Guess? Sets Its Sights on Europe

In 1981, two French brothers from Marseille helped redefine the image of blue jeans in American fashion from utilitarian to sexy. After setting up a tiny apparel business in Los Angeles, Maurice Marciano and Paul Marciano persuaded Bloomingdale's (M) flagship New York store to take two dozen pairs of their slim-fitting "3-zip Marilyn" jeans. They sold out within hours, and the Guess? (GES) label was born. Guess quickly gained a wide following for its glamorous all-American style, personified by Naomi Campbell, Claudia Schiffer, and Carla Bruni, the top models who sported its wares in sexy black-and-white advertising campaigns. But after sales peaked in the 1990s, Guess lost momentum until the Marcianos launched a turnaround in 2004 that has produced steady growth ever since—including a 75% jump in revenues since 2006. Now the brothers are staging a homecoming of sorts, turning their attention back across the Atlantic. They plan to open more than 100 stores in Europe by the end of next year, in addition to 320 already in operation. On Sept. 4, Guess launched a 6,500=square-foot flagship boutique on London's Regent Street. "We were always interested in developing our European business, but we were being patient, waiting for the right moment," Chief Executive Paul Marciano says. (Maurice is chairman.) Sagging U.S. SalesThat moment looks to have arrived. The company's North American business has been flagging since last year, with sales at its U.S. retail outlets down more than 6% in the second quarter of this year. By comparison, Guess' European operations have been on a roll, with second-quarter revenues up 21%. Paul Marciano says Europe has generated 50% of the company's operating profit this year, up from only 15% five years ago. The European bounce began after 2005, when, after years of lackluster performance in the Old World, Guess acquired an Italian company to which it had previously licensed its European jeanswear business. "We lost control of the Guess product and brand integrity under our licensee," Paul Marciano says. Under direct management, European sales have soared since then from $43 million to $719 million, now accounting for more than one-third of the company's $2.1 billion in global sales. The Marcianos want to open more company-owned retail stores in Europe to decrease their reliance on sales through other retailers, which now account for 80% of European sales. (In the U.S., by contrast, only 20% of revenues are via wholesale distribution.) Guess is keen to move more merchandise through company-owned stores to save on markups and gain tighter control over the brand. The company learned that lesson early this decade in the U.S., says Christine Chen, a senior retail analyst at San Francisco brokerage Needham, when it was overexposed and performing poorly. "They cut down on their wholesale operations and started focusing on growing their retail business instead, leading to a huge turnaround," Chen says. Jeans are only a small part of the Marcianos' plan to woo European customers. Guess has positioned itself as a "comprehensive lifestyle brand," Paul Marciano says, offering a wide range of apparel for adults and children, as well as luggage and handbags, watches and eyeglasses, and even perfume. "In Europe, there are so many jeanswear companies that already exist, we wouldn't have stood out as a unique brand if we only sold denim," he says. Already, Guess has 90 European boutiques selling only accessories, which account for some 45% of the company's sales worldwide. With 91 of its European retail outlets in Italy and its European creative headquarters in Florence, the company says it is now eager for growth in Britain, France, Germany, and other northern European countries. Breaking into new markets can be tricky, though. British consumers initially spurned Guess when the company opened its first store in Covent Garden in 2005, a result of "product design which was done in Florence and reflected a style that may not have been appropriate for northern Europe," said Jeffrey Black, director of equity research at Barclays Capital (BCS) in New York in a recent research report. If Guess can keep up its momentum in Europe, it could soon outdistance bigger rivals such as Gap (GPS) that have struggled to appeal to consumer tastes in the region. Indeed, with $719 million sales in Europe last year—up a robust 34% over 2007—Guess is within striking distance of sales at Gap's 173 European stores, which slumped almost 6% last year, to $780 million. For the Marciano brothers, it could be a very profitable homecoming.

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