Monday, May 21, 2007

Looks Alone Will Not Help What's Ailing Jones Apparel Group

Being properly attired is a must at clothing retailer Jones Apparel Group, Inc. (JNY-$28.57). Named Executive Officers and non-management directors alike receive 35% -to- 40% discounts on purchases made at any Barneys New York stores.

Jones Apparel Group is a marketer and wholesaler of branded apparel, footwear and accessories. The Company operates the Barneys New York chain of luxury stores and also markets directly to consumers through its chain of 411 specialty retail stores and 701 (value pricing) outlets. Its nationally recognized brands include Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, Kasper, Evan-Picone, Norton McNaughton, Joan & David, and Mootsies Tootsies.

Corporate Governance

Directors Lowell W. Robinson and Allen I. Questrom, who made $242,008 and $268,266, respectively, in their service to the Company last year, were rebated $11,710 and $35,198, respectively, in their pursuit of the better-dressed look.

CEO Peter Boneparth and Chairman Sidney Kimmel earned compensation of $4.02 million and $1.36 million, respectively, in total compensation for fiscal 2006. Included in this remuneration were clothing discounts totaling $10,586 and $25,829, respectively.

Pride does not wish to owe and vanity does not wish to pay. ~ French noble and writer Fran̤ois de la Rochefoucauld (1613 Р1680)

Chairman Kimmel can relax in traffic, too, for the Company provided him with a car and driver, which cost shareholders $120,554 last year.

When in NYC, CFO Wesley R. Card is provided with a car service, company apartment, and a tax gross-up for his ‘crib’ in the city—$8,411, $79,171, and $77,448, respectively. Messer. Card earned more than $2.5 million—and the Company is headquartered in NYC—could he not afford to rent his own apartment?

Financial Outlook

On May 2, Jones Apparel Group posted a lower-than-expected quarterly profit and slashed its full-year outlook due to higher cost of goods and weak sales of shoes and moderately priced sportswear.

The company said it earned $47.8 million, or 44 cents per share, on $1.24 billion in sales in the quarter. Jones' retail same-store sales (open more than one-year) fell 5% for the period, driven by a 12.3% decline at its footwear outlet stores.

Analysts polled by Thomson Financial expected net income of 60 cents per share on revenue of $1.22 billion.

Due to the strategic decision to exit some moderately priced lines (with estimated aggregate operating margins in the single digits) and a cautious retail outlook for fiscal 2007, management cut its 2007 earnings outlook to a range of $1.95 to $2.05 per share from a prior implied forecast of $2.41 per share, or 10 percent year-over-year growth.

Of course, those businesses being targeted for sale, such as sportswear makers Norton McNaughton and l.e.i and/or Westies and Sam & Libby footwear brands, are non-performing—in terms of projected revenues and profitability—and would be sold at discounts (given recently recorded goodwill and trademark impairment charges), for there likely would be few buyers.

Investment Considerations

The share price of Jones Apparel Group has lost about 17 percent in value in the last year, as compared to a 52-week change of 20.18% in the S&P 500 Index.

There is another reason why the stock appears cheap, selling for a projected 0.6 times and 14.2 times 2007 sales and earnings, respectively. Operating margins and ROA (for the trailing five years) of 8.8% and 5.3%, respectively, are well below industry averages of 15.6% and 15.8%, respectively.

In addition, the retailing landscape is in flux, shrinking Jones’ national footprint. Ownership changes in the retail sector are a cause for uncertainty. Federated Department Stores (FD-$39.70), which operates more than 850 department stores in 45 states under the names of Macy's and Bloomingdale's—accounted for approximately 18% of Jones’ sales in fiscal 2006.

Federated is swallowing May Department Stores, and is expected to close about 80 duplicate stores in the coming year.

There is an increasing focus by Jones’ department store customers to concentrate an increasing portion of their product assortments within their own private label products. These private label lines compete directly with Jones’ own product lines. In fiscal 2006, ten customers (principally department stores) accounted for approximately 47% of gross revenues.

Until the directors and executives start spending less time gazing in front of the store mirrors—and more time looking at how to turnaround this troubled retailer—there are no catalysts in play (such as a sale or spin-off of Barneys) to push Jones’ share price back above the $30 level.

Narcissus does not fall in love with his reflection because it is beautiful, but because it is his. If it were his beauty that enthralled him, he would be set free in a few years by its fading.
~~ Anglo-American poet W. H. Auden (1907 – 1973)
Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this column. The 10Q Detective has a Full Disclosure Policy.

No comments: