Jones Group Is Revised To $13.85 On Better Inventory Management

The Jones Group (NYSE:JNY) recently announced better than expected Q2 fiscal 12 results. ^[1] Though the company reported a decline of 3.6% in its quarterly revenues compared to the same period last year, the primary highlight of the earnings was an improvement of 180 basis points in its gross margins due to better inventory management and inclusion of luxury brand Kurt Geiger. Tight inventory control is a big plus for the aspirational luxury retailer, as it had struggled with inventory issues  during the past few quarters.  Jones Group competes with brands like Liz Claiborne (NYSE:LIZ) and Phillips-Van Heusen (NYSE:PVH) as well as department store mainstays such as Polo Ralph Lauren (NYSE:RL) and store-owned private labels.

We have revised our price estimate for Jones’ stock to $13.85, which is nearly 25% above the current market price. Change in our price estimate reflects changes to the company’s net cash/debt position, along with changes to the Jones’ capital expenditures.

Check out our complete analysis of Jones Group

Inventory control a big plus for Jones this quarter

One of the primary highlights of its recent earnings release was the tight inventory planning and control by Jones Group during the entire quarter. Inventory management had been a big issue for the company, particularly during the holidays 2011. A higher than expected inventory in holidays season forced the company to usher promotions to the tune of 80% in its retail stores, which were extremely high considering the “aspirational luxury” brand image of the company. Additionally, due to the massive inventory hangover, the company came under significant pressure from its wholesale customers to provide severe markdowns on its merchandise. This in turn took a toll on company’s margins, which resulted in Jones stock plummeting by nearly 14% after the Q1 results. See: Jones Update: Large Markdowns During Holidays Could Hit Results

A tight inventory control this quarter was a major catalyst behind the  improvement of 180 basis points in its gross margins. As the company continues to emphasize on tight inventory control, we expect the margins to improve further as Jones will be able to capitalize on the declining cotton prices. Cotton prices have declined by nearly 18% over the past two months, from 100.1 cents per pound in April 2012 to 82.1 cents per pound in June 2012.  ((Cotton prices on a decline, Source: Index Mundi))

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1. Jones Group reports Q2 fiscal 12 results, Source: Jones Group’s IR [↩]