Why pay over $100 for jeans when you can get jeans for $20 from big box stores or other clothing retailers? My wife tells me it's the same fascination as Coach (COH) or Michael Kors (KORS) purses (which again to me are overpriced bags.) Supposedly its all about the fit and quality, but as we know, it's about image, and the more expensive the item, the bigger increase in image. While morally it's a dilemma, as an investor it's great. Take a low cost product, put a fancy logo on it, and charge a crazy price, which should mean high margins and great profits. The catch is getting the product to be accepted and recognized by the masses.
Joe's (JOEZ) has been criticized for trying to be in retail but having the majority of revenues come from its wholesale business. In two recent moves it is setting conditions to grow its retail business. First up is the appointment of Joanne Calabrese to its board of directors. According to her linked in profile she has worked as a divisional merchandise manager for Macy's (M), a vice president at Gap (GPS), and is now the founder of jcr3 which is a retail consulting practice. This is a lot of retail industry knowledge both domestic and international. In another announcement Joe's announced a new brand exclusive to Macy's. The else line is going to start out in 140 stores throughout the U.S. and online at macys.com. This line will start at $68 per pair to get customers that can't afford the Joe's stamped jeans. I will be waiting to hear the sales on the conference call next week, and then what a full quarter's worth of earnings looks like when the next quarter is reported.
On the February conference call the numbers were encouraging. The new 55 colors program is reducing inventory and increasing reorders. Retail sales increased 44% with 12% same store sales growth; and it also noted that the company has seen similar numbers thus far during the current quarter. I like the comment about being able to cut capital expenditures for new stores down to $200,000-$250,000 and around 1,500 sqft. Francesca's (FRAN), a similar boutique type retailer spends just over $300,000 to build out new stores averaging 1,400 sqft. It also discusses opening 10 of these stores in 2012 and moving more production to locations with cheaper fabric prices. I like the new lower price point line and hope that it will be enough of a success so that it can make it into the rest of Macy's stores. It is about 40% less than the regular Joe's line, so it allows customers to get a "premium" denim jean for a reduced price.
In its 2011 annual report Joe's adds to 2012 strategy by working on developing other tees, tops, and non-jean pants to help fill out the brand. I am encouraged by the balance sheet with $12.7 million in cash to only $3.3 million in debt. To add to that it generated $9 million in free cash flow over the trailing 12 months and I also like the 26% insider ownership. Shares are up 16% in the last week, based of what I presume is speculation of better sales for the most recent quarter. With the wholesale business struggling, I think we'll see revenues for the quarter come in between $21-$23 million and same store sales near 13%. A huge factor will be information about the release of the else line at Macy's.
If you're up for a little gamble, buy in here and take the ride higher with good news on the call. If you want to make sure Joe's is on the right path, wait till second quarter results to see if the Macy's release is successful, costs are reduced due to production relocation, and new retail store build out expenses are meeting the target. If Joe's can pull it together I think we could see shares near $2 for the end of 2012. And that would be a positive sign for 2013 and growth from continued improvements.
Disclosure: I am long FRAN.
Additional disclosure: And I may initiate a long position in JOEZ within the next 72 hours.