Jones Apparel Group (NYSE: JNY) is a multi-brand company that designs and markets apparel, footwear, accessories, fragrances, and jewelry to women and children. The company’s primary brand was initially Jones New York, but over time it has acquired and established over 30 brands, including Nine West, Anne Klein and Easy Spirit. JNY’s brands cover a range of styles including sportswear, activewear, casual apparel, fashion, and formal attire.
Jones Apparel Group faces direct competition from comparable holding companies such as Liz Claiborne (NYSE: LIZ) and Phillips-Van Heusen (NYSE: PVH). In addition, many of JNY’s brands face competition from other department store mainstays such as Polo Ralph Lauren (NYSE: RL) and department store-owned private labels.
We currently have a $22 Trefis price estimate for Jones Apparel Group’s stock, about 45% above the market price. We estimate that Jones Apparel’s footwear & accessories wholesale business is the largest value driver for the company, contributing 30%.
Over the last 5 years, the footwear & accessories wholesale business has witnessed large variation in margins. Below we discuss the trends and prospects for EBITDA margin of the division and the likely impact on Jones Apparel Group’s stock price.
Footwear & Accessories Wholesale Segment
Footwear and accessories wholesale business includes the sale of branded and private label footwear, handbags, jewelry, and other products to department stores as well as other third party retailers. The segment has witnessed a significant decline in its EBITDA margin over the past few years.
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Footwear & accessories wholesale EBITDA margin declined during 2005-08 primarily due to lower net sales in the higher margin wholesale jewelry business, higher net sales in the lower margin international business, increased sales to off-price retailers, and greater production costs in China and other Pacific Rim countries.
In 2009, however, EBITDA margin improved as discounting moderated and the company improved its inventory management. Jones Apparel also reported reduced sales in the low-margin international business and fewer buying agency commissions.
We forecast EBITDA margin improvement through 2012, driven by continued reduction in discounting, as well as the addition of higher-margin Stuart Weitzman products.
Pressures on EBITDA Margin in the Future
Although we forecast an increase in footwear & accessories wholesale EBITDA margin for the next couple of years, there are factors that could negatively impact margins going forward:
- Increasing commodity pricing & sourcing costs: With the improving economic environment, commodity prices are on the rise. Further, the rising standards of living in outsourcing destinations are resulting in (i) Rising raw material costs, (ii) Rising wages across sourcing regions, (iii) Weakening of US dollar, (iv) Increasing logistic costs, and (v) Strong local demand affecting capacity.
- High US unemployment rate: The retail environment in the US has improved significantly in 2010 with recovery in economy and improving consumer sentiment. However the US unemployment rate has continued to remain at high levels increasing to 9.8% during November 2010.  
- International business to drive demand for footwear & accessories: JNY has witnessed an increasing international share in its footwear & accessories revenues. The demand for footwear & accessories in the future is projected to increasingly come from developing markets like China and India. As the international business is a lower margin business (compared to US), a higher international share in footwear & accessories revenues will put downward pressure on this segment’s EBITDA margins.
Potential Downside Scenario
We estimate there could be a 12% downside to $22.37 Trefis price estimate for Jones Apparel Group’s stock if the footwear & accessories wholesale EBITDA margin remains flat going forward, due to the factors described above, vs. our current forecast of growth through 2012.
- The Jones Group, J P Morgan, Dec 3 2010
- Marketwatch: Nonfarm Payrolls Up 39,000 in November, Dec 3 2010
Disclosure: No positions