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JNY: As Good As It Gets

“Come on in, and try not to ruin everything by being you.” – Hunt to Nicholson in 1997’s As Good as it Gets.

This is going to be a great quarter for JNY. Mid teens top line growth due to refilling the wholesale channel in Better Apparel as well as Footwear, adding on the Stuart Weitzman acquisition, and smaller launches such as Jessica Simpson denim, etc… But, mark these words, for JNY, this is as good as it gets.  

Even if we look at the factors above and plot against the puts and takes vs. a year-ago, the company faces a decelerating top line starting in 4Q.  This does not assume a significant rollover in the consumer (i.e. real consumption goes negative – again). On top of that, JNY goes against some big margin numbers at the same time cotton has gone parabolic. Does the company have an appropriate risk management process around this? In fairness, one of JNY’s strengths over time has been its ability to get product to the customer packaged to spec in a tight delivery window with a low failure rate. But the last time it was in front of investors, cotton was at $0.80. Now it is at $1.27.

What else has happened?

  1. Two weeks ago, JNY announced a sudden departure of the CEO of its wholesale footwear and accessories business, as well as the CEO of its Retail business. For what it’s worth, wholesale footwear is perhaps JNY’s most defendable business, and 9 out of 10 bull cases I hear involve a turnaround in its perennially money-losing retail operation. We can’t imagine that these two gents where shown the door because the business was knocking the cover off the ball.
  2. JNY dropped the name ‘Apparel’ from its name. I don’t get it…

Key Questions In My Mind

  1. I don’t understand how JNY’s Better Apparel business is running at a 13-14% margin – exceeded historically only by the time when JNY operated $1bn+ of Ralph Lauren business at a 25% margin.
  2. Ditto for denim. The last time margins broke double digits was when Polo Jeans was a meaningful part of the mix. How can this be sustainable?
  3. The Jones of old would get to this point, and then they’d use free cash flow to buy something. With Stuart Weitzman, CEO Wes Card worked out a ‘merge now and pay later’ deal with former JNY CEO Peter Boneparth for the sale of Weitzman (owned largely by Boneparth’s private equity partners). I’m not saying this to pick a fight – but simply to point out that JNY’s leverage at this point leaves little room in its model to revert to its old bad practice of buying growth.

Our core thesis with JNY remains simple. Without a major reinvestment in the company – JNY is locked into earning $1-$1.50 in perpetuity. When people start to believe $2EPS numbers (as we do today), then the short case becomes more powerful. When the cash flow stream inevitably blows up because the company can’t kick the can down the alley anymore, then we can put on our bull hats.

As it stands today, this quarter will be “As Good As It Gets.” The party will, in fact, be ruined once the real JNY shows up. Fundamentally this name should break down within 2 quarters.

As it relates to Keith’s levels… “JNY starting to see price momentum breakdowns (trading below its TRADE line of 19.74) as volume accelerates = bearish immediate term signal. The intermediate term TREND line of 17.62 remains intact, so that would be my risk mgt target on the downside for now.”

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