Guess? (NYSE:GES) capped off fiscal 2007 with an outstanding fourth quarter. This comes as absolutely no surprise, considering that its monthly same-store sales were clearly pointing to another winning performance. The results led my Foolish colleague Seth Jayson to declare with enthusiasm, "Stupid, stupid Guess!" You have to read his take on the quarter to know that "stupid, stupid" means "good" -- it's that whole double-negative-makes-a-positive thing.
In the spirit of March Madness, will Guess? maintain its hot touch from beyond the arc in fiscal 2008? Or will this dapper dandy lose its hunger for victory, get out of shape, and become a has-been? To help us answer these questions, we turn to the company's end-of-fiscal-year earnings conference call.
One World, One Brand
In a recent Fool on Call for a competitor of Guess?, I noted that Polo Ralph Lauren (NYSE:RL) has utilized a similar strategy during its remarkable run over the past few years. One key to victory for both companies is that each identified recapturing brand control as vitally important. For example, Ralph Lauren recently made a targeted acquisition of Polo Jeans from Jones Apparel (NYSE:JNY), effectively bringing the important brand under the company umbrella.
During the conference call for Guess, it was evident early on in management's prepared remarks that brand "oneness" remains a top priority. The company held its first brand vision conference last year in Los Angeles, called One World, One Brand. The purpose of the event was to bring together its myriad distributors, licensees, partners, key customers, etc., to share with them the "Guess? brand vision in a global scale." CEO Paul Marciano reflected on last year's conference and the successful fiscal 2007 that followed, stating, "We believe that the conference had a huge impact in all the businesses in 2006 and gave us the best year ever."
Management just returned from its second annual One World, One Brand conference, and the leadership seems equally optimistic about the upcoming fiscal year. Five hundred participants gathered from 67 countries to spend three days in Singapore, while Guess' leadership team laid out a "clear vision once again of each retail concept."
No other info was offered regarding the conference, but a comment made by Marciano during the question-and-answer session of the call suggests that tight brand control will remain a priority. He states, "The challenge we have is to learn to say 'no,' because we don't want to lose control of the products starting to go too many places."
Based on my analysis of the company over the past couple of years, as well as comments made in this call, it is my hunch that unified branding in line with the vision displayed in the company's Guess? stores is at the heart of its game plan. COO Carlos Alberini concluded the call by stating that the company is "very, very different" than it was five years ago. One of the primary differences is the shift in focus from a wholesale model to a retail one. "I think the best is when you travel, any country you go, ask for a Guess? store -- you will find a Guess? store anywhere," Alberini said.
Because of this retail-focused vision, I don't have the same concern about Guess? that I do about Polo Ralph Lauren. It is true that wholesale remains an important and growing part of the company's business. For the fourth quarter, wholesale revenues increased by 27%, while operating margins in this segment increased an astounding 13 percentage points from the year-ago period as the company was able to leverage reduced SG&A expenses. Despite the success, and the fact that its wholesale products are now in 974 stores, the bulk of the company's sales and the focus of its growth platform remain in retail. I am pleased to see that retail will be a top priority this year.
G in 2007
In the call, management highlighted that in the month of January, comparable same-store sales increased 12.7%. This is impressive when we consider that it follows a 27% increase in comps in the same period a year ago. In light of the favorable response the brand is seeing from customers, Guess? will continue to push the retail envelope again this year.
In the next couple months, Guess? will unveil its first G store, which will target a younger audience. The first G store is set to open in Escondido, Calif., and by July there will be at least 24 other sites in operation. Should Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS), American Eagle (NASDAQ:AEOS), and other youth-oriented retailers be worrying? You better believe it. I expect the same sexy and edgy design that made Guess? so popular will also permeate the merchandise tailored for youth.
Its higher-end concept, Marciano stores, is also ramping up for growth this year. There are currently 25 units in operation in the U.S. and Canada, and plans are under way to increase store growth for this concept by 40% this year.
Guess? stores will continue expanding as well, but store growth will happen almost exclusively overseas, with the greatest international focus coming in Europe, Asia, and Russia. In response to one analyst, Marciano said, "The emerging market for us now is really Russia."
The company is planning to spend roughly $85 million in capital expenditures, the bulk of which will be used for "revenue-generating growth initiatives" like new store openings and store remodels. I'll reiterate: The evidence suggests Guess? is sticking to its bread and butter, retail, to continue driving growth. This is very good news for prospective Foolish investors.
Dapper dandy
We've spent our time discussing the company's focus on retail and brand vision, and I haven't had the chance to point out what may be the fashion trend for 2007 -- dresses. Polo Ralph Lauren indicated that dresses are going to be a point of emphasis in 2007, and Guess? is echoing the same.
The company's got sexy dresses, edgy jeans, and continued retail expansion through Guess?, Marciano, and now G. In the spirit of Dick Vitale and March Madness, I expect this dapper dandy to continue being a dipsy-doo dunk-a-roo for investors with a long-term investment horizon.
American Eagle Outfitters is a Motley Fool Stock Advisor recommendation. Discover why with a free 30-day trial. Gap is both a Stock Advisor and an Inside Value pick.
Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
