Jones Group (NYSE:JNY) will announce its fiscal year 2011 Q2 earnings on Wednesday. In the past quarter, revenues grew by 8% to reach $949 million however the firm’s gross profit margin declined to just under 35% from last year’s 37%. This reflects the shrinking margins in apparel industry as a result of increases in cotton, freight and labor costs. We expect the trend to continue this quarter also however the gross margin may slightly increase compared to that of previous quarter due to the acquisition of U.K. luxury shoe retailer Kurt Geiger on June 2. Jones Apparel competes with brands like Liz Claiborne (NYSE:LIZ) and Phillips-Van Heusen (NYSE:PVH) as well as department store mainstays such as Polo Ralph Lauren (NYSE:RL) and store-owned private labels.
Our $17 price estimate for Jones stock is about 45% above market price.
Impact of Kurt Geiger Acquisition on Jones
Kurt Geiger is one of the Europe’s largest luxury shoe retailer operating through 156 concessions and 49 company-operated retail locations. Jones group acquired Kurt Geiger on June 2 from private-equity firm Graphite Capital for about $350 million in cash and debt. The acquisition will not only improve the company’s international presence but also provide the firm an opportunity to meliorate its shrinking margins. Luxury brands often carry higher margins compared to normal ones, and with a better mix of products, we expect the margins in Footwear & Accessories to improve. However the impact may not be much significant since the acquisition has been completed just a month ago.
In its presentation of Kurt Geiger acquisition, the company increased the expected contribution from upscale department stores to 2011 net revenues from 8% to 13% (including Kurt Geiger). We will closely follow the revenues and margins in the Footwear & Accessories to see how the improvement in margins of footwear will impact the overall gross margin of Jones Group.