Multibrand retailer Jones Group (NYSE:JNY) had a tough Q3 fiscal 2013 in terms of sales growth due to weak retail environment in the U.S. The company’s net sales decreased by 1.3% as it saw revenue decline across most of its businesses. Although its earnings climbed by 68% due to a steep decline in interest expenses, operating margins remained flat. So far in the year, the company has used more than $90 million cash in its operations, while it generated about $13 million last year. This difference is attributable to larger investments in working capital, higher interest and tax payments, and lower operating earnings. Jones Group ended the quarter with $27.8 million in cash down from $81 million in Q2 fiscal 2013.
Barring the domestic wholesale jeanswear business, all other domestic segments posted revenue declines due to a soft back-to-school season, highly promotional environment, consolidation of under-performing stores and exit of Sam & Libby brand.  However, the pleasing performance of Stuart Weitzman’s initial stores in the U.S. and e-commerce growth provided some boost for Jones Group’s domestic business. Domestic wholesale jeanswear segment posted healthy revenue growth for the third straight quarter backed by improving brand performances. In international markets, Jones Group’s retail business continued to perform well with the success of its popular emerging brands – Stuart Weitzman and Kurt Geiger. We expect these segments to sustain their growth momentum in the near future as the retailer continues to invest in its wholesale business and economic conditions in Europe improve. However, the fourth quarter will be tough for Jones Group as discretionary consumer spending in the U.S. remains uncertain.
Our price estimate for Jones Group stands at $ 14.03, implying a discount of about 10% to the market price. However, we are in the process of updating our model in light of the recent earnings.
Domestic Business Weighs On The Growth
According to our estimates, Jones Group’s domestic business accounts for about 70% of its value. During the third quarter, the company’s domestic retail revenues declined by about 2.5% due to cautious consumer spending, promotional environment and store consolidation. Due to the impact of payroll tax increase, gas price inflation, and higher healthcare costs, U.S. buyers have spent less on discretionary products this year. Moreover, they have diverted their spending to cars and houses to take advantage of low interest rates, while holding back on other products such as apparel.
The recently concluded back-to-school season was highly promotional as several retailers including Jones Group were offering heavy discounts to win back customers. This weighed on Jones Group’s comparable store sales growth and also its operating margins shrunk from 11.1% (Q3 2012) to 9.5%. Jones Group had started consolidating its under-performing store network earlier this year, in order to improve its profitability. The company had 52 fewer stores in this quarter as compared to the same quarter last year, which also contributed to the revenue decline. However, Jones Group’s 45 Stuart Weitzman stores in the U.S. performed well and its online revenues increased by 17% despite weak demand.  As the company continues to expand the brand in the U.S. and grows its online business, it can generate better results in the future.
Jones Group’s domestic footwear and accessories wholesale revenues remained flat due to the exit of the Sam & Libby business late last year, partially offset by higher sales of handbags and jewelry. Domestic sportswear segment’s sales slipped by almost 10% due to weak demand for Jones New York brand. 
However, Domestic Wholesale Jeanswear Business Remained Resilient
Although historically the domestic wholesale jeanswear business has been challenging for Jones Group, it has grown substantially this year. It registered a staggering 38% revenue growth in the first quarter and followed it up by 20% increase in the second. During the third quarter, jeanswear wholesale’s revenues increased by 6% driven by strong demand for Gloria Vanderbilt, l.e.i, Nine West, Bandolino and other private label brands. Jones Group has been aggressively working on these brands’ design enhancements, which has yielded fruitful results. The company’s management stated that its products continued to resonate well with its customers and its seasonal offerings were well received. Also, with proper inventory management, this segment has been able to operate with fewer markdowns. 
Going forward, we believe that domestic jeanswear wholesale will continue to perform well as the retailer continues to add new product lines across its major wholesale locations such as Bon-Ton, Belk, Kohl’s and Sears. Its partnership with retail giant Wal-Mart (NYSE:WMT) will also assist the segment’s growth.
Also, International Retail Continued Its Steady Performance
Ever 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 steadily. This trend continued in the third quarter as revenues increased 6% and operating margins expanded from 4.2% (Q3 2012) to 5.3%. Apart from these two brands, Jones Spain also contributed to the segment’s growth. While Europe has been the main contributor to Jones Group’s international retail business growth historically, Jones Canada emerged as the best performer in this quarter. This is a pleasing sign for the company as the outlook for its business in Europe is already quite optimistic.
Europe is the biggest market for luxury goods in the world and Stuart Weitzman and Kurt Geiger are well established brands in the region. Moreover, retail sales growth in the euro zone has shown encouraging signs for the past couple of months, indicating that economy is on a mend. Retail sales in July increased by 0.5% compared to June 2013, and further rose by 0.7% in August, beating market expectations.  Economic output across the euro zone in September registered its fastest growth since the summer of 2011. Notes: