10 years, beginning in 2000, and stayed on as a director for a year following his departure to become co-ceo of Restoration Hardware. With responsibility for logistics and retail operations, among other areas, and a background including Price Waterhouse and several retail organizations, he is often cited, inside the company and out, as a vital force in facilitating change and also putting the company’s relationship with Wall Street back on track.

 

EUROPE AND BEYOND

Following its 20th anniversary in 2002, Guess returned to profitability in 2003 and began a growth spurt that even stood up under the pressures of the Great Recession of 2008. The bottom line improved, often at a double-digit clip, every year for eight years, a streak interrupted by the 2011 results. Revenues have risen without a pause, with increases of 33.8 and 39.7 percent in 2006 and 2007, lifting volume to $1.25 billion and $1.75 billion, respectively.

Even with the decline in overall profitability last year, Maurice and Paul pointed with pride to Guess’s growth in Europe, which, despite brisk economic headwinds and a marked slowdown in southern Europe at the end of the year, registered a 9.8 percent increase in sales to top $1 billion in revenues for the first time. Not only does that make it the second-largest segment of the business, behind only North American retail (up 4.5 percent to $1.12 billion), but its growth rate was second only to Asia’s, where revenues expanded 24.8 percent to $250.7 million.

In what has become a template for companies seeking greater control and greater recognition of revenues, Guess in 2005 took over its European jeans operations after the expiration of a license. The company philosophy about global expansion is summarized by a statement Paul made that year, which can be seen in the lobby of the company’s 355,000-square-foot headquarters east of downtown Los Angeles: “The world is our field.”

“Between 2004 and 2011, the company went from $43 million to $1 billion just in Europe,” Paul noted, “and this was without eyewear and watches, which are a huge business.  Even when times are good, Europe is an extremely challenging market because it’s so fragmented by language and customs. In the last two years, it’s been going through major turmoil. But we’re from Europe and we understand the different ways its markets and businesses function. However the economy is doing, there is always a local need that you have to address to be successful.”

Paul earlier this year reminded analysts that Italy, which accounted for more than half of European revenues four years ago, now accounts for less than 40 percent, and that its top 10 growth markets on the continent, including Germany and Russia, grew 29 percent last year and now represent almost 30 percent of the European business.

The Europe-Middle Eastern region concluded 2011 with 561 stores and, like Guess’s worldwide total, that’s expected to grow by about 50 percent to between 850 and 875 in five years, part of a global network expected to expand to between 2,290 and 2,365 from the year-end total of 1,559. (Those numbers exclude shop-in-shops and smaller formats operated by licensees or other affiliates.)

In Asia, growth will be somewhat more brisk, with the 423 total from last year expanding to 720 to 750. Its Asian operations are dominated by South Korea, with 283 stores and concessions and a rapidly growing G by Guess franchise among younger South Korean consumers.

“The kids there are really trendy,” Paul said. “They remind me of the Japanese kids from years ago, and it’s similar in that the Koreans today are driving technology the way the Japanese kids did. It reminds us of Tokyo in the Eighties.”

The brothers said they’re astonished by the industriousness of the Chinese and surprised by the slow pace of infrastructure development in India, where the company expects to double its store count to about 55 this year. “They’re totally opposite situations,” Paul pointed out. “In China, they’ve built more infrastructure in the last four years than the French did in 40. Meanwhile, in India, the infrastructure just isn’t there. They’ll build a mall in the middle of nowhere with no way to get to it.”

 

GLOBAL GUESSWORK

Another untapped market for Guess is Japan. The company exited a joint venture arrangement there in 2006 and has yet to return. “We’ll build our team now and go there directly, not with a licensee or franchisee, and build what Guess has to be for the next 20 years,” said Paul. “I like to look at the glass as half full, but they’ve really had 20 years of darkness there. Now we can start from fresh roots.”

The brothers believe that there are still opportunities to be harvested in Africa, but no single market has captivated Paul during his period as ceo more than Brazil, and not only because of its obvious status as a fast-growing market.

“We have 40 stores in Florida and there are 25 flights a day between São Paulo and the cities in Florida,” he said. “We have extremely strong brand recognition among Brazilians and when they hit our stores in Florida they basically shop, shop, shop.”

Guess, he reported, is in the “final stages” of negotiating a joint venture deal with a large Brazilian retailer.
“We knew the demand was there,” Maurice noted, “but it was a matter of finding the right partner.”

There are also a few category voids that the brothers would like to fill. They had a special affection for a home collection launched in the mid-Nineties that never quite caught on. “The majority of home collections are along the lines of elegant, classic, traditional,” Paul said. “We’re young, sexy and adventurous and we think there’s a fit there for a young person or a young couple who wants something less formal and more relaxed than the traditional brand.”

Maurice, shaking his head, commented that, as closely as people associate Guess with the bustiers and push-up bras worn by models in its ads, the company doesn’t have a North American or Asian lingerie or innerwear licensee.

“It’s such a natural for us,” the chairman noted, “and so tied to the sexy part of the business. But like in Brazil, you have to find the right partner.”

WORD ON THE STREET

Wall Street has been far from enamored with Guess in recent months but analysts see promising signs despite the headwinds of a troubled European economy, unfavorable currency rates going forward and even the continued pressure on margins due to higher commodity costs, which aren’t expected to ease until the second half of the year.

Sterne Agee’s Margaret Whitfield, who was impressed by the improvement in women’s merchandise last year, expects to see similar progress in men’s and accessories and, while it might be a short-term drag on profitability, the marketing efforts dedicated to the 30th anniversary to provide improved recognition for the Guess brand.

She’s among many who have words of praise for the continuing development of the G by Guess stores, which are distinguished by prices below those of Guess and above those of its outlet stores as well as by clear, distinct merchandising.

“It’s been their best retail concept, something that could very well work in the middle of the country,” she said. “It had the best [comparable-store sales] in the company last year and among the reasons for that is the clear delineation between denim, dressy and casual and the way they’ve made it easier to put outfits together with key items, footwear and accessories. This should help them boost units per transaction and really makes them stand out in the crowded world of teen retail.”

Eric Beder, analyst at Brean Murray, Carret & Co., believes that investors, who were attracted to Guess’ European penetration until the sovereign debt crisis on the continent became a liability, are still fearful about the status of the company’s overseas business.

“But I think they’re on the right track as far as turning around their U.S. business,” he said, “and I think that better numbers in the second and third quarters this year would go a long way to rebuilding their credibility with the Street.”

He’s upbeat about upcoming ventures in places like Japan and Brazil — “the Guess name resonates in both places” — but doesn’t believe those can produce immediate returns.

“It won’t be material for the 31st or 32nd anniversaries, but maybe after that,” he offered.

STILL FULLY ENGAGED

Maurice, who’s now 63, may be officially retired, but he describes himself as “still very, very much involved with strategy and expansion,” prompting his assistant to suggest that he “un-retire” in order to have more time for himself and his family. He is pursuing several personal passions, including the cultivation of his property in California’s Napa Valley and plans to bring Marciano Estates wine to market. The winery should be finished this summer and, like his property in Beverly Hills, is just blocks away from his brother’s home there.

“I talk to Paul five times a day,” he reported. “Our kids grew up together and the families are very close.”
As he put the final touches on his plans for Guess’s 30th anniversary last month, Paul turned 60, a number he admitted “gets caught on your tongue.” He said he’s healthy, feels great, continues to love his work, the country he calls home and even the travel outside of it.

There’s no requirement for retirement in Guess’s bylaws, he noted. “And the word ‘retirement’ doesn’t exist in my vocabulary.”

View Slideshow