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Paul Guez, Denim King, Bounces Back From Cocaine, Bankruptcy
By Seth Lubove - August 3, 2006 00:07 EDT


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Aug. 3 (Bloomberg) -- It's hard to say when the cocaine made Paul Guez go completely crazy.

It could have been in 1988, when Guez was hauled away in handcuffs by Federal Bureau of Investigation agents after allegedly threatening to kill the judge overseeing the bankruptcy of his Sasson Jeans Inc. Maybe it was in 1987, when he was accused of assaulting two U.S. marshals who were attempting to seize Sasson's business records. (In both instances, Guez was later acquitted.)

Then there was the lawsuit against his brothers Gerard and Hubert in 1986, blaming them for illegally using the Sasson name. (The three eventually settled.) And the time Guez was arrested in 1984 for allegedly tapping the phones of his estranged wife. (A New York grand jury declined to indict him.)

Whatever the case, by 1988, Guez was left as penniless as when he arrived in the U.S. from France in 1976 with some samples of tight, French-cut jeans that would serve as the basis for Sasson.

``The empire did not implode,'' Guez, 61, says. ``It was me. I had severe drug and alcohol addictions.''

Clean and sober now for 18 years, Guez has bounced back in time for the fashion world's latest fling with designer denim. He's built a new company, Los Angeles-based Blue Holdings Inc. and controls or owns stakes in a sprawling network of premium jeans brands, retail stores and Mexican contract manufacturing plants.

Guez has made a fortune by taking Blue Holdings public on the Nasdaq Stock Market. With the stock trading at $5 on Aug. 2, Guez's 72 percent stake was worth about $93.3 million. Once broke, he now lives in a beachfront house in Santa Monica, California, and travels by private jet.

Denim Boom

Guez got back in the game in 2001, just as the market for primo jeans took off. Since then, jeans from brands such as 7 For All Mankind, which go for $150 a pair, have become de rigueur for dressed-down celebrities. Luxury jeans are often made to look well-worn. They come scuffed, ripped, punctured, patched and even splattered with paint.

Characterized by online journal Slate as ``fashion's equivalent of a secret handshake,'' high-end jeans have morphed into unlikely status symbols. To designer devotees, back-pocket designs -- a brand's defining feature -- telegraph who the wearer is. The pants have developed a reputation as the Wonderbra for the rear end, for their supposed ability to lift, squeeze and shape the derriere, says Marshal Cohen, chief retail industry analyst at NPD Group Inc., a Port Washington, New York-based market research firm.

Denim is big business. U.S. sales of women's jeans rose 10 percent to $7.6 billion in 2005, according to NPD Group. Premium jeans accounted for 18 percent of the market, up from 12 percent in 2004, NPD says. The top target markets, Cohen says, are girls and women in the 13-24 and 45-54 age brackets.

``Maybe they fit a little better, but the fit is the least of the reasons,'' Cohen says of designer jeans. ``It's almost like a collectible.''

Challenges Ahead

The future of Guez's empire depends on the whims of fashion, and Guez can't afford to misread tomorrow's trends. Blue Holdings is a stock market pipsqueak. Daily trading in its shares averaged about $102,000 in the three months ended Aug. 2, which means only a few sell orders can sink the stock.

Fading denim sales at U.S. chains such as New Albany, Ohio- based Abercrombie & Fitch Co., which targets college students and suburban kids, have unnerved some investors and hit Blue Holdings stock hard, says Eric Beder, an analyst at New York-based Brean Murray, Carret & Co. As of Aug. 2, Blue Holdings shares had tumbled about 80 percent from their record high of $28.71.

Preparing to Sell

Some of the company's biggest shareholders -- insiders such as Guez who collectively control 92 percent of the company -- are getting ready to sell. In May, Blue Holdings filed with the U.S. Securities and Exchange Commission so insiders could unload as many as 23 million shares. Guez says he'll keep his stock.

