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, Jones Group (NYSE:JNY) still relies heavily on its wholesale channel. This channel depends on selling products through third party retail stores.
We believe that Jones Group needs to expand its retail channel significantly due to the higher margins, a booming online retail market and less in-store competition from private label brands. Although the retailer is well-positioned in the market due to the success of its individual brands, we believe an opportunity exists in the growth of its retail channel.
Higher Gross Margins For The Retail Channel
Gross margins for Jones Group’s retail business are more than 1.5 times its wholesale margins.  The lower margins for the wholesale channel result from profit sharing between Jones Group and third party retailers. As a result, despite accounting for 75% of total revenues, Jones Group’s wholesale business constitutes 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.
Booming Online Sales Will Complement Retail Business
Expanding the retail business will give Jones Group an opportunity to leverage its growth in the online retail market. Forrester forecasts online sales in the U.S. to grow 13% to $262 billion in 2013 and reach $370 billion by 2017.  Based on the historical trends, we expect online apparel sales to grow faster than the overall online sales in the U.S. 
To better understand how retail and e-commerce channels are interconnected, we take a look at one of Jones Group’s strategies. Recently, the retailer added an iPad app in its stores that allows customers to access its e-commerce websites, product information, look-books, place online orders and check-out conveniently.  This not only strengthens the e-commerce channel, but also helps improve the overall shopping experience. The company has stated that with the launch of this app, its online traffic has doubled and the app accounts for somewhere between 20%-75% of the daily transactions. 
Stiff Competition From Private Label Brands In Wholesale Channel
In recent years, private labels have increased their share of sales in department stores. This has hurt branded apparel retailers such as Jones Group, which has been losing shelf space at department stores to private labels. In Q4 fiscal 2012, revenues from domestic wholesale apparel and jeanswear declined due to poor performance of brands such as Joneswear, Evan-Picone, Gloria Vanderbilt, Grane and Bandolino as a result of fierce competition from private labels. This resulted in the brand’s exit from JC Penny and lower shipments to Wal-Mart (NYSE:WMT). The same issue has also weighed on Coach (NYSE:COH) who has been unable to maintain the same pace of growth in the wholesale channel as it has in the retail channel.
Expanding the retail business will mitigate competition from private labels and could potentially boost same store sales growth for Jones Group.
How Can Jones Group Strengthen Its Retail Channel?
If the revenue contribution of the retail segment increases to 35-40% of total revenues over the long term, there could be at least 5%-10% upside to our price estimate for Jones Group. The retailer can add this value 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 underperforming stores. The number of domestic stores came down from 901 in 2009 to 569 in 2012.  However, while the store count has reduced, daily revenue per store has increased from $1,811 in 2009 to $2,448 in 2012.  By the end of fiscal 2013, the retailer plans to further close down 30 stores. The consolidation strategy is clearly helping the retailer in improving its store productivity.
Contrary to the U.S., the international markets provide an immense expansion opportunity for Jones Group’s retail business. In the past few years, Jones Group has significantly increased its international retail footprint. Its acquisition of Kurt Geiger and Stuart Weitzman in Europe have been the primary drivers.   The retailer increased its international store count from 37 in 2009 to 335 in 2012.  By mid fiscal 2013, it plans to add 34 stores in international markets, including China and the Middle East. China, the second largest apparel market in the world, has proved to be an important market for some western apparel retailers.  Coach (NYSE:COH) has registered good growth in this region while Abercrombie & Fitch and Gap (NYSE:GPS) seem to be doing well too.
Although the expansion of the retail channel is necessary, there are some reasons that make the wholesale channel indispensable. The wholesale channel allows Jones Group to cater to a broader spectrum of customers and helps it enter new markets and create brand popularity without investing too much. That said, we believe there is upside potential from expanding its retail presence internationally and online.
Our price estimate for Jones Group stands at $14, implying a premium of about 10% to the market price.Notes:
- Jones Group’s SEC filings [↩] [↩] [↩] [↩]
- U.S. Online Retail Sales To Reach $370B by 2017, Forbes, Mar 14 2013 [↩]
- Calculated using the data available with United States Census Bureau [↩]
- Nine West’s iPad app bridges online and store shopping, Internet Retailer, Jan 3 2013 [↩] [↩]
- Jones Group Buys Kurt Geiger for $352 Million, The Wall Street Journal, June 2 2011 [↩]
- Jones Group Completes Acquisition of 55% of the Equity Interests of Stuart Weitzman, PR Newswire, June 2 2012 [↩]
- From Mao To Wow: Winning in China’s booming apparel market, Mckinsey, Jan 2011 [↩]