Jones Group’s Earnings: Continued Struggle in Q4 Justifies Acquisition

by Trefis Team
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Jones Group
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Multi-brand apparel retailer Jones Group (NYSE:JNY) recently reported disappointing Q4 fiscal 2013 results as its revenues fell by almost 9%. However, its overall gross margins improved slightly to 36.1% from 34.6% in Q4 fiscal 2012, due to better margins in a number of its businesses, including  footwear & accessories wholesale, domestic retail, domestic apparel wholesale, and the international retail business. On the other hand, Jones Group’s sportswear business continued to struggle with a significant decline in revenues and operating income. Also, the Jeanswear wholesale business stumbled once again after showing some promising signs of revival during the first three quarters of fiscal 2013. Overall, the company’s adjusted EPS fell by about 27% in fiscal 2013. [1]

These quarterly results justify Jones Group’s decision to sell its business to Sycamore Partners. The company entered a definitive agreement with the private equity firm on December 19 for acquisition by Sycamore Partners’ affiliates. Under the terms of agreement, which is subjected to customary closing conditions, Jones Group’s shareholders will receive $15.00 (which is roughly near the current market price) per share. The deal is expected to close in the second quarter of fiscal 2014.

Our price estimate for Jones Group stands at $ 12, implying a discount of about 20% to the market price. However, we’re in the process of updating our model in line with the recent earnings release.

See our complete analysis for Jones Group

The Retailer’s Struggle Continued

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. This trend continued in 2013 as well. The main reason behind this is poor performance is the retailer’s second largest brand, Jones New York. Due to a competitive pricing environment, the weak reception of its fashion offering, 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

2010

2011 2012 2013
Domestic retail

651

631

584

564

Domestic wholesale sportswear

965

892

782

671

Domestic wholesale jeanswear

820

773

746

823

Domestic wholesale Footwear

842

848

919

916

International wholesale

270

329

330

329

International retail

47 260 388

418

The company’s domestic retail segment has struggled due to poor performance of its read-to-wear clothing outlets and its less effective store consolidation strategy. Moreover, the tough retail environment in the U.S., the result of weak consumer confidence and changing spending patterns, has added to Jones Group’s problems. On top of this, the company’s international wholesale business has remained flat for the past three years, due to the mixed results of  Brian Atwood and Nine West, and a decline in Jones New York’s sales in Mexico and Canada.

On the other hand, Jones Group’s domestic jeanswear business has shown some promising signs lately. For the first three quarters of fiscal 2013, this segment registered healthy revenue growth, backed by solid performance from Gloria Vanderbilt, l.e.i., Jessica Simpson and private label brands. Lower promotional activities, better inventory control and compelling customer response to design enhancements helped fuel their demand. However in Q4, the segment’s revenues declined by 18% suggesting that its future is somewhat uncertain.

However, Footwear Business Provides Some Hope

For the revival of its business, Jones Group was advised to shift its focus from non-core fashion brands to footwear business by James Mitarotonda (manager of activist hedge fund Barington Capital Group LP) who joined the company’s board in May 2013. Over the years, Jones Group’s footwear business has helped it offset the impact of revenue decline in other segments. Barring the exit of Sam & Libby business in late 2012 (the impact was visible in 2013), the company’s domestic footwear business has done well. Also, its international retail business has grown substantially, backed by its luxury footwear brands-Stuart Weitzman and Kurt Geiger. The segment’s revenues increased by 10% in the fourth quarter despite the uncertain economic environment in Europe. Going forward, we believe that Jones Group’s footwear business will play a crucial role in its turnaround efforts.

Reminder To Investors- The Company Has Gone Private

On December 19 2013, Jones Group announced that it has signed an acquisition agreement with Sycamore Partners, with a view of executing a better turnaround of its business. [3] Going private will free up management’s resources, which it can direct towards reviving the growth of the company’s businesses. Out of view of public investors, the turnaround, rather than the attainment of quarterly earnings objectives, can be the highest priority. Jones Group’s CEO also believes that it can reach its true potential as a private company. [3] Private equity firms have longer holding periods of often four to eight years, and this time should allow Jones Group to focus on improving its business operations as well as undertake any major business changes needed to make it stronger in the long run.

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Notes:
  1. The Jones Group Inc. Reports 2013 Fourth Quarter and Full Year Financial Results, Jones Group, Feb 10 2014 []
  2. Jones Group’s SEC filings [] []
  3. The Jones Group Announces Agreement To Be Acquired By Sycamore Partners For $15.00 Per Share In Cash, The Jones Group, Dec 19 2013 [] []
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