Guez is as combative as ever. Two of his designers left after a dispute with him and founded Los Angeles-based True Religion Apparel Inc., a designer jeans maker with sales of $103 million in 2005. Guez has sued ``a number'' of other companies, according to SEC filings, accusing them of either counterfeiting or ripping off his back-pocket designs.

``Listen, my father should have been dead five times with the life he led,'' says Daniel Guez, 29, chief executive officer and 41 percent owner of Los Angeles-based People's Liberation Inc., which makes jeans designed by celebrities such as singer Justin Timberlake and tattooed rock drummer Tommy Lee. ``You either love my dad or hate him. There's no medium.''

As a founding father of designer denim in the 1970s and '80s, Guez has proven that practical economics don't always apply to fashion. Success depends on buzz and on plying celebrities with freebies so they get photographed in your clothing.

Oo-La-La

Guez built Sasson using advertising drenched with sex appeal and the memorable ``Oo-la-la Sasson'' jingle, as well as an ambitious licensing program that slapped the brand on everything from watches to lingerie. Sasson's sales soared to $700 million in 1984.

Guez's success afforded him a luxurious lifestyle, with a Manhattan town house, a yacht and half of 500-acre (200-hectare) Water Island in the Caribbean. Heavy drug use took its toll, and Guez had lost control of the business by the time he declared bankruptcy in 1986. By then, he was better known for his courthouse antics than for his business talents.

``I had a disease,'' Guez says of his drug habit. Eventually, he checked himself into rehab for 28 days.

The End of Sasson

For Sasson, the damage was already done: The company was liquidated, and the Sasson trademark was sold, eventually landing in 1999 at Wal-Mart Stores Inc., which hasn't done anything with the brand.

``We really have no plans to discuss,'' Wal-Mart spokeswoman Linda Blakely says.

Guez says he'd like to buy back his old brand to bring closure to the episode. ``Sasson, the business, was good. It had no problems,'' he says. ``I had a huge problem.''

While Guez's life was spiraling out of control, his younger brother Hubert had set up a contract manufacturing operation in Mexico, where he made jeans for such brands as Bill Blass Ltd. Stuck with 53,000 irregular pairs, Hubert asked Guez in 1991 whether he could help sell the inventory for $4 apiece. Guez got $9.50 a pair.

``I saved his butt, basically,'' Guez says. ``So Hubert came to me and said, `I guess we're partners now.'''

Guez had unloaded the inventory on the Value City department store chain, owned by his friends, the Schottenstein clan of Columbus, Ohio. Following the sale in 1992, Guez got a life- changing proposition from patriarch Jerome Schottenstein, then 66.

``I was broke, basically, and he says, `Paul, I would like you to participate in a charity. You have to pay $100,000,''' Guez says.

Schottenstein's Offer

The charity was to pay for a new English translation of the Talmud, the sacred Jewish text. ``I'm sure he knew I was broke,'' Guez says of Schottenstein. ``Then he sent a rabbi to make me sign a contract for $100,000. My wife exploded laughing, `Like from where?' I didn't know from where, but I did it.''

The ``where'' turned out to be the Schottensteins themselves. Soon after Guez agreed to make the donation, Jerome Schottenstein gave him an order for 12,000 pairs of jeans for Schottenstein's Warrendale, Pennsylvania-based American Eagle Outfitters Inc. -- enough to cover Guez's donation. That was followed by an order for 650,000 pairs. To finance the product, Schottenstein lent Guez $500,000.

``I didn't even have a bank account,'' Guez says.

Guez's Comeback

After Schottenstein's death in 1992, his son Jay sold Guez 1 million shares of American Eagle for $12 a share when the stock was trading at $16, even arranging a line of credit to finance the $12 million purchase price. The stock soared to more than $70 by 1999, making a now sober Guez wealthy again.

