For the first quarter of 2011, Joe’s (NASDAQ:JOEZ) reported net sales of $21.3mm, down 9% from the first quarter of 2010. This seems disappointing, but it’s important to dig into the detail provided in the conference call to assess the direction of the company.
On March 31st I posted an article titled "Joe’s Jeans: A Great Value for the Long-term Investor” and now that the company has reported first quarter 2011 earnings I want to provide an update.
If we exclude leggings from the data, overall revenues would have increased by 4%. The women’s wholesale business declined double digits, but only would have been down 8% excluding leggings. While a general slowdown of the women wholesale business is impacting the company it is clear that Joe’s investment in leggings overshot the mark. Leggings also negatively impacted the international business in Q1, which was down 13%, but only 7% excluding leggings. The leggings fashion/trend “miss” has led to difficult year-over-year comparisons, which will largely disappear from the numbers over the next quarter. The company also stated on the call that remaining legging inventory accounts for only 6% of total inventory, again supporting the fact that the leggings issue is almost behind the company.
Growing Men’s Business
The men’s wholesale business increased 6% in the first quarter of 2011. In the specialty store sector Joe’s men’s business grew in the double digits as doors increased 39% and non-denim sales increased 32%. Of note, non-denim now represents 13% of the total men’s business.
Retail sales increased 105% as the store count increased to 18 from 6. However, same-store sales were down 9% due to lower conversion rates and a 3% decline in the average transaction size. While the lack of same-store sales growth was disappointing, the company stated on the call that the 12 stores that were not in the same-store sales calculation are doing well, with each incremental store performing better than the last. Joe’s also reiterated plans to open 9 additional stores in 2011. On the positive side retail gross margins increased to 68% from 56% a year ago.
Qualitative Commentary on 2011
While Joe’s does not provide guidance there was some qualitative commentary regarding the coming year. The changes made to the spring line in response to changing trends have led to improved sales with sell-through improving dramatically. The company referenced the great response it received from stores on the fall collection, which has also been picked up by new retailers. It is selling faster than in the fourth quarter.
Cash Flow Generation
Free cash flow was positive in the first quarter for the second quarter in a row, partially driven by a decrease in inventories. The company has stated that inventory will continue to come down over the year. Joe’s got caught increasing inventories as the economy slowed and it takes some time to work through the excess. Inventory levels are down over $6mm from the third quarter of 2010.
Joe’s is now trading at just over $1/share - equating to a market capitalization of $66mm versus a book value of $65mm. The company is trading at an enterprise value to sales ratio of 0.7x. In my prior posting I suggested that Joe’s needs to successfully execute on its strategy and that if it does, its valuation should increase materially. I view the Q1 2011 results as successful execution. While ample risks remain and the apparel business is fickle and competitive, Joe’s has shown an ability to recognize fashion trends and adapt. The qualitative commentary on the spring and fall lines speak to this fact. How this will translate into revenue growth and profitability remains to be seen - and this will not happen overnight. While I do not have a specific price target I do believe that Joe’s shares remain a compelling risk/reward investment opportunity for investors willing to take a long-term perspective, giving management time to continue to successfully execute the company's strategy.