Guess how to blow $1.5 billion

It takes just five words to understand what Paul Marciano once envisioned for Guess, Inc. and the dominating control he and his brothers have exerted on it. Scrawled in a looping, cursive script and lit up like a neon bar sign, the quintet hangs on the first-floor wall of Guess’s Los Angeles headquarters opposite supersize images of its iconic, nearly nude models: ‘The World Is Our Field’. “It’s my handwriting,” says Paul Marciano, Guess’s 63-year-old co-founder, chief executive and vice chairman, underscoring the point. “All of this is my handwriting.”

Technically, Guess went public in 1996. As far as control goes, though, it remains as much a family-run company—family-dominated, really—as when it was founded in 1981. Mercurial, obsessive and opinionated, Paul and his siblings, Maurice, Georges and Armand, erected a denim empire by imposing their will on everything: The jeans (tighter, lighter and more stylish), the marketing (the iconic and voluptuous Guess Girls, most notably Anna Nicole Smith, who turned a workman’s staple into a garment as seductive as lingerie) and, yes, even the glowing lettering in the headquarters.

For much of their run it was hard to argue with their domineering ways. When Guess’s stock reached an intraday high of $57.20 in October 2007, the siblings, who owned nearly half of the company, were collectively worth an estimated $2.7 billion; Maurice and Paul were individual billionaires.

But the past few years have not been kind to the family business. Sales have declined for three consecutive years, down to $2.4 billion, and profits have plummeted to just $95 million, the lowest in a decade. The stock is down 65 percent from its high, a period when the S&P 500 surged 40 percent. Today the Marcianos barely make Forbes’s list of America’s 200 Richest Families, clinging to the last rung with a collective worth of $1.2 billion.

The Marciano clan has split at the seams as well. Georges, 68, left in a huff in 1993 after selling his stake to his brothers. An exile living in Montreal, he is now suing Guess over alleged trademark infringement (see box). Armand, 70, who never made much of a mark, quietly departed a decade after Georges, following a medical leave. That left Maurice and Paul—but Maurice, 66, stepped down from his co-CEO role with Paul in 2007, becoming chairman while also focusing on his 55-acre Napa Valley estate and winery. He reduced his role further in 2012, officially retiring as a Guess executive. While he and Paul still seem close socially, he recently has found himself more out of the picture at Guess as he recovers from a car crash in May. That leaves Paul, the youngest, by himself at Guess.

It’s been a lonely place lately. “It’s no secret that our business has changed drastically,” says Paul. Still he’s not thinking about anything too radical: “Guess will always be loyal and true to its roots”.

That may ultimately be its undoing, according to numerous ex-employees and Wall Street analysts. “You need new management. Some new blood,” says Morningstar’s Bridget Weishaar.

The Marcianos’s own youth was spent far removed from the southern California beaches and pinups that would later become key elements of the Guess image. They grew up poor, sons of an Orthodox rabbi, in Marseille. When they were young, they opened a series of stores in France. They left 12 behind (as well as an unpaid nearly $10 million tax bill, eventually settled for $2.2 million) to move to America in 1977.

Guess began in 1981, with Georges and Maurice first, then Armand and Paul. Georges designed the clothes, burnishing Guess’s signature style: stonewashed denim, lighter in colour, softer and more form-fitting than competitors’. Maurice handled product development. Armand ran distribution. Paul created the advertising, all of it in-house.

Sex sold Guess jeans. Paul developed ads indelibly linking the brand with steamy images of women wearing practically nothing but Guess jeans. “All of our pictures are seductive but elegant,” he says. He opted for unknown models, demonstrating an eye for picking a face that would connect with his customers while launching the careers of many famous models: Claudia Schiffer, Naomi Campbell, Laetitia Casta and Smith.

Guess’s first big hit was the Marilyn jean, pants with such a snug fit, it had three zippers: One at the fly, one at each ankle. While the brothers had their own Beverly Hills store, they also sold their jeans to Bloomingdale’s, which priced them at a then head-turning $60. In just one year, sales hit $6 million.