``The family strongly believes the more you give, the more you get,'' Schottenstein spokesman Michael Broidy says. ``Good things happen if you do good things.''

In 2000, with his newfound riches, Guez hungered to move back into the spotlight as a maker of an original brand.

``It's more glamorous than going to Mexico and traveling with buyers from chain stores,'' he says.

At the time, designer jeans had again exploded onto the fashion scene in the form of Vernon, California-based 7 For All Mankind, the denim powerhouse founded by entrepreneur Peter Koral. Combining a flattering, curvaceous fit with endorsements from the likes of singers Jessica Simpson and Britney Spears, ``Sevens'' became a hit beyond the trendy boutiques, such as Fred Segal in Los Angeles, that are the launching pads for luxury denim.

``Seven broke open the whole thing for the universe of retailers,'' says Ilse Metchek, executive director of the Los Angeles-based California Fashion Association. ``They took a high- end jean into Bloomingdale's and Macy's and Neiman Marcus and Saks.''

Incubator for Designers

Guez set out to create a sort of incubator for up-and-coming designers. He started in 2001 with a line called Hippie Jeans, designed by the husband-and-wife team of Jeffrey and Kymberly Lubell. The partnership unraveled within a year when the Lubells complained to Women's Wear Daily that Guez was poaching their designs. The couple went off and founded True Religion. They didn't return telephone calls seeking comment for this article.

``They did a great job,'' Guez says of the Lubells. ``There were too many people and too many personalities and too many brands in that little place, and the egos of the designers were clashing.''

``They respect each other, but I don't think they share Christmas cards,'' says Brean Murray's Beder, who follows both companies.

`Good Catalyst'

Guez followed Hippie Jeans with such brands as Antik, Taverniti So and Yanuk. His daughter Irene, 33, is vice president of sales for Taverniti So.

Guez hires a design team to develop the clothing while he handles sourcing, finances and distribution. In the case of Taverniti, French designer Jimmy Taverniti; his wife, Ann; and their assistants hole up in a secluded, cramped room in the back of Guez's factory and headquarters in the industrial city of Commerce near Los Angeles. They surface at midday to share a communal lunch at a conference table in Guez's office.

``I am a good catalyst,'' Guez says as he devours a meal of osso buco with porcelain-skinned Taverniti. ``I am honest, courageous and I know how to make something bigger.''

Like most of today's luxury jeans, Taverniti's are designed to appear as weather-beaten and trashed as if wearers had owned them their entire lives. Guez outsources that task to Richard Kim, whose International Garment Finish Inc. is among the top denim ``laundries'' in the Los Angeles area that are responsible for adding ersatz authentication to jeans.

Torturing Denim

Operating out of a decidedly unfashionable section of Long Beach, amid auto body shops and menacing guard dogs, Kim's workers tear, sandblast, puncture, cook and otherwise torture denim. In one part of Kim's factory, a woman folds and irons crotches to form the signature ``whiskers'' found on many designer jeans.

In another section, giant Tonello washing machines stonewash jeans in sacks of pumice. Elsewhere, workers artfully apply paint splotches or send the jeans through curing ovens set to a secret temperature Kim won't reveal.

``We use lasers and other stuff so that by the time we finish, it will be impossible for Taverniti's competitors to duplicate,'' Kim says as he shows off a pair of jeans that sparkles under a hand-held black light. ``For the discotheque,'' he says.

Blue Goes Public

To finance his ambitions, Guez took Blue Holdings public in April 2005 by merging it with Marine Jet Technology Corp., a listed shell company. The deal -- a so-called reverse merger -- enabled Guez to access the capital markets without having to arrange an initial stock offering.

As the CEO of a public company, Guez has had to disclose more about how he runs his empire. Blue Holdings SEC filings reveal related-party transactions that have drawn scrutiny from analysts such as Beder, who is otherwise a fan of Guez. Since March 8, Beder has had a ``strong buy'' recommendation on the stock and a target price of $10.

