Jones Apparel Group (JNY)

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With net sales of $4.7B in 2006^[1]Jones Apparel Group, Inc. (NYSE: JNY) is a major clothing manufacturer. The company owns several mid-range department store brands that cater to young professional men and women, including Jones New York, Anne Klein, and Nine West. In addition to these working wardrobe basics, the company sells children's clothing through its Energie, GLO Girl, and l.e.i. brands.

Department stores' share of the the retail clothing market has been shrinking for years, and since the majority of Jones' revenue (around 75% between 2004 and 2006^[2]) comes from selling its clothing wholesale to mid-market department stores, the company's revenue has declined over the past three years as a result of department store consolidation .

[edit] Company Overview

[edit] Breakdown of Holdings

Jones Apparel Group, Inc. Revenue by Business Segment, 2004-2006^[3]

One of the clearest trends in recent years for Jones is the decrease in its wholesale business and a corresponding increase in its retail segment. Jones' wholesale business has steadily decreased in recent years, largely due to the consolidation in the department store industry. Department stores have closed stores and reduced orders of traditional brands in favor of cheaper private labels.

However this industry-wide trend fails to account for all of the decrease in the company's ratio of wholesale-to-retail holdings. 2006 wholesale revenues were particularly low due to a $279M loss that Jones took as part of a one-time sale of its Polo Jeans Company business. Jones sold the business back to Polo Ralph Lauren as part of a litigation settlement in February of that year.^[4]

By contrast, retail revenues almost doubled between 2004 and 2006(from $780M to $1.478B respectively). While the increase was partially a result of new store openings and a rise in same-store sales, it was also driven by the company's $400M purchase of the luxury department store Barneys New York, which it has since sold for $948M.^[5]

[edit] Recent Earnings

Jones Apparel Group, Inc. Revenue and Operating Income, 2002-2006^[6][7]

In 2006, Jones saw a sharp drop in its net operating income. The company went from a $497M gain in 2005 to a loss of $144M in the following year. These losses were largely due to the sale of its Polo Jeans Company business, as well a $491 as a result of goodwill and trademark impairments. While the loss from the Polo sale was a one time event, the goodwill impairment shows that the company foresees a significant decrease in revenue across several of its moderately-priced apparel brands in the coming years.^[8]

[edit] Trends and Forces

[edit] Dependency on Department Stores

Department stores in the United States have undergone significant changes in recent years. In response to declining margins, stores have implemented tighter inventory controls and have scaled back the quantities of merchandise that they purchase from wholesalers. As three-quarters of Jones’ business comes from its wholesale relationships, Jones appears especially vulnerable to such changes. Bond rating firms Moody's and S&P hit Jones' bonds with a downgrade to "junk" status in September of 2007, citing negative industry-wide trends for department stores, the core of Jones' customer base.^[9] The company’s ten biggest clients accounted for almost half of Jones’ total revenue in 2006^[10], and the loss of any of those clients would come with a significant loss in wholesale revenue.

In addition to competing with other major brands for department store business, Jones has to contend with the rise of private label merchandise as well. As private labels become an increasing part of department store sales^[11], big companies may scale back on the traditional brands they order from companies like Jones. Department stores have a strong incentive to prefer private labels wherever possible because they can be sold at higher margins than outside brands.

In addition, a series of mergers and acquisitions in the industry (e.g. Federated Department Stores' 2005 takeover of Marshall Field's) give the businesses that remain potentially greater power to negotiate lower prices with Jones, thereby lowering profits.

[edit] Volatility of Fashion Trends

As fashion trends fluctuate in unpredictable ways, apparel companies must be careful to not fall behind from season to season. However, Jones appears to be better situated that some competitors in that several of the company's large core brands are comprised of basic wardrobe staples (e.g. Jones New York suits, Anne Klein blouses) that are not particularly vulnerable to the swings in the high-end fashion world. In addition, the company’s recent sale of Barney’s New York (which sells luxury brands like Marc Jacobs, Fendi, and Prada) marked its exit from the more expensive end of the designer label market and a return to its mid-market core brands.

[edit] Competition

Jones faces competition from a variety of sources. Its Jones New York and Anne Klein sportswear and suits compete with brands like Liz Claiborne, Ann Taylor, and Banana Republic. Jones’ l.e.i. and GLO Girls brands compete for the younger consumer’s business with Aeropostale and The Gap.

1. ↑ Jones Apparel Group, Inc. 2006 10-K(filed February 26, 2007), p. 36
2. ↑ Jones Apparel Group, Inc. 2006 10-K(filed February 26, 2007), p. 35
3. ↑ Graph data from Jones Apparel Group, Inc. 2006 10-K (filed February 26, 2007)
4. ↑ Jones Apparel Group, Inc. 2006 10-K (filed February 26, 2007), p. 36
5. ↑ Jones Apparel Group, Inc. 2007 Q3 10-Q (filed November 5, 2007), p. 9
6. ↑ Graph data from Jones Apparel Group, Inc. 2006 10-K (filed February 26, 2007)
7. ↑ Amounts are in millions.
8. ↑ Jones Apparel Group, Inc. 2006 10-K (filed February 26, 2007), pp. 33-34
9. ↑ "Jones Net Up, But Revenue Weakens" (WSJ.com: published October 31, 2007)
10. ↑ Jones Apparel Group, Inc. 2006 10-K (filed February 26, 2007), p. 13
11. ↑ "Stores boost sales with own labels" (San Francisco Chronicle, May 5, 2006)
12. ↑ Unless otherwise noted, the figures in the table below come from Yahoo! Finance and/or Phillips-Van Heusen's 2006 10-K (filed April 5, 2007).
13. ↑ From Polo Ralph Lauren Wikinvest article
14. ↑ From Polo Ralph Lauren Wikinvest article