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Retail Focus Fuels Guess

The momentum keeps building at Guess Inc. as the company logs double-digit gains in Q3 earnings and sales and raised its guidance.

The momentum keeps building at Guess Inc.

This story first appeared in the December 5, 2007 issue of WWD.  Subscribe Today.

Coming off double-digit growth in earnings and sales for the third quarter, company executives on Tuesday raised their earnings per share guidance for the year and predicted Guess’ European operations alone could one day be a billion-dollar business. The growth comes as a result of Guess’ increased focus on its own retail operations, as well as the development of additional brands and collections.

“Guess is not a wholesale company, but a retail company. It is a global company. This is a new beginning for the company once you [bring] the different concepts to [all] the regions of the world. There is plenty to execute. It is a question of discipline, a clear strategy and brand protection around the world,” said Paul Marciano, chief executive officer, in a telephone interview.

“We continue to see the world as our field, not just the U.S. or Canada. That’s why the company is so different today than 10 years ago or five years ago. More than 50 percent of our earnings are outside of the U.S.,” Marciano explained, emphasizing that the company relies less on the U.S. market when the dollar is declining and benefits from the overseas markets when those currencies are on the rise.

For the three months ended Nov. 3, net income soared 32.5 percent to $58.3 million, or 62 cents a diluted share, from $44 million, or 48 cents, in the same year-ago quarter. The consensus from analysts called for 58 cents a diluted share.

Total revenues spiked 42.7 percent during the quarter to $469.1 million from $328.8 million. Total revenues include a 43.2 percent gain in sales to $446.7 million from $311.9 million, and a 32.6 percent increase in royalty income. For the quarter, the wholesale segment increased 75 percent to $76.9 million, while the European segment rose 78.8 percent to $159.4 million.

For the nine months, income jumped 53.9 percent to $131.3 million, or $1.40 a diluted share, from $85.3 million, or 93 cents, a year ago. Total revenues rose 44.2 percent to $1.24 billion from $856.4 million. Included in total revenues was a 44.4 percent increase in sales to $1.17 billion from $810.9 million and a 41.2 percent gain in licensing income to $64.3 million from $45.5 million.

The company said it expects diluted EPS for the fiscal year ending Feb. 2 to be between $1.93 and $1.96, on forecasted revenues of between $1.68 billion to $1.7 billion. Wall Street has the company pegged to earn $1.92 a diluted share.

The company also provided fiscal year 2009 guidance, predicting diluted EPS between $2.35 and $2.45, on expected revenues of $1.97 billion to $2.05 billion. The consensus among analysts is $2.29.

“We were able to do this because the company invested a lot in infrastructure to be able to drive the business forward. We are well positioned in Europe due to new investments in our infrastructure there, along with new showrooms and new [management teams],” said Carlos Alberini, president and chief operating officer.

North American same-store sales gained 15.8 percent in the quarter, compared with an increase of just 8.9 percent a year ago, said Alberini. He explained the company saw double-digit comps sales growth in September and October that were on top of the double-digits posted in the same two months last year.

“This represented our 17th consecutive quarter of earnings growth and our 19th consecutive quarter of same-store sales growth in North America,” the president said.

Alberini noted that with the company focused on the “lifestyle” aspect of the brand in multiple categories, the possibility for expansion is great, particularly in Europe and Asia where the company is just establishing a deeper presence.

“We are opening stores in certain markets aggressively, and addressing markets where the brand is very well known, but market penetration still is low. In Europe, where a few years ago the business was nonexistent, the [operation] now will be $500 million for the year. So far it is $386 million for the nine months. The profits are remarkable, and our operating margin was 29.8 percent, or $45.8 million, for the quarter in Europe,” Alberini said.

Marciano expects Europe to be a “$1 billion” business in the next few years, and foresees growth in northern and Eastern Europe, as well as Russia. The company is setting up new headquarters in Lugano, Switzerland, and has hired Massimo Macchi as president of Guess Europe. He has worked at Gianfranco Ferré, IT Holdings, Bulgari Group, Gucci Group and Testoni Group. Marciano also said Guess hired Jacques Mitterand, former chief financial officer of Mexx Canada, as the company’s new chief operating officer of its European operations.

Alberini noted that while the company is aware the North American consumer is under pressure, which is why Guess expects comps in the low-single digits for next year, several store openings for its different concepts are planned, providing opportunities here and abroad. At least 69 stores will open in the U.S., Canada and Mexico combined.

As of Nov. 3, the company operated 365 retail stores in the U.S. and Canada and 557 retail stores outside North America, of which 56 were directly owned.

In addition, Alberini said the company’s goal is to “chase the business,” meaning making investments in infrastructure and having lean inventories so that it can sell more goods at full-price while training “the customer to buy when the merchandise hits the selling floor.”

As part of its sourcing initiatives, the company has cut almost three weeks out of its product development cycle, which now averages 34 weeks for the core Guess line, according to Alberini. The firm is also working closer with some of its raw goods suppliers. By taking positions in key fabrics, for example, the company can place new orders if an item is selling well.