Guez has cut millions of dollars in deals among companies he controls or owns stakes in. In 2005, Blue Holdings bought $3 million of fabric and finished goods from Blue Concept LLC, another company Guez controls.

Inside Deals

Blue Holdings also pays Blue Concept a monthly fee of $78,500 for human resources, sales, purchasing and other services, according to SEC filings. Blue Holdings paid another company, Azteca Production International Inc., $2 million in 2005 for ``sewing and processing charges,'' according to a proxy statement filed with the SEC in April. Guez and his brother Hubert control Azteca, a Mexican contract manufacturing firm.

Guez, Hubert and their brother Gerard have undertaken similar transactions. Guez and Hubert, for example, control 4.8 million shares, or about 12.5 percent, of Commerce, California-based Innovo Group Inc., which makes Joe's designer denim. Innovo bought $64 million of goods from Azteca last year, or 68 percent of its total supplies, according to Innovo's 10-K filing with the SEC. Gerard is chairman and 39 percent owner of Los Angeles-based Tarrant Apparel Group, which bought $49 million of goods and services from Azteca from 2003 to '05, according to Tarrant Apparel's 10-K.

``I don't like them,'' Beder says of such insider deals. ``Paul has one more big entity in him, and this is his big run. It has to be super-efficient and really squeaky clean to get the respect that he craves and deserves.''

Guez dismisses the criticism. ``I have nothing to hide,'' he says.

Rising Sales

Things have been looking up at Blue Holdings. Sales rose 137 percent to $12 million during the first three months of 2006. Net income climbed 46 percent to $680,000 during that period. Blue Holdings projects full-year 2006 sales of $60 million-$70 million, with a gross margin of 50 percent.

That isn't enough to satisfy everyone. During a conference call with analysts on May 11, Darren Schlanger of Gilder Gagnon Howe & Co., a New York-based brokerage firm, accused Guez of having used sales from healthy brands to camouflage declining sales of foundering ones. ``How sustainable a model was that, to keep replacing new brands with old brands that suddenly are on the downturn?'' Schlanger asked. He declined to elaborate when contacted later.

Patrick Chow, Blue Holdings' chief financial officer, responded at the time that the Antik brand sputtered when the company priced it too high at a retail minimum of $240. After the company lowered prices, Antik rebounded, he said.

A more-pressing issue is whether people will keep buying jeans that cost $150, $200 or more. So far, there's no shortage of women -- and an increasing number of men -- who are willing to pay through the nose for the privilege of advertising a brand on their rear ends.

New Frontiers

Kids are the latest frontier: Guez makes pint-size versions of Antik jeans for $100, starting at size 2. Next up: skinny, pencil-legged women's and men's jeans that move away from the flared, boot-cut versions that have been popular in recent years.

The California Fashion Association's Metchek says denim has hit a plateau. ``If you ask retailers, they've had enough designer jeans,'' she says. ``They won't put in any more brands. It's not about inventory; it's about how many labels can one department store absorb.''

Guez is optimistic about the bull market in blue jeans. ``How long will it last?'' he asks. ``The answer is very clear: forever.'' In June, Guez, putting shareholders' money where his mouth is, agreed to pay $32 million in cash and stock for Washington-based Long Rap Inc., which owns the 24-store U.S. chain Up Against the Wall, so he can sell his jeans himself.

Metchek says Guez is out of sync with today's fashion industry. ``He shoots from the hip, and this is now an MBA business,'' she says.

Guez, of course, has already been to hell and back. He's survived coke, booze and bankruptcy. Now, he just has to prove he can keep stitching, ripping, pounding and splotching denim into the jeans people want to wear -- and that he can reward shareholders as well as he's enriched himself.

To contact the reporter on this story: Seth Lubove in Los Angeles at [e-mail].

To contact the editor responsible for this story: Ronald Henkoff in New York at [e-mail].

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