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Joe’s Jeans (NASDAQ:JOEZ) designs, develops and markets branded clothing through retailers throughout the United States. The company has recently been hitting 52 week lows after the company’s 10-K was released, showing that, while revenues were up 23%, gross margins contracts and EPS fell from $0.40 to $0.04 (unfortunately, not the result of a non-cash writedown). Furthermore, the company swung from CFO of positive 10,599 to negative 4,149 and incurred significantly higher capex demands, leading to a large negative free cash flow for the year.

The volatility of this company’s operations stems from its line of business. In the conference call following the earnings release, the company’s CEO, Marc Crossman, had this to say by way of reasoning for the poor performance:

In the fourth quarter, our net sales declined 7% from $25.2 million to $23.6 million. The sales decline was entirely attributable to our women’s wholesale business. The domestic women’s wholesale business, which is our largest and mature segment decreased double digits on a year-over-year basis. During the quarter, our consumer looked to new fabrics as a new catalyst for her next purchase. We did not capitalize on this trend with the right offering of cords, pontes, and super-stretch fabrics. We didn’t have enough newness in innovation of products to drive to the level sales we had last year, especially given that we were facing tough comps against last year’s successful Jean legging.

As we can see, the company is very much at the whims of fashion trends. JOEZ has not been able to consistently stay ahead of the curve and this has led to highly volatile financial performance. With unstable revenues, earnings and cash flows, the value investor is left to wait until the company trades at a significant discount to assets – until then, a buy is primarily speculation as to the company’s ability to gain insight into its customers sufficient to allow it to show consistent performance.

Author Disclosure: No position.

Source: Joe's Jeans: The Importance of Stability