Jones Group Revised to $14: Weak FY 2011 Sales Outlook Disappoints

The Jones Group (NYSE:JNY) recently announced lackluster Q3 earnings with the total revenue rising by a meager 2% which was lower-than-expected company estimates. ^[1] Declining U.S. business was the primary reason behind the weak sales with Jones registering declines across all the domestic business segments barring Footwears & Accesories, where the results were uplifted due to strong performance of luxury shoe brand Stuart Weitzman. Additionally the company has lowered its sales outlook for fiscal year 2011 on account of declining consumer confidence, which has further raised questions in investor’s mind on Jones’ preparedness for next quarter along with all important holiday season. Jones Group 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.

On a positive note though, Jones did manage to increase its gross margins by 2.3% largely due to the inclusion of its recently acquired luxury shoe brand Kurt Geiger. The company also scored on the international front with international retail revenues increasing by $77 million primarily due to the impact of Kurt Geiger.

We have revised our price estimate for Jones’ stock to $14, which is nearly 25% above the current market price. The decline in our price estimate primarily reflects weak sales outlook for 2011 along with an increase in capital expenditures compared to last year, which has been slightly offset by increase in margins.

Check out our complete analysis of Jones Group

Declining consumer confidence is taking its toll on Jones

Uncertain macro-economic condition was the primary reason behind the decline in Jones’ domestic business.

As the CEO Wesley Card summed up:

The level of consumer spending continues to be a question mark as we move into the fourth quarter. The consumer remains very much in a buy-now/wear- now mode and is responding to new fashion and promotional activity.

While we were expecting a decline in Jones’ Jeanswear division, it is the slump in sportwear segment which is more alarming. The sportswear segment consists of Jones New York, the company’s most recognized brand, and a decline in this segment puts a ‘question mark’ over Jones’ core business. 

Jones strategy going forward

While Q3 earnings were disappointing, we believe that Jones can rebound by focusing its energies on luxury brands, which are more resilient to cost pressures. The increase in gross margins was a bright spot this quarter and we expect this trend to continue going forward. The company plans to expand its ambit in the near term by focusing primarily on emerging luxury brands such as Stuart Weitzman, Rachel Rachel Roy, Kurt Geiger and B Brian Atwood.

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1. The Jones Group reports Q3 2011 results, Source: Jones IR [↩]