Is Jones Group Getting Serious About Selling Its Business?

by Trefis Team
-14.10%
Downside
14.99
Market
12.88
Trefis
JNY
Jones Group
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Multi-brand retailer Jones Group’s (NYSE:JNY) shares jumped almost 10% on the news that the company has hired Citigroup Inc. to look for prospective buyers. [1] This is not the first time that the retailer has explored the possibility of going private. It previously tried to sell its business to Goldman Sachs in 2006, but was unsuccessful. Jones Group is struggling to sustain its growth and has been looking at options to revive its business. Earlier this year, the company came out with plans to substantially reduce its store count and work force in order to improve its profitability. We believe that even if Jones Group is unable to sell its entire business, it may still consider divesting certain parts of it.

See our complete analysis for Jones Group

Jones Group’s Troubled Business

Over the past few years, Jones Group has struggled to sustain its growth, especially in the U.S. market. Three out of its four domestic segments have posted substantial revenue declines over the last four years. The main reason behind this was poor performance from the retailer’s second largest brand, Jones New York. Due to a competitive pricing environment, a weak response to its fashion and its exit from J.C. Penny, the brand has been Jones Group’s weakest link. [2] In addition to this, lower shipments of Ann Klein and Evan-Picone and weak product performances from Grane, Le Suit and Energie have also weighed on the retailer. [2]

Revenues in $millions

2009

2010 2011 2012
Domestic retail

648

651

631

584

Domestic wholesale sportswear

893

965

892

782

Domestic wholesale jeanswear

815

820

773

746

Domestic wholesale Footwear

697

842

848

919

International wholesale

186

270

329

330

International retail

41 47 260

388

Aside from the domestic footwear and international business, the revenues from all other segments have fallen significantly since 2009. Even the international business is primarily relying on two recently acquired footwear brands – Stuart Weitzman and Kurt Geiger. It appears that any hope Jones Group has, lies with its footwear business.

The Company Was Advised To Focus On Footwear Business

In May this year, James Mitarotonda of hedge fund firm Barington Captial Group joined Jones Group’s Board. Not surprisingly, he advised the company to focus on its footwear brands and gradually reduce other businesses. [1] Jones Group has made two major footwear brand acquisitions over the last couple of years – Stuart Weitzman in 2010 and Kurt Geiger in 2011. Stuart Weitzman has been around for almost 26 years now and has created a strong position for itself in the luxury footwear market. Similarly, over the past 50 years, Kurt Geiger has established itself as one of the most popular luxury footwear brands in Europe and sells more shoes than any other retailer in the region. [3] [4] These two brands have lifted Jones Group’s international results, and therefore, the retailer is introducing them in the U.S. to complement the success of its domestic footwear & accessories segment. However, this might not be enough to facilitate a turnaround as a majority of Jones Group’s business still remains weak.

Jones Group Also Tried To Boost Its Profitability

Jones Group has been closing its underperforming stores in the U.S. to improve its overall store productivity. During 2009-2012, the company closed more than 300 stores that helped its daily revenue per store increase from $1,811 to $2,448. [2] In its recent strategic plan, Jones Group stated that it wants to further shrink its store fleet in order to operate a smaller and efficient chain of domestic stores. [5] About 170 stores in the U.S. are scheduled for closure by mid-2014, out of which, the retailer had already shut down 25 stores by the end of Q1 fiscal 2013. [6] Upon the plan’s completion, the proportion of Jones Group’s outlet stores (which are more productive) in the overall retail portfolio will be much higher. Although this strategy has aided the improvement in daily revenue per store, it is weighing on the segment’s revenue growth.

In order to reduce its operating expenses, Jones Group is cutting its retail workforce headcount. The retailer is reducing its corporate and supply chain staff by 2% and its domestic retail staff by 18%. This process began a couple of months ago and will continue through the first half of fiscal 2014. [5]

… But Now, It Is Looking For Buyers

According to a recent report from Reuters, Jones Group hired Citigroup Inc. to look for potential buyers for the entire company or a part of it. [1] Now the question remains – how will Jones Group benefit from a public to private transition? A company may choose to go private for a number of reasons which include financial gains for CEOs and shareholders as well as lower regulatory and reporting requirements that save money. Going private frees up management’s resources, which it can direct towards the business’ growth as the SOX regulations are absent.

Private equity firms have longer holding periods of often four to eight years, and this time often allows the company to focus on improving its business operations as well as undertake any major business changes needed to make it stronger in the long run. However, there are risks involved in selling a business such as management losing control or being ousted by the new owners. The new owners may want the company to pursue a different strategy or believe new leadership would better guide the business in making the necessary changes such as shutting or selling off under-performing businesses. Nevertheless, looking at Jones Group’s current situation, selling a few businesses might not be a bad idea.

Our price estimate for Jones Group stands at $ 13.35, implying a discount of about 15% to the market price.

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Notes:
  1. Jones Group hires Citi to explore possible sale of company: Sources, Reuters, Jul 9 2013 [] [] []
  2. Jones Group’s SEC filings [] [] []
  3. Kurt Geiger – A Shining Example Of A Sole Trader, The Independent, Jan 23 2011 []
  4. Meet The Kurt Geiger Rock ‘N’ Roll Sweethearts, Vogue, Jul 4 2013 []
  5. The Jones Group Inc. Announces Strategic Plan To Improve Profitability, Jones Group Inc., Apr 24 2013 [] []
  6. Jones Group’s Q1 fiscal 2013 earnings transcript, May 1 2013 []
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