Jones Group‘s (NYSE:JNY) Q1 fiscal 2013 earnings reflected weakness in its retail business. Comparable store sales for domestic retail were down 2.9% due to the prolonged cold weather and poor performance from Jones New York.  However, this segment can do better in the future with Jones Group’s store consolidation strategy, efforts to reduce expenses and launch of emerging brand stores (Kurt Geiger, Stuart Weitzman & Brian Atwood) in the U.S.
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Although the company’s international retail segment did register some growth, most of it can be attributed to a weak comparable period and additional days in this year’s fiscal quarter. The growth remained slow due to the unusually cold weather and weak economic environment in Europe. However, given the popularity of Kurt Geiger and Stuart Weitzman brands in the region, Jones Group can look towards a better future. Additionally, there were some underlying positives in an otherwise disappointing quarter for Jones New York.
Domestic Retail Business – Performance Review & Outlook
Jones Group’s domestic retail segment’s revenues were down slightly due to a decrease in comparable store sales and fewer stores resulting from consolidation strategy.  This decline was partially offset by healthy growth in the segment’s e-commerce business. The comparable store sales decline can be attributed to a cold first quarter and weak results from Jones New York.
March 2013 was the coldest in the U.S. in the last 17 years, and had a negative impact on spring season sales.  Moreover, the retailer aggressively invested in Jones New York’s fashion, but did not receive the desired customer response.  As a result, Jones Group will carry this season’s inventory in to the second quarter, which is likely to impact its comparable stores sales growth and margins.
However, the long term outlook for domestic retail business appears to be positive. Jones Group is persisting with its store consolidation strategy, which is aimed at improving its profitability. During the quarter, the retailer closed about 25 of its underperforming stores and plans to further shut down more than 150 such locations in the next 12-15 months.  Although this will negatively impact the segment’s revenues in the near term, daily revenue per store and margins will improve. Also, Jones Group is planning to reduce expenses (including workforce) related to some of its support functions.  With these actions, the retailer believes that its profitability can increase by $40 million a year in pre-tax savings (by mid-2014), with one-time costs of about $40-$60 million.  A while back, Jones Group introduced emerging brand stores – Kurt Geiger, Stuart Weitzman and Brian Atwood in the U.S.  Since these brands are quite popular in international markets, they are likely to complement the retailer’s domestic retail business growth.
Domestic retail business constitutes about 20% of the company’s value, according to our estimates.
International Retail Business – Performance Review & Outlook
The international retail business has been performing well for the past few quarters; however, in Q1 fiscal 2013, the segment reported relatively weaker results due to a combined impact of weak European economy and prolonged cold weather. The unusual cold weather impacted a number of industries and worsened the recessionary environment in the region. This had a negative impact on Jones Group’s store traffic and demand for its spring season products, such as fashion apparel and footwear.  As a result, the retailer had to usher large promotions, which brought its operating margins down. 
However, this is just temporary weakness as Jones Group has done reasonably well in Europe despite the sluggish economic growth. Stuart Weitzman and Kurt Geiger have been the primary growth drivers. [Read: Jones Group’s International Retail Growth In Focus] Even amid a weak quarter, Kurt Geiger was able to generate positive comparable store sales and its e-commerce business registered double-digit growth. Moreover, Jones Group is adding its other brands in Kurt Geiger stores to enhance their popularity. This has worked well so far as the sales of other brands in Kurt Geiger stores increased by 83% in this quarter. 
International retail business constitutes more than 20% of the company’s value, according to our estimates.
Underlying Signs Of Jones New York’s Revival And The Retailer’s Efforts
Jones New York brand has been struggling for a while due to a weaker-than-expected response to its fashion styles, the brand’s exit from J.C. Penny and the lack of competitive pricing.  Weak response to its fashion continued in Q1 fiscal 2013, even as the retailer aggressively invested in the brand’s fashion. 
However, there have been some underlying signs indicating that Jones New York is headed in the right direction. Some of the brand’s product segments such as Easy Care, Platinum suitings and Signature denims performed well throughout fiscal 2012.  In response to this, Jones Group started making efforts to increase their proportion in its merchandise mix. In Q1 fiscal 2013, these products contributed about 20% to the brand’s revenues, up from 9% in the same quarter last year. Jones Group is also reworking on the brand’s design and pricing to better appeal to its loyal customer base of 45+ year old women.
Jones New York will see the impact of inventory hangover in the second quarter due to weak customer response. As this effect wears off, the brand will come out with the new summer and fall collections, featuring a range of office wear at affordable prices, reflecting the brand’s DNA.  It will be interesting to see if these changes resonate well with the customers.
Jones New York contributes a little less than 20% to the Jones Group’s revenues.
Our price estimate for Jones Group stands at $ 13.30, which is slightly below the market price.Notes:
- Jones Group’s Q1 fiscal 2013 earnings transcript, May 1 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Jones Group’s SEC filings [↩] [↩]
- Prolonged Winter Puts Retail Sales In Deep Freeze, CNBC, March 31 2013 [↩]
- Jones Group Inc. Announces Strategic Plan To Improve Profitability, Jones Group, April 14 2013 [↩] [↩]
- Jones Group’s Q4 fiscal 2012 earnings transcript, Feb 13 2012 [↩] [↩]