Their expansion plans quickly exceeded their bank account. To raise cash, the Marcianos sold a 50 percent stake in Guess for $4.7 million in 1983 to the Nakash brothers, owners of Jordache, an established clothier, which already had plants in Hong Kong. The two denim phenoms apparently had a gentlemen’s agreement that Jordache would not knock off Guess, but shortly after the deal was done, the Marcianos alleged that their new partners copied Guess’s designs. It eventually led to a courtroom brawl.

The Nakash brothers, in turn, accused the Marcianos of operating a kickback scheme and paying themselves double the salary outlined in the employee contracts. According to previous Forbes reporting, things got even murkier when the Marcianos established a cozy relationship with an IRS agent, feeding him allegations about the Nakashes’ tax dealings—a congressional panel later accused some high-ranking IRS officials of misconduct; the Marcianos reportedly denied any wrongdoing. The two sets of brothers settled in 1990, and while the terms were never disclosed, the Marcianos emerged from the melee the sole owners of Guess, which thrived amid the ordeal.

At that point, the Marcianos began to turn on one another. Georges wanted to put Guess into lower-tier stores, like JC Penney. His brothers hated the idea. Different camps formed within the company, with each pledging allegiance to either Georges or the other three. Georges eventually gave in and sold his stake to his brothers in 1993 for $214.2 million. To finance the purchase, they had to borrow $210 million, and $105 million was still outstanding three years later. To raise money, the brothers decided to take Guess public and bunkered in. “I’ve never worked for any boss who worked harder than they did,” says Karen Ioli, a former licensing vice president who reported first to Georges, then to Paul. “We worked Saturdays—they worked Saturdays. It was a challenging place to work, difficult at times.” Their chief obsession, pre-IPO, was the exclusivity of their brand. Guess started axing any wholesalers that might tarnish that image, though it continued to sell in outlets like Bloomingdale’s and Dillard’s. The wholesale business, some 67 percent of revenue in 1993, shrunk to 56 percent within two years.

Things did not ease up after the 1996 offering. One former Guess executive recalls a particularly fraught meeting occurring about the logo on a pair of jeans. A distraught Maurice demanded, at the top of his lungs, that the logos get replaced immediately.

“Maurice, what are we going to do with all the inventory?” the executive remembers asking.

Maurice didn’t miss a beat. “Burn it.”

“Now, I don’t think we ever burned the jeans, but there was a theatre to Guess,” the executive says, “and that order to burn them was part of the theatre.” (Guess denies any knowledge of the incident.)

The theatre moved out of the offices, as Guess continued to shift away from wholesale to its own branded stores, including in Europe. Customers responded, helping drive up sales by 40 percent in the four years following the IPO.

Emboldened, the Marcianos rolled out a handful of new store formats all around the world. One devoted itself to accessories. G by Guess, meanwhile, positioned itself as the middle ground between factory and regular prices. Yet a third chain received a particular burden: The Marciano name. Those Marciano stores—half the size of the older Guess stores, with a more boutique feel—carried higher-priced women’s clothes. They also agreed, despite those plans elsewhere, to sign licensing deals in Asia, where they apparently felt it was more difficult to get a foot in the door.

While the Marcianos had never shared power with anyone, they found a valuable lieutenant in Carlos Alberini, who had spent time at Bon-Ton and the corporate entity that became CVS before joining Guess in 2000. At Guess, he set strategy with the Marcianos and helped communicate those plans back to other executives in the organisation. In that decade, the number of stores grew from 427 to 1,373, and sales ballooned to $2.5 billion.

For Guess, the turning point can be traced to two departures. The first, Maurice’s, was in 2007. He exited the co-CEO position, taking a slowly diminishing role as Guess’s chairman. He threw himself into building a winery—Marciano Estate—on property he’d bought one year earlier, a historic patch of northern California once owned by a Gold Rush-era tycoon.

While Maurice toiled in Napa, Alberini left in June 2010 to run Restoration Hardware. Since he left, the stock has dropped about 40 percent as the broader market almost doubled. Almost as dramatic, the fall in Guess stock since Maurice retired in January 2012: A 30 percent drop versus the market’s 60 percent climb.

