Jones Group (NYSE:JNY) will announce its Q3 fiscal 2012 earnings on 24th October 2012, and investors will be closely watching the effect of reduced shipments of certain brands and closing of stores on the company’s revenues.  The international retail segment remains important from future perspective as it has registered substantial growth in the previous quarters.  Moreover, macroeconomic factors such as the consumer spending might have a negative impact on the same store sales; although, the decline in cotton prices is likely to have a moderate positive impact on the profit margins.
Declining Revenues Due to Reduced Shipments
Jones Group’s revenues registered a year-over-year decline of 2.6% and 3.7% respectively in Q1 and Q2 of fiscal 2012.  This can be mainly attributed to the reduced shipments of brands such as Gloria Vanderbilt, Erika and easy spirit as J.C. Penny dropped these brands from its stores.  Changes in Wal-Mart’s retail strategy also affected the shipments. Jones Group reduced the shipments of Grane due to its low performance and Energie due to a challenging environment in modern junior tops business.  Furthermore, it also lowered the shipments of Jones New York and Anne Klein product lines to its underperforming stores. 
As a part of its strategy, Jones Group closed down its underperforming stores. In the first half of fiscal 2012, the retailer closed down 65 locations bringing the total store count down to 607.  These factors have also contributed to the revenue decline for the retailer.
The above mentioned factors may continue to put pressure on revenue growth for Jones Group, and the impact is likely to be visible in Q3 results.
While the overall revenues have declined in the last two quarters, the international retail segment has shown significant growth. This growth has been driven primarily by the acquisition of Kurt Geiger and promising performance of Stuart Weitzman in the European retail business.  The international retail segment constitutes about 12% of the total revenues and 15% of the company’s value according to our estimates.  This segment registered revenue growth of 84% in the last quarter and we expect a good performance in this quarter as well.  However, the slow European economy might have a dampening impact.
Consumer Spending Fluctuations and Lower Cotton Prices
The consumer spending in the U.S. has been a little sluggish. Although the average consumer spending has roughly remained the same in the last two quarters, the figure for the entire month of September was below average.  This can be attributed to low store traffic, and we expect this to have a negative impact on same store sales growth. Same store sales declined by about 4.5% in the last quarter for the domestic retail business. 
Cotton prices have also decreased over the last year, and this is something that will aid Jones Group’s margins.  The company reported an increase of 1.8% in its gross margins for the last quarter due to the mix of products sold and lower cotton prices.  Given the fact that cotton is a key raw material for the retailer, we expect that there will be a marginal increase in Jones Group’s gross margins in Q3 fiscal 2012.
Our price estimate for Jones Group stands at $14, implying a premium of about 5% to the market price.Notes: