Jones Apparel Group's (
) stock price has dropped by over 30% since the firm reported
its 1Q11 earnings on April 27
. The multi-brand company that designs and markets women's and
children's apparel, footwear, jeanswear, jewelry and handbags
competes directly with other apparel and accessories 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.
We currently maintain a
$16.86 Trefis price estimate for Jones Apparel
, at a whopping 65% premium to the stock's market price.
The decline in stock price can be attributed to 2 key factors
that have resulted in two short spurts of rapid decline in Jones
stock price. Below we take a look at these two factors and present
rationales for our bullish estimate.
In its 1Q11 earnings, Jones reported revenue growth of 8.3% to
$961 million, beating the analysts' average estimate of $939.2
million. However, the profit available to shareholders was down at
$24.9 million, compared with $37.5 million a year earlier. This was
driven primarily by a decline in firm's gross margin which fell to
34.4% from 36.8% a year earlier.
We currently forecast Jones to maintain steady margins across
its product segments in 2011 as the firm plans to raise prices on
clothes and its more expensive shoes in first half of the year,
followed with hikes across all of its products in the second half.
The company also said that it has been keeping inventories tight to
help stem the margin decline.
However, if Jones is not able to curb the margin decline going
forward in the face of continued high unemployment, rising gasoline
prices and a troubled housing market and the margins shrink by 2%
across Jones' divisions in 2011,
there could be a downside of 40%
$16.86 Trefis price estimate for Jones
and hence justify the current stock price. This goes to show how
sensitive the stock is to the gross margin trends.
Kurt Geiger Acquisition
On June 2, Jones Group Inc. (
) announced the acquisition U.K. luxury shoe retailer Kurt Geiger
from private-equity firm Graphite Capital for about $350 million in
cash and debt, adding to its international presence. The
acquisition positions Jones as one of the world's most powerful
portfolios of fashion footwear and is expected to bump up its
international penetration. ((
The Jones Group Acquires Kurt Geiger
, The Jones Group))
However the stock price has dived more than 10% since the
announcement and it might be due to the fact that there is usually
a premium involved in acquisitions which could have been too high
in this case, specially as Jones already has a net debt on its
See our full analysis of Jones Apparel Group