In an era where most apparel retailers such as Abercrombie & Fitch (NYSE:ANF), Aeropostale (NYSE:ARO) and Urban Outfitters (NASDAQ:URBN) operate their own stores, the majority of Jones Group‘s (NYSE:JNY) revenues come from its wholesale channel which basically involves selling products through third party retail stores. We believe that Jones Group needs to significantly expand its retail channel given its higher margins and less in-store competition from private label brands. Although the retailer is well positioned in the market due to success of its individual brands, an opportunity exists in terms of retail channel growth. The only question is, how can it tap this opportunity?
Significance Of The Retail Channel
- Jones Group’s Earnings: Continued Struggle in Q4 Justifies Acquisition
- Sycamore Partners To Buy Jones Group For $15 Per Share
- A Review Of Jones Group’s Jeanswear Business’ Slump And Revival
- Jones Group’s Results Slip As Apparel Industry In The U.S. Remains Weak
- Jones Group Will Rely On International Growth To Offset Domestic Weakness
- How Jones Group Is Reviving Its Main Brands – Jones New York & Nine West
The gross margins for the company’s domestic retail business are nearly 1.5 times its domestic wholesale margins.  As a result, while the wholesale channel contributes about 75% to Jones Group’s overall revenues, it accounts for roughly 50% of its estimated value. On the other hand, with just 25% revenue contribution, the retail channel accounts for about 45% of Jones Group’s value. It is clear that the retail business is much more valuable to Jones Group. Although the proportion of retail revenues has increased over the past 3 years, the growth needs to be faster.
For instance, if the revenue contribution of the retail segment increases to 35%, there can be 5%-10% upside to our estimated price for Jones Group. This is something that the retailer can do, either by expanding aggressively or increasing its retail stores’ productivity. Jones Group is less likely to expand in the U.S. market as it is already consolidating its under-performing stores. The number of domestic stores came down from 901 in 2009 to 672 in 2011.  By the end of fiscal 2012, the retailer plans to further close down 100 stores.  However, while the store count has reduced, daily revenue per store has increased from $1,811 in 2009 to $2,291 in 2011.  This implies that the consolidation strategy is helping the retailer in improving its store productivity.
Contrary to the U.S., the international markets provide immense expansion opportunities for Jones Group. In the past few years, Jones Group has significantly increased its international retail and wholesale footprint. Jones’ acquisition of brands such as Kurt Geiger and its introduction of brands such as Stuart Weitzman in the European market have been the the primary drivers.
The retailer increased its international store count from 37 in 2009 to 315 in 2011, and currently operates 338 stores.  By mid fiscal 2013, it plans to add 34 stores in international markets, including China and the Middle East. China has proved to be an important market for some retailers such as Coach, (NYSE:COH), which has registered substantial growth in this region.  Moreover, the initial stores of Abercrombie & Fitch and Gap (NYSE:GPS) in the region seem to be performing well too.
Amid mixed performance by its various divisions, the international retail segment registered positive revenue growth in Q3 fiscal 2012.  This indicates that the retailer is moving in the right direction.
Competition At Department Stores Weighing On Wholesale Segment
In recent years, private labels have increased their share of sales at department stores. This has hurt branded apparel retailers such as Jones Group, which has been losing shelf space at department stores to private labels. For example, in Q3 fiscal 2012, revenues from domestic wholesale sportswear and jeanswear declined due to change in retail strategy of JC Penny, Macy’s and Wal-Mart (NYSE:WMT). This happened as revenues from brands such as Joneswear, Evan-Picone, Gloria Vanderbilt, Grane and Bandolino decreased due to competition from private labels. 
Even Coach has been unable to maintain same pace of growth in its wholesale channel that it has witnessed in the retail channel. The daily handbag revenue per store in the wholesale channel decreased from $960 in 2008 to $ 802 in 2010.  Whereas, for the retail channel, the figure increased from $7,770 to $8,590 during the same period.
Our price estimate for Jones Group stands at $14, implying a premium of about 20% to the market price.Notes: