Mysterious, Critical E-Mail Stings Shares of Clothier Guess

Alongside jilted lovers and maligned bosses who have been wounded by e-mail gone awry, you can add clothier Guess Inc.

The Los Angeles-based company got pummeled on financial markets Wednesday after a half-baked e-mail, replete with important investing names, somehow got forwarded all over Wall Street and the rest of the country.

Guess shares fell almost 15% on the New York Stock Exchange after the e-mail, allegedly from a Salomon Smith Barney broker in Chicago and citing the investment house’s apparel analyst in New York, wrongly warned that Guess’ inventory numbers were grossly overstated, among other concerns.

The number of Guess shares trading hands Wednesday soared to 930,000 from a daily average of about 100,000. They finished the day down $2.38 at $13.50 on the NYSE.

Trouble is, the top-drawer New York analyst cited in the message does not cover Guess, according to the company and First Call/Thompson Financial, an earnings tracker that lists analysts who cover public companies. In fact, no one at Salomon actively covers Guess, according to the clothing maker. The e-mail went on to list some negative opinions about the company, but other analysts who do monitor Guess’ finances say they strongly disagree with the assessment.

“It doesn’t take much to set off investors, given this type of industry backdrop,” said John Rouleau, a retail analyst who covers Guess for Gruntal & Co. in Chicago. “The investment side shoots first and asks questions later.”

The e-mail note from P. Campbell Hillstrom, a Chicago-based broker, was dated June 20.

Hillstrom and Salomon could not be reached for comment, but Hillstrom told the BridgeNews wire service that the message “shouldn’t have gone out to people.”

The note describes a conversation with Carol Pope Murray, an analyst well known for her “Apparel By Carol” reports. It cites concerns at four companies, including Guess.

“She thinks it is not unlikely that they miss numbers in the months ahead, and that they will have big problems down the road,” the e-mail said.

The note also alleges that Guess jeans are no longer “hot”; that the management team is not capable of handling the company’s expansion plans; and that “its sales backlog is grossly inflated because it sends product to its retail stores and books it as backlog.”

The last comment was the biggest problem.

“It’s like, why us?” said Guess spokesman James White. “We haven’t had a change in projections and analysts haven’t changed their estimates or their ratings of us.”

Murray could not be reached for comment.

Guess follows standard industry practices of listing only its wholesale orders--those from department stores and specialty retailers--under a line item called “backlog,” an industry word that means the dollar amount of orders placed but not yet shipped, according to the company and other analysts. Analysts use that number as a way of projecting a company’s sales.

Guess’ first-quarter backlog, reported in a conference call with analysts on May 2, was $160 million, an increase of more than 70% over the same period a year earlier.

“That’s an absolutely phenomenal number,” Gruntal analyst Rouleau said.

During the conference call, however, someone asked if that number also included Guess’ anticipated shipments to its own retail stores. That would make for a dramatically different interpretation of backlog, because instead of being made up of money due from outside vendors, it would also include clothing the company hoped to sell through its own channels.

After a moment of confusion, Guess executives said, they told the analysts that the backlog figure was based only on orders from outside retailers, the standard practice the company has always followed. In fact, White said, the company made a point of calling analysts and investors back after the conference call just to make sure the point was clear.

What’s more, White said, if the company were using that kind of creative accounting, it would mean a downward change in Guess’ earnings projections for the next quarter and the full year. White said the company told analysts and investors at several points that Guess expected earnings to be right on track--no need for any revisions, because there were no material changes in sales projections.

According to a conference call roster, Murray was not a participant. Two other Salomon associates were, White said. The company has not had a conversation with analyst Murray for about nine months, and she is not considered to actively follow the company.

Guess also took exception to other remarks in the e-mail, not an uncommon reaction by companies to the opinions of the people who critique them. But in this case, other analysts more familiar with Guess management agreed with the company.

Guess reported sales at its own stores were up 13.4% in April and 9% in May for stores open at least a year--numbers that were several times higher than the retail industry overall--meaning the brand is a hit with shoppers, said Darren Barker, an analyst with Wedbush Morgan Securities in Los Angeles who closely follows the company.

As for Guess’ expansion plans, Barker said, they are not terribly aggressive and he has no worries about the company being able to make good on them. The 180-store chain has said it will open 60 stores this year and 85 more in 2001.