I wrote in early November that Joe's Jeans (JOEZ) appeared to be undervalued given its risks and that its acquisition of Hudson Jeans, another premium brand, would give the company near-term momentum. One of the catalysts that I identified for Joe's in the near term was the disclosure of Hudson's financials.
Toward the end of November, the momentum I foresaw began to occur, with the stock rising roughly 8%, prior to the release of Hudson's financials. However, Joe's CFO had said, in an October 15, 2013 earnings call, that Hudson's results would be released before the end of November. That did not happen, which raised a red flag. Joe's has now disclosed Hudson's financials which, on their face, could worry investors. A closer reading, however, indicates that they are cause for cautious optimism about Joe's.
On December 6, 2013, Joe's released Hudson's results in the form of an amendment to a previously filed 8K. A quick reading of the results shows revenue growing at Hudson, consistent with Joe's previous statements. Specifically, Joe's stated that Hudson had nearly $75 million in revenue for the year ending December 31, 2012, up nearly 14% from the prior year, with net income of nearly $3 million. (Amended 8K, p. 4). Through September 30, 2013, Hudson's revenues were around $60 million. (Amended 8K, Ex. 99.2, p. 3). So, revenue is growing at a decent rate for Hudson. Surprisingly, however, Hudson has recorded a small net loss of $148,000 through the 3rd Quarter of 2013. (Amended 8K, Ex. 99.2, p. 3). Contrast this with almost $2 million in net income for the first nine months of 2012, and you have some potential cause for concern.
The loss is attributable to a significant increase in selling, general, and administrative expenses. (Amended 8K, Ex. 99.2, p. 3). A closer examination of this category, however, reveals that serious concern over Hudson's loss is probably unjustified. About 40% of the increase in SGA expense is explained by transaction costs assumed by Hudson related to its acquisition by Joe's, in the amount of $1.95 million (Amended 8K, Ex. 99.2, p. 20). Another element of the increase was share-based compensation in the amount of $646,000 (Amended 8K, Ex. 99.2, p. 17), which was a large jump from $28,000 in the year-ago period. The increase in share-based compensation appears to have been triggered by options automatically vesting due to the acquisition. If we take these two seemingly one-time events out of the expense numbers, Hudson was solidly profitable through the 3rd Quarter of 2013: net income would have been almost $2.5 million, nearly a 25% increase from the year-ago period.
There is a third expense that increased greatly during 2013 for Hudson, however, which also bears consideration. Hudson's advertising costs were up 16% through the 3rd Quarter of 2013. (Amended 8K, Ex. 99.2, p. 9). No explanation is given for this marked increase, although it is consistent with a similar advertising cost increase identified by Joe's this year and explained by growing competition in the premium jeans space. Thus, it appears that this space is now sufficiently mature that profits are being limited by advertising costs. This concern, not exclusive to Hudson, must be weighed with one that is: 37% of Hudson's sales have been to just two customers in 2013. Although this is down from 46% for the same period in 2012, Hudson is still far from diversified.
Overall, Hudson's performance appears to be a positive for Joe's. I had feared a sell-off in the stock this morning due to a possible knee-jerk reaction to Hudson's loss. So far that has not happened, suggesting that investors have read the amended 8K carefully enough to realize that the loss is attributable to one-time expenses. Joe's 4th Quarter performance, now that the Hudson acquisition is complete, should be watched closely. If Joe's cannot earn a profit, with numerous one-time charges behind it, then cautious optimism should become concern.