JNY: Insight On A Jeanswear Deal

 

To the extent that this is not a firesale because business is tanking, it makes sense strategically. But the timing is suspect.

 

 

There are puts and takes on this proposed JNY Jeanswear sale to Israel’s Delta Galil Industries (DELT.IT). Netting it all out, I come out on the plus side – IF it actually happens.

 

Biggest positive:  It would provide a $4.50 slug of cash to a company with a sub-$10 stock. And let’s face some facts, with brands like l.e.i, energie, Gloria, and Jessica Simpson selling squarely in mid and lower tier channels in a stagflationary environment, it’s not the most defendable business out there.  In fact, much of this content exists not because it should, but because years of deflationary sourcing costs and lower interest rates allowed JNY to roll up a portfolio of average content, and then keep it afloat while milking for cash.

 

The new reality removes the opacity of this model, and management knows this. If they can relieve the balance sheet pressure, get rid of the low end of the portfolio, and simply rid themselves of a distraction while they focus on real content – like Jones New York and Weitzman – then I’m ok with this.

  1. On the negative side, the company came out and said that it would use proceeds to repo stock. That’s great…really, it is. But they have over $7 per share in debt, deferred payments remaining  for its Stuart Weitzman acquisition and a sub-$10 stock. Maybe they have such huge confidence in their business such that a sub-$10 stock is ridiculous to them. That’d be super bullish, and I definitely won’t ignore that. But in this market, I’d like JNY to finally put on its conservatism pants and get rid of debt.
  2. The price seems out of whack. Either; a) the multiple is either really low, b) the business is really bad, or c) the business being discussed is actually a subset of what we otherwise currently classify as JNY Jeanswear. Wholesale Jeanswear generated about $820mm in revs last year at a respectable 9.3% EBIT margin. On those numbers, the range discussed amounts to 4.0-4.5x EBITDA. Granted, those margins are what I’d consider a peak. Haircut them by 25% to what’s realistic for this year, and it suggests 5.0-5.8x EBITDA on the disposal.  This compares to JNY’s current multiple of around 4.8x EBITDA.
  3. Of course, the bigger curve ball would be that JNY is missing the quarter meaningfully, making the multiple higher than it seems. That would also synch with timing of this leak. I wouldn’t put this past them to divert investors’ attention away from the quarter in favor of a capital markets event.

Lastly, be careful on this one. LIZ looked like a great idea at $10, and not a whole lot changed while it dropped to $4 – certainly not enough to explain away a 60% loss in equity value. Yes, JNY looks cheap. But it could be a value trap waiting to happen. I think LIZ offers up a better portfolio, more upside, and far stronger downside support.

 

 

JNY Segment Results & 2011 Outlook:

JNY: Insight On A Jeanswear Deal - JNY Segs 10 11

 

JNY: Insight On A Jeanswear Deal - JNY Guid 10 11

 

JNY: Insight On A Jeanswear Deal - JNY 10 11

 

Brian McGough

Managing Director

 

 


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