Jones Apperal Group put itself up for sale this year, but buyers balked at paying $35 a share. If the company can revamp its aging brands, it may be worth even more.
WHEN JONES APPAREL GROUP OFFERED ITSELF FOR sale earlier this year, bidders including Bain Capital and Texas Pacific Group browsed through its closets, but balked at the company's asking price: at least $35 to $36 a share. Jones wasn't seeking much of a premiml1 to its stock price-then, as now, in the low 30s. But buyout firms line up financing on the basis of past profits, not promises, and Jones' earnings have been slipping for several years. Mter five months on the auction block, the company gave up its search for a buyer, notwithstanding the private-equity market's keen interest in retail and ap parel concerns.
A humiliating out come? To be sure. But the dress ing-doW11 has given Jones, a stalwart or> the middle-to-"better"-priced women's wear market, even greater impetus to remake itself, and quickly. The Bristol, Pa,-based company, which owns more than 35 brands, including Jones New York, Anne Klein and the luxury retailer Barneys; is overhauling the management of some divisions in a bid to lift profitability. If it takes these and other steps to rejuvenate its largely tired labels, Jones could get its price in either the public or private market, And, if it beats Wall Street's consensus earnings forecasts-a subdued $2.22 a share for 2006 and $2.54 for .'07 -the shares, over time, could rally to ward 40.
Jones has jumped more than 11%, to 33 a share, since management's hopes for a deal collapsed in August. The smge stems in part from money rotating into consumer stocks as oil prices retreated in recent weeks, though it also demonstrates a measm'e of hope for the company's planned tmnaround one that mirrors Jones' confidence in rejecting lowball offers.
At a current 13 times '07 estimates, Jones Apparel Group (JNY) trades in line with rival Liz Claiborne (LIZ). Its shares aren't cheap, but Lazard Capital Mar kets analyst Todd Slater thinks the multiple can expand if the company manages sustainable top-line growth; revenues have been relatiyely flat for several years. Jef frey Edelman of l'BS mges investors to focus on 2007 and beyond, when margin improvement is likely to be come more apPal'ent. Edelman is one of only two Wall Street analysts with a Buy rating on the stock.
Lastweek. Mood's Investors Service also casta vote of confidence for Jones b:: confmning its investment-grade rating on the company's dE' be after an eight-month review, and pronouncing the outlook stable. The rating agency said in a statement that it expects Jones' financial metrics to improve as the company executes a strategic plan.
The challenges facing Jones help explain why ealings from operations sank to $2.48 a share last year from as much as $2.84 in 2002. The consolidation of department stores in recent years has boosted their clout vvith vendors and reduced the in-store real estate allotted to Jones' apparel and footwear brands. The growth of private-label merchandise and newer, hotter labels also has crowded out older names.
While Jones owns other stores in addition to Bar neys, its wholesale business contributed about 75% of last year's $5 billion of revenue. Federated Department Stores (FD), which operates Macy's and Bloomingdale's and recently merged with May Department Stores, accounts for 20% of the company's sales. This pits Jones "against an 800-pound gorilla at a time when I don't think it has much leverage," says an executive at a buyout that looked at the company.
When Jones reports third-quarter earnings Wednesday, investors woll be able to gauge this threat better but may find it overblown. In the wake of the Federal stores with insufficient traffic has removed a drag on margin. Analysts expect the company to post revenue of $1.24 billion, claW'll from $1.33 billion a year ago, and operating earn ings of 66 cents a share, duwn from 76 cents last year.
In the aftermath of Jones' failed sale, speculation on Seventh Avenue and Wall Street has swirled about the company's futme. Much of the talk centers on the futme of CEO Peter Boneparth and the sale or spinoff of assets such as Barneys and Nine West, a footwear brand the company acquired in 1999 for $1.4 billion.
For now, however, the board's directive to manage ment seems straightforward, according to people briefed on the board's thinking: Till'n around the flailing wholesale segments; and improve' growth enough to boost Jones' bargaining power with both retailers and futme suitors. Evidently this plan will buy time for Boneparth, 46, the former head of Jones' McNaughton Apparel Group subsidiary and head of the parent com pany since 2002. Through a Jones' spokesman, Boneparth declined to comment.
In truth, there is much Jones can do to spruce itself up, and dare we suggest it? - become fashionable again. For one, Jones must expand its store base to gain more control of its retail destiny, says Stevan Buxbaum, exec utive vice president of the Los Angeles retail and apparel consultant Buxbaum Group. The com pany plans to open 15 Anne Klein stores a year in the next few years, starting with eight this fall, and the revenue contribution from all its retail operations is projected to rise to 32% of sales in 2007. Still, criticssay the pace of retail expansion could be quick ened.
In the view of Morgan Keegan analyst Brad Stephens, Jones also must broaden its international footprint to reduce its reli ance on U.S. shoppers and spread economic cycle risk. Currently less than 10% of the company's revenue comes from overseas, compared with an average of 28% for the 13 retailers he studies.
Equally important, say apparel-industry insiders, is the need for Jones to diversify its customer base. Over many decades the company has built a faithful following by dressing women in clothes that are long on forgiveness though short on buzz. But those core customers are aging, and many are succumbing to the lure of value shop ping. Jones has yet to woo their children -and grand- children -the way Liz Claiborne has with its purchase of hip brands like Juicy Couture and Lucky Jeans. Small wonder Jones' gross margins, at 36.5%, trail those of Liz, at 47.4%, and Polo Ralph Lauren (RL), at 54%, based on Credit Suisse calculations.
Jones has spent nearly $2.5 billion in recent years on a series of acquisitions including Gloria Vanderbilt Apparel, suit maker Kasper and Maxwell Shoe-that lifted top-line growth by only half that amount. Andrew Jassin, a former Jones ex ecutive who is now managing director of the New York fashion-consulting firm Jassin-O'Rourke Group,. says the company must alter its acquisition model to look for "small, hip brands that aren't traditionally on its radar" and that appeal to younger generations, not just in apparel but also in accessories and even home furnishings.
Too, the company would be wise to ex ploit the fashion sensibility of hipper-than thou Barneys. Th[organ Keegan~ Stephens calls Barneys, with its Th[adison Avenue flag ship, a "learning lab" for Jones; he suggests the company could adapt the store's de signer fashions at moderate price points, and perhaps buy for itself up-and-coming designer labels.
Jones picked up Barneys in 2004 for $397 million, to the bafflement of many. Iron ically, it's the only business segment boast ing revenue growth today. Barneys sales at stores open at least a year rose 8.9% in the second quarter, following a 6.6% increase in the first. Earlier this year, Credit Suisse analyst Omar Saad estimated Barneys could fetch $634 million if sold, assuming a purchase price of 10 times 2006 earnings before interest, taxes, depreciation and am ortization. Jones has given no indication that it plans to part with the retailer.
Jones' centralized business model, in which a back office distributes and sup ports multiple brands, allows it to keep costs low. This was a negative to potential buyers, who saw fewer cost savings with which to boost earnings. But it could be a plus for shareholders, as improved sales would flow quickly to the bottom line. An other plus: Jones pays a quarterly dividend of 12 cents a share, for a 1.5% cm'rent yield.
At Jones, as at other apparel outfIts, the future rides on appealing fashions as well as profItable distribution. With the right design and marketing, the company could turn its anchor brands into names that shop pers covet again. Chances are, when it does, investors will covet its shares.
By Kopin Tan