Guess has historically struggled to keep its people in the fold and content. “The Marcianos are inconsistent when managing staff and the overall company culture. It’s a challenging environment,” says a departed Guess vice president, who, like nearly all ex-Guess employees, pleaded for anonymity to avoid trouble with the Marcianos. A big part of the problem was the poisonous atmosphere. “It was like World War III,” says one ex-merchandising vice president, describing a climate where the Marcianos fixated on people’s mistakes. Paul won’t comment. Alberini, meanwhile, says he “never saw them in that light”.

They also never seemed able to stick to a strategic plan, a problem that has been catching up with them. “You could work with senior leadership, establish your three-to five-year plan, and if accessories had two great weeks in a row, half of the store was converting to accessories,” says the former vice president. “It’s never about the longer-term vision. It’s never, ‘How are we going to grow this?’ That’s not them.” (Paul again wouldn’t comment.)

That shortsightedness has wrecked profitability. In its key North American retail business—still the biggest part of Guess—comparable store sales, a key barometer of a retailer’s health, have declined by 4.9 percent and 3.7 percent, respectively, in the past two fiscal years. Net profits, not coincidentally, are off 40 percent. Ironically, the most profitable segment of the business now is the tiny licensing division. It accounts for 4.6 percent in sales but 80 percent of profits.

Paul has responded to the business’s decline with some store closings, stopping short of anything drastic, a small capitulation to the criticism that Guess had overexpanded. In North America its store count decreased by 5 percent to 481 in three years. Many of the closings were the newer store formats that Maurice and Paul had developed in the 2000s.

Paul has also been merging some of the higher-priced women’s clothes from the Marciano stores into the main Guess stores. Plus, the brand’s front woman, Gigi Hadid, is becoming high-profile, recently appearing in Sports Illustrated’s swimsuit issue. Yet a recent trip to a mammoth New Jersey mall reveals a desultory scene. The Marciano store is empty. The Guess store has a few people, examining a head-scratching assortment of items: Bejewelled booty shorts and many garments adorned with Guess emblems. The ubiquity of the logo—it’s stamped on perhaps two-thirds of the store’s merchandise—makes any purchase feel like a submission to idolatry.

Nearly 3,000 miles away, in a Guess HQ conference room, Paul defends the future of his family business. “We believe in our brand. We believe that if it has to be a smaller company, so be it,” he says. “If that means we have to shrink the number of our stores from 1,600 to 800, we’ll do that. Our effort is to believe that we will be in business 10 years from now, 20 years from now, because that is my dream.” If the last of the domineering Marcianos needs to will his vision, then so be it.

 

Escape to Montreal
For many years Georges Marciano was the brother most associated with the Guess brand, the creative genius behind its hit designs. He left abruptly in 1993, selling his stake to his brothers for $214.2 million. He no longer had anything to do with the brand. He was busy spending his spoils on wine, art, cars, watches and jewellery, including a $16.2 million diamond he named after his daughter, Chloe.

His life started to unravel in 2003, when Marciano and his wife, Megan, divorced. In the following years he engaged in a series of nasty lawsuits with former employees, whom he accused of stealing from him. His chief bookkeeper testified that he had threatened to “ruin” her; another bookkeeper said his behaviour had driven her to seek therapy and put her into a deep depression. The court ruled in the employees’ favour. Georges subsequently decamped for Montreal in 2009, while those employees have struggled to collect money from him. Their dispute apparently remains ongoing. Through a spokesman Georges declined to comment.

These days, Georges is trying to rekindle his design success—this time as a solo act. He opened a boutique bearing his name in Montreal last August in a historic part of town just steps from the beautiful Notre-Dame Basilica. Yet he hasn’t totally put his old life behind him. He’s suing Guess and a Kuwaiti firm, Universal Perfumes & Cosmetics, for $21 million, over alleged trademark infringement. He says he spotted Universal Perfumes selling a line of perfumes bearing his name on its website and believes there’s a link between Universal and Guess. He refuses to go into detail about why he suspects a connection, which isn’t immediately apparent. Calls to Universal were not returned; a lawyer for Paul says the lawsuit has “no merit” and adds that Guess hasn’t had a perfume licensee for “many years”.

—A.B.