In the domestic wholesale apparel segment, Jones Group (NYSE:JNY) offers brands such as Jones New York, Nine West, Ann Klein, Rachel Roy etc. through third-party specialty stores and department stores. The segment’s revenues increased to $965 million in 2010 driven by the launch of RACHEL Rachel Roy product line at Macy’s.  
Since then, the revenues have been coming down due to weak customer response to Jones New York, reduced shipments of Jones New York and Ann Klein sportswear lines and the discontinuation of Jones New York suit lines (to redirect the focus on sportswear).  The retailer’s exit from J.C. Penney due to a change in its retail strategy also played a part in this decline. As a result, the segment’s revenues fell to $782 million in 2012, and we expect this trend to continue. In this analysis, we’ll look at certain factors that support our view.
Shifting Focus Due To Lower Margins & Competition From Private Labels
Over the last three decades, the retail market share of department stores in the U.S. has declined from 10% to 2.4% as the retailers started shifting their focus from wholesale to retail and direct channels.  Stiff competition from private label brands and low margins (due to revenue sharing) were some of the reasons behind this shift.
In recent years, private labels have increased their share of sales in department stores resulting in low shelf space for Jones Group. 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. The same issue has also weighed on Coach (NYSE:COH), which has been unable to maintain the same pace of growth in the wholesale channel as it has in the retail channel. 
Moreover, the department stores tend to have complicated terms of agreement, which often include unlimited rights to return orders, budget for advertising and right to reduce supplier payments during markdowns.  These factors tend to put negative pressure on margins and are encouraging Jones Group to focus more on its retail and direct-to-consumer business.
Shift Of Sales To Online Channel
Online apparel sales are growing at a rapid pace indicating a shift in the shopping trends. During 2001-2009, while the total apparel sales increased at an average annual rate of less than 5%, online apparel sales grew by more than 30% annually.  This is likely to continue in the future due to the growing usage of Internet and proliferation of smart phones and tablets. 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.  The e-commerce channel directly complements Jones Group’s retail segment (see Jones Group Has A Large Growth Opportunity In Its Retail Channel). As more customers start buying their apparel online, wholesale revenues will fall.
However, Efforts To Improve Jones New York Might Slow Down The Decline
Jones New York contributes a little less than 20% to Jones Group’s overall sales, and accounts for a substantial portion of domestic wholesale apparel’s revenues. Revenues from this brand decreased by 11% in fiscal 2012 due to a weaker-than-expected response to its fashion, the brand’s exit from J.C. Penny and the lack of competitive pricing.  J.C. Penny dropped Jones Group’s brands when it adopted a strategy to sell low-priced merchandise throughout the year.
However, Some of Jones New York’s product segments such as Easy Care, Platinum suitings and Signature denims have performed well. The retailer is looking to push these products to revive the brand’s growth. It is re-balancing its merchandise mix to increase the proportion of its performing products.  Additionally, Jones Group is looking to focus on specific fashion-based apparel. The company’s management stated that keeping Jones New York’s prices competitive will be one of the key strategies for the brand’s growth. These efforts should help the brand’s sales in the future and subsequently, offset domestic the decline in wholesale business.
Significance For Jones Group
The domestic wholesale apparel business constitutes about 15% to Jones Group’s value according to our estimates. We forecast the segment’s revenues to gradually decline to $670 million in the next five-six years due to aforementioned reasons. However, if the retailer’s efforts to revive Jones New York help it in sustaining the revenues at the current levels, there could be 5% upside to our price estimate. On the flip side, if these efforts do not pay off and the revenues decrease to $600 million, there could be about 5% downside to our price estimate.
Our price estimate for Jones Group stands at $14, which is slightly ahead of the market price.Notes:
- Jones Group’s SEC filings [↩] [↩]
- Rachel Roy Launches Digital Magazine And Video Series The Life Of rachelroy.com, Market Watch, April 4 2013 [↩]
- Clothing Companies Are Trying To Find More Direct Path To The Customers, The New York Times, March 6 2013 [↩] [↩]
- Coach’s SEC filings [↩]
- Calculated using the data available with United States Census Bureau [↩] [↩]
- U.S. Online Retail Sales To Reach $370B by 2017, Forbes, Mar 14 2013 [↩]
- Jones Group’s Q4 fiscal 2012 earnings transcript, Feb 13 2013 [↩] [↩]