Last quarter, multibrand retailer Jones Group (NYSE:JNY) reported a revenue decline of 1.1% with weak results from its domestic retail and wholesale segments. This was attributable to the impact of a prolonged winter season, poor customer response to fashion changes and inventory hangover, resulting in heavy markdowns. When the company comes out with its Q3 fiscal 2013 earnings on October 30, we expect similar results from its domestic business. The U.S. retail market is going through a rough phase due to cautious consumer spending and a change in spending patterns. The recently concluded back-to-school season was particularly weak for apparel retailers as it was marked by high promotional activities throughout the industry.
However, the domestic jeanswear business posted tremendous growth last quarter with strong brand performances. As the customer response to these brands is getting better, Jones Group can sustain this growth in Q3 fiscal 2013. The company’s international retail business, which has been running well with Stuart Weitzman and Kurt Geiger brands, is likely to maintain its performance in Q3 as well. Moreover, we expect this segment to find support from the ongoing recovery in the European economy.
Our price estimate for Jones Group stands at $ 14.03, implying a discount of about 10% to the market price.
Domestic Retail Business Will Remain Weak
The recently concluded quarter turned out quite weak for apparel retailers in the U.S. due to prevailing economic weakness. This year, U.S. buyers have been extremely cautious of their spending on non-discretionary products due to the payroll tax increase, gas price inflation, and higher healthcare costs. Moreover, they have started diverting their spending to cars and houses to take advantage of low interest rates while holding back on other products such as apparel. As a result, the U.S. apparel industry has been struggling due to low store traffic.
During August, several apparel retailers offered heavy discounts on their products in order to win back customers.  According to the Commerce Department, retail sales excluding the automotive sector increased by just 0.1% in August.  Even during the month of September, many apparel retailers such as Gap Inc. (NYSE:GPS), Zumiez Inc., The Buckle Inc. and American Apparel Inc. posted comparable store sales declines.  Therefore, we believe that Jones Group’s domestic retail business will remain weak in the third quarter. However, the retailer’s store consolidation strategy might have a positive impact on its productivity and operating margins.
Domestic Jeanswear Wholesale’s Growth Can Continue
Domestic jeanswear wholesale has been a challenging business for Jones Group. Revenues from this segment dropped 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 a change in retail strategies at J.C. Penny and Macy’s.  However, there was a turnaround in the first quarter of 2013 as increased shipments pushed the sales up by 38%. 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. 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. 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 planned to add this product line to another 400 stores by fall, which indicates that the growth momentum will carry into the second half of 2013. Additionally, a good customer response to l.e.i. design changes and partnership with retail giant Wal-Mart (NYSE:WMT) will also assist the segment’s growth. 
International Retail Growth Will Find Support From Mending European Economy
Since the acquisition of two of the biggest luxury footwear brands in Europe, Stuart Weitzman and Kurt Geiger, Jones Group’s international retail business has grown substantially. Since 2010, revenues from this segment have increased by almost 700% on acquisition of these brands as well as organic growth. Europe is the biggest market for luxury goods in the world and these brands are well established in the region. Although the segment’s growth was relatively slow during the first half of fiscal 2013 due to prolonged cold and higher promotional activities, we expect Q3 to be notably better on account of better economic conditions.
The retail sales growth in the euro zone has shown encouraging signs for the past couple of months, indicating that consumer confidence is improving. Retail sales in July increased by 0.5% compared to June 2013 and further rose by 0.7% in August, beating the market’s expectations.  Moreover, economic output across the euro zone in September registered its fastest growth since the summer of 2011.  This trend bodes well for Jones Group’s international retail business, which is the key driver for its stock.Notes:
- U.S. retailers rely on deep discounts to win back-to-school shoppers, Reuters, Sept 5 2013 [↩]
- Forecast Envisions A Weak Holiday Season, The Wall Street Journal, Sept 17 2013 [↩]
- U.S. retailers’ September sales rise modestly, shoppers wary, Reuters, Oct 10 2013 [↩]
- Jones Group’s SEC filings [↩]
- Jones Group’s Q2 fiscal 2013 earnings transcript, Jul 31 2013 [↩] [↩]
- European Economic Recovery Picking Up Steam, The Globe And Mail, Oct 3 2013 [↩] [↩]