Multibrand retailer Jones Group (NYSE:JNY) has been struggling in the U.S. for some time now. During the last couple of years, revenues from the company’s domestic retail and wholesale network have fallen substantially, accompanied by a decline in gross margins.  This business contributes more than 50% to the retailer’s value and it is critical for Jones Group to take steps to revive it. In order to do so, the company plans to reduce its domestic retail store count significantly to improve overall productivity. It also plans to expand its Kurt Geiger and Stuart Weitzman brands, and will convert some of its existing stores to those brand stores that offer maximum growth opportunity. For the wholesale channel, Jones group intends to focus on its sportswear business that has been the weakest. The retailer will also lower its operating expenses by reducing staff headcount. Jones Group expects that these strategies will result in $40 million in annual pre-tax savings by mid-2014, with a one time cost of $40-$60 million.  This saving can result in 10%-15% upside to our price estimate.
Domestic Retail Network Consolidation And Workforce Reduction
Over the past few years, Jones Group has been closing its underperforming stores in the U.S. to improve overall store productivity. During 2009-2012, the company closed more than 300 stores that helped its daily revenue per store increase from $1,811 to $2,448.  In last month’s strategic plan, Jones Group stated that it wants to further shrink its store fleet in order to operate a smaller and efficient chain of domestic stores.  About 170 stores in the U.S. are scheduled for closure by mid-2014, out of which the retailer had already shut down 25 stores in Q1 fiscal 2013.  Upon the plan’s completion, the proportion of Jones Group’s outlet stores (which are more productive) in the overall retail portfolio will be much higher. 
Although initially this strategy will weigh on revenue growth, operating fewer stores will help Jones Group reduce expenses and improve profitability. For its revenue growth, Jones Group can expand its online channel, taking advantage of the anticipated growth in online retail sales in the U.S.
In order to reduce its operating expenses, Jones Group is decreasing its retail workforce headcount. The retailer is reducing its corporate and supply chain staff by 2% and its domestic retail staff by 18%. This process began last month and will continue through the first half of fiscal 2014. 
Expansion And Conversion Of Brand Stores
Over the last couple of years, Jones Group has made two major acquisitions - Kurt Geiger and Stuart Weitzman. These brands have almost single handedly boosted the company’s international retail results. Stuart Weitzman is a high-end footwear brand which has created a strong position for itself in the luxury footwear market over the past 26 years, with high attention to detail and use of unique materials.  Kurt Geiger is one of the most popular luxury footwear brands in Europe and sells more than 10 pairs of shoes every minute in the U.K. It sells more shoes than any other footwear retailer in the region.  A while back, Jones Group introduced these brands in the U.S.  Given their popularity and success in international markets, we expect these brands to complement the retailer’s efforts to improve its domestic business.
Jones Group stated that it will look for specific ways to increase the profitability of each individual store, which will mainly include conversion and shuffling of brands offered there. This way, the retailer will keep only those brands at its stores that resonate well with local customers and offer maximum potential for revenue growth.  On this front, Jones Group can follow a strategy that appears to be working well in international markets. The retailer is adding other brands to its Kurt Geiger stores in Europe to increase their sales.  In Q1 fiscal 2013, sales of other brands at Kurt Geiger stores surged by almost 83%.
Improving Wholesale Channel
Jones Group recently stated that in order to improve the wholesale channel, it will focus on the domestic wholesale sportswear business. This segment accounts for about 20% of the retailer’s revenues and has been the weakest performer for the last two years. During 2011 and 2012, revenues from this business declined at an average annual rate of 10%, mainly due to lower shipments of the Jones New York brand.  The brand has been struggling for a while due to a weaker-than-expected response to its fashion styles, its exit from J.C. Penney (NYSE:JCP) and the lack of competitive pricing. Weak response to its fashion continued in Q1 fiscal 2013, even as the retailer aggressively invested in it. 
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 its 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-plus year old women. The company’s management has stated that keeping Jones New York’s prices competitive will be one of the key strategies for the brand’s growth. 
Additionally, Jones Group is focusing on an optimized operational structure for this channel, which will include consolidated distribution and supply chain facilities, design, production and selling divisions. 
Our price estimate for Jones Group stands at $ 13.30, implying a discount of 10% to the market price.
Disclosure: No positions.