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Joe’s Jeans (JOEZ): At Current Levels Joe’s is Worth Taking a Long Look

|Includes:Joe's Jeans Inc. (JOEZ)
Since the beginning of May the S&P 500 is down 6.7% and remains up only 1.1% for the year. 5.5% of the decline has been in the first nine trading days of June, during which the S&P 500 has only had two positive days.
Small cap stocks, as measured by the Russell 2000 index, have seen an even larger slide falling 10.2% since May. The Russell 2000 is now down 0.8% on the year. Of the Russell’s recent slide 8.4% has taken place in June, and the Russell 2000 has also had only 2 up days in June thus far.
In sell-offs of this type certain small cap stocks fall disproportionately. I believe Joe’s Jeans (NASDAQ:JOEZ) is a victim of the sell-off, rather than having had a material change in its business prospects. Since May Joe’s stock has declined 32.9%. 21.7% of this decline has been in the recent June slide.
The decline in Joe’s stock to $0.66 per share means that the company now has a market capitalization of only $42.5mm and an enterprise value of $40.5mm.   From a valuation perspective Joe’s is trading at 0.7x book value, 0.4x sales, and 6x trailing EBITDA.
There is no question that Joe’s stumbled in 2010/11 when the company overshot on the Jeggings trend and didn’t capitalize on the non-denim trends that impacted women’s fashion. Further, given their nascent retail strategy they were hurt by the slow-down in the women’s wholesale business. These types of fashion “misses” are going to happen from time to time, but what’s important is how management reacts. For a small company like Joe’s the impact of these issues can change the perceived trajectory of the entire company. This can add significant volatility to the stock, which as a small cap has material retail ownership adding even more volatility.
Any double-dip recession scenario, further deterioration on the job creation front, prolonged high gas prices, etc. will impact consumer spend – and Joe’s is obviously dependent on consumer spending. One positive is that Joe’s international business is relatively small and their near-term growth story is not depending on Europe removing a potential roadblock. 
However, baring significant economic deterioration of the US economy, Joe’s fall line will show whether or not management has successfully reacted to fashion trends. Having seen the catalogues I believe they will be successful. Also, remember that Joe’s is a relatively high-end product, which will prove more resilient in a down turn and gives them greater ability to pass-through input costs. 
A strong argument can be made that current levels are a great entry point into Joe’s. I would encourage anyone who follows the company and is thinking about whether or not to invest to head to the story to see, feel, touch, and try on the merchandise. I would expect the fall lines to be in stores in the next 3-4 weeks. If the economy is in a “soft-patch” and growth picks back up in the second half as many economists are predicting an investment in Joe’s will have been well worth the time in the dressing room.

Disclosure: I am long JOEZ.
Stocks: JOEZ