Jones Group Surprises With Domestic Jeanswear Growth & International Wholesale Strength

by Trefis Team
-14.10%
Downside
14.99
Market
12.88
Trefis
JNY
Jones Group
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Quick Take

  • Jones Group’s revenues fell by a little over 1% in Q2 fiscal 2013
  • However, this decline was lower than market’s expectations as strength in domestic jeanswear and international whole sales businesses offset the weakness in domestic sportswear and footwear segments
  • We expect the pressure on domestic revenue growth to continue in the second half of 2013, but international business is likely to do well as Jones Group launches in additional markets

Multibrand retailer Jones Group (NYSE:JNY) reported 1.1% decline in its Q2 fiscal 2013 revenues, which was still better than the market’s expectations. While most of its business remained weak, strong growth in international wholesale and domestic wholesale jeanswear segments helped the results. Sales from these segments jumped 18% and 20% respectively driven by strong brand performances. [1]

The prolonged cold at the start of the quarter led to an increase in the number of markdowns, which had a negative impact on Jones Group’s revenues and gross margins. [1] The company’s domestic retail segment saw its sales decline due to slow spring start, store consolidation and startup losses related to Kurt Geiger and Brian Atwood. However, the same store sales improved by a modest 1.8% which suggests that the situation can improve over the longer term as these stores operate more efficiently. [1]

See our complete analysis for Jones Group

Recovery In Jeanswear Business Will Continue

Domestic jeanswear wholesale has been a challenging business for Jones Group. Revenues from this segment have fallen from $815 million in 2009 to $746 million in 2012 due to reduced shipments of Gloria Vanderbilt, l.e.i., Bandolino and Erika product lines. This can be attributed to a competitive retail environment and change in retail strategies at J.C. Penny and Macy’s. [2]

There was a turnaround in the first quarter of 2013 as increased shipments pushed the sales up by 38%. [2] The strong performance continued in the second quarter as well, with solid results from Gloria Vanderbilt, l.e.i., Jessica Simpson and private label brands driving 20% growth in revenues. [1] Lower promotional activities, better inventory control and compelling customer response to design enhancements contributed to this performance. As a result, Gloria Vanderbilt has now become the leading brand in its wholesale locations such as Bon-Ton, Belk, Kohl’s and Sears. [1] Earlier this year, the company launched Gloria Vanderbilt Active featuring t-shirts, tank tops, leisure, performance pants and track jackets in 800 stores, which received good response. Jones Group plans to add this product line to another 400 stores by fall and which indicates that the growth momentum will carry into the second half of 2013. [1] Additionally, good customer response to l.e.i. design changes and partnership with the retail giant Wal-Mart (NYSE:WMT) are likely to help the segment’s future growth. Overall, Denim now contributes about 12% to the company’s revenues and its comparable sales grew by triple digits during the last year. [1]

International Retail Remained Steady

Though the international retail environment remained highly promotional due to weak economic conditions in Europe, the segment was still able to register a moderate revenue growth of 4%. International retail business has been Jones Group’s strongest link since the acquisition of popular luxury footwear brands – Stuart Weitzman and Kurt Geiger.

We believe that international retail business will remain the key driver for the company and will continue to offset the weakness in its domestic segment. Currently Europe is the largest luxury goods market in the world with annual sales of more than $95 billion. [3] Moreover, about 30% of global luxury sales come from footwear and apparel. [3] This plays right into Jones Group’s strengths.. The company is also planning to expand Stuart Weitzman in India, Canada and China this year and has already launched an international e-commerce website for the brand. [4]

Improving Nine West Fuels International Wholesale Business

Jones Group’s international wholesale revenues were up 18% primarily due to the growth of its largest brand, Nine West. Although the brand had a disappointing fiscal 2012 due to a decrease in international shipments, it registered double digit growth in Q1 fiscal 2013 and carried the momentum in the second quarter as well. Higher sales of casual wear, sandals, jewelry and double digit rise in handbags’s sales helped the brand post good results. [1]

Nine West’s marketing, trendy products and e-commerce focus have been the main reasons behind its success. [1] It is leveraging the power of social media to enhance its brand image in global markets, and has gained significant momentum on its digital channel (Channel 9) for shoe lovers. The brand is also adding shoppable videos to these platforms wherein the viewers can click on the videos to buy products. Apart from its own e-commerce channel, it has also seen robust growth through Zappos, Piperlime and Macys.com, which indicates its popularity. During the quarter, Nine West’s e-commerce sales jumped 30%. [1]

However, Domestic Sportswear and Footwear Segments Remained Weak

Due to the cold weather at the start of the quarter, Jones Group had a smaller window to sell its apparel products. It therefore relied on excessive promotions to clear its inventory. In addition, spring fashion of sportswear brands Jones New York and Ann Klein did not resonate well with the customers and the segment’s revenues slumped 24% during the quarter. [1] Although the company is taking some steps to improve Jones New York such as focus on career wear, rebalanced prices, and expansion of product categories, a near-term turnaround is highly unlikely. [1] Jones Group saw lower demand and higher inventory levels for its domestic footwear and accessories business as well, which resulted in large markdowns. As the company’s wholesale partners are ordering conservatively for the second half of the year, we expect the pressure on the growth to continue.

Our price estimate for Jones Group stands at $ 14.26, implying a discount of about 15% to the market price.

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Notes:
  1. Jones Group’s Q2 fiscal 2013 earnings transcript, Jul 31 2013 [] [] [] [] [] [] [] [] [] [] [] []
  2. Jones Group’s SEC filings [] []
  3. Bain projects global luxury goods market will grow overall by 10% in 2012, though major structural shifts in market emerge, Bain & Company, October 15, 2012 [] []
  4. Jones Group’s Q4 fiscal 2012 earnings transcript, Feb 13 2012 []
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