Joe's Jeans: Questions Linger After Earnings

Oct.16.13 | About: Joe's Jeans (JOEZ)

Joe's Jeans (NASDAQ:JOEZ) released earnings for the third quarter of 2013 on Tuesday, October 15, 2013 and they were not nearly as pretty as the company's namesake denim jeans. While Joe's posted increases in both wholesale net sales and retail store net sales, Joe's reported a third quarter net loss and decreasing net sales. Joe's net sales decreased 3% from $30.3 million to $29.4 million.

Joe's retail sales improved 14% from the third quarter of 2012 but can mostly be attributable to the addition of 8 stores, bringing Joe's total to 33 stores from 25. With these new 8 stores came much higher operating expenses. However, Joe's management notes that the new stores with smaller footprints are doing as well as some of its stores with much larger footprints.

You may be asking yourself how did Joe's have an increase in both wholesale and retail net sales but have decreasing net sales? Joe's brand Else was a huge reason for the fall. The year-over-year slide of $2.2 million for Joe's Else brand is a gigantic decrease for the company. Management brushed it off on the conference call but this loss should really be bringing out the red flags. What exactly is going on with the Else brand for it to decrease in sales so much so that it could be "entirely attributable" for the decline in total net sales for the company? While Else provides a ton of questions about the business - there may be an even bigger question mark.

Hudson Jeans and the charges related to the completion of the acquisition, which officially took place on September 30th, should also be in question. If not for the cost related to the acquisition, Joe's would have swung to a profit for the quarter, opposed to a loss of $240,000. Joe's attributes nearly $1.3 million in charges to the completion of the acquisition.

While certain questions exist with the financials and the trends of Joe's core business, as well as the dramatic decline in its Else business, no question is bigger than the recent merger acquisition of Hudson Jeans. Joe's Jeans recently completed the acquisition of Hudson in a $98 million deal. Since the announcement of the acquisition, Joe's stock has plummeted from $1.90 per share to slightly over $1. While much of the reason for the decline has been for the subpar performance in the Joe's brand itself, Hudson certainly wasn't helping the cause.

After all, Hudson was bought by Joe's to help the cause. None of the financials have yet been released. However, Chief Financial Officer Hamish Sandhu commented on the conference call that the total trailing full-year revenue of Hudson should be somewhere between "$75 to $80 million." That is far shy of Joe's trailing revenue of over 120 million, but management did note that Hudson Jeans is growing at a very steady and swift pace, with high single digit gains for years now. CFO Hamish Sandhu also commented that the full financials of the newly acquired Hudson will be disclosed to the public sometime around "30 days from now." These financials will certainly give Joe's just the boost it's looking for or just the rip to the fabric that it doesn't need.

Disclosure: I am long JOEZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.