Is Joe's Jeans Cheap Enough to Buy After Earnings Report?

| About: Joe's Jeans (JOEZ)

Joe's Jeans Inc. (NASDAQ:JOEZ), a designer, developer and worldwide marketer of Joe's® branded apparel and apparel-related products, which includes premium denim jeans, related casual wear and accessories, announced its February 2011 quarterly report after the market close yesterday. Earnings came in at 1 cent, above the break-even analyst consensus estimate; revenue came in lower at $21.2 million versus $22.4 million analyst estimates, and 9% down year-over-year over the comparable February 2010 quarter.

The company distributes its products primarily wholesale via numerous retailers, which include major department stores, specialty stores and distributors around the world, and the remainder through company-branded retail stores. The company has attributed the weakness in the current and prior November 2010 quarters to weaker sales in the women’s and international channels of their wholesale business, while both the men’s wholesale channel and their retail segment experienced growth.

Sales at the retail segment were up 105% year-over-year to $3.7 million in the current February 2011 quarter and up 156% year-over-year to $4.1 million in the prior November 2010 quarter. This is due to the company expanding their store base to 18 from six in the prior year period. The company does not break down women’s versus men’s in the wholesale channel, but overall sales in the wholesale channel were down to $17.5 million in the February 2011 quarter from $21.4 million in the prior-year period.

Gross margins in the current February 2011 quarter were steady at 49% while operating expenses were slightly higher year-over-year, which led to significantly lower operating income at $0.5 million for the quarter versus the comparable prior year quarter at $1.4 million. Gross margins were higher at 68% in the retail channel versus 45% for the wholesale channel, but due to high operating expenses particularly associated with opening new stores, operating margins were negative 3% at the retail channel versus 25% in the wholesale channel, before taking out corporate expenses. However, operating margins were still down year-over-year in the wholesale channel from 29% in the year-ago quarter, in spite of the company reducing SG&A costs, due to a reduction of sales volume.

The stock traded lower after the earnings release after the market close, at under $1, slightly below the $1.13 close. At a market cap of $72 million, and $96.2 million in revenue over the last 4 quarters, the stock appears cheap, but it is unlikely to move outside of its recent trading range between $.80 and $1.30 based on this most recent quarterly report. At yesterday’s closing price of $1.13, it is still trading at a rich 18 time forward P/E based on a $.06 annual EPS estimate for the FY ending November 2011. It is trading at over 1.0 price to sales ratio, and it is also trading slightly above book value of $1.02 per share.

However, the company has the potential to be the next big name in the apparel category, like its peer True Religion Apparel (NASDAQ:TRLG), another manufacturer of premium denim jeans and associated apparel products via both the wholesale and company-branded retail stores. The key will be for the company to continue to execute on its retail channel, as the company is scheduled to open nine more company-branded retail stores in the next five months. With a greater proportion of future sales revenue coming from retail, that should give JOEZ better control of its business, reducing the cyclicality inherent in the wholesale business, as well as lead to higher margins.

On the conference call after the close yesterday, the company was optimistic about the performance of its twelve newer ‘non-comp’ stores and stated that, “The non-comp stores actually performed quite well….. So in terms of the direction, each store seemed to be doing a little bit better than the last.”

Also, the company is in a fickle industry and it will have to better adapt to fashion trend changes, and reverse the declining trend in the women’s wholesale channel, while at the same time continuing to build on the strength in the men’s wholesale channel.

Institutions have been unloading the stock recently, with 68 Institutions holding a total of 11.8 million shares or 18% of the shares outstanding shares, down from 22% in the prior period. Insiders have been net sellers, selling 2.9 million shares or 17% of their holdings in the prior 12 months. Of the three analysts covering the stock, one recommends it as a buy and the remaining two rate it at a hold.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online® and Zacks Investment Research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.