Guess on Unsure Financial Footing Amid Possible Loan Covenant Violation

Fashion jean designer and retailer Guess Inc. might fall into violation of its $125-million lending agreement with Chase Manhattan Bank in the fourth quarter, even as it struggles to work off bloated inventories of its distinctive apparel and close poorly performing stores.

Moreover, top executives of the company sold more than 100,000 Guess shares in late August and early September--prior to its recent plunge--at more than $20 a share, according to InsiderScores.com, which tracks stock sales by corporate officers.

Guess shares closed at $5.19 Thursday, down 19 cents on the New York Stock Exchange. The stock is off more than 75% this year because of poor financial performance. Most of the decline has come since the executives sold their shares.

Company representatives did not return repeated calls from The Times seeking more information about the lending agreement and the stock sales.

The Los Angeles-based company said in a Securities and Exchange Commission filing Tuesday that it could fall into violation of a covenant in the lending agreement “based on current earnings expectations” for the fourth quarter, which includes the important Christmas sales season. The company said its fourth-quarter profit will be about a quarter of the $19 million earned in the same period a year ago.

Guess said in the filing that it is negotiating for a waiver in its lending agreement, but “there can be no assurance” that the waiver would be granted.

Analysts said it’s not clear how a violation might affect the company, which did not offer any details. But they said lenders typically put spending limitations on companies if they violate loan covenants, something that could slow expansion efforts at Guess.

Already the company has slashed the number of new stores it plans to open next year from 60 to 25. Guess also sells its brand of jeans, shirts and other apparel to department stores and through 198 stores it owns.

Without more information, it’s hard to judge the severity of the potential violation, said Darren Barker of Wedbush Morgan Securities in Los Angeles.

“The company is still generating sales and has a sound balance sheet. We need to know more,” Barker said.

News of the lending problem surfaced even as Guess took another step Thursday to revamp its top management to help deal with a slowdown that has forced it to sell millions of dollars of goods to discount retailers such as T.J. Maxx and Marshalls below cost.

Guess said that Brian Fleming, its chief financial officer, resigned effective immediately. Just a week ago, Fleming was meeting with Wall Street analysts by teleconference to explain the company’s poor third-quarter financial results. Guess offered no reason for Fleming’s departure.

On Wednesday, Guess said it hired Carlos Alberini to the new position of president and chief operating officer. Alberini was senior vice president and CFO of Mahwah, N.J.-based Footstar Inc., which operates more than 600 shoe stores, mostly under its Footaction division.

Last week, Guess reported that earnings fell 60% to $5.6 million, or 13 cents a share, in the third quarter compared with the same period a year earlier. Revenue rose 39% to $216.4 million, primarily because of new-store openings.

The decline in Guess shares and its finances comes at a time of growing frustration among Wall Street analysts over how the company communicates with investors.

“When a company like Guess says that they will have earnings of 35 cents a share with just a week left in the quarter and then it comes in at less than half of that there’s a good indication that they don’t have a handle on what’s going on,” said John Zolidis, an analyst with Sidoti & Co. in New York.

The sale of shares by company insiders prior to the recent negative disclosures has raised eyebrows on Wall Street, analysts said.

“Any time a management team sells shares prior to bad news, [it] calls into question how much they knew and when they knew it,” Barker said.

The three executives--co-Chairman and co-Chief Executive Maurice Marciano, his brother and executive vice president Armand Marciano and Alice Kane, a director, sold a combined 116,750 shares at prices ranging from $20.38 to $22.75, according to InsiderScores.com.

Guess, which has 3,600 employees, is controlled by Maurice, Paul and Armand Marciano, the three brothers who collectively own a majority of the company’s stock.

Maurice has handled the wholesale end of the business, dealing with the department stores that sell Guess merchandise, while Paul, also co-chairman and co-CEO, runs the company’s chain of boutiques, outlets and children’s stores.

Zolidis said that though the brothers have shown a flair for design and merchandising that has turned Guess into one of the nation’s premium designer brands, their recent problems with inventory and markdowns prove they need an executive who can handle “the financial nuts and bolts of the business.”

He said Alberini’s hiring should help improve financial management.

“But the near-term prospects are not positive,” Zolidis said. “Christmas looks bad for them. They have new management coming in that’s going to have to get up to speed, and the retail environment doesn’t look that good.”