• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Liz just changed its name to 5th and Pacific after consolidating into a focused portfolio of three relevant growth (either current or potential) brands. Jones, however, is as unfocused as ever. We think Jones should change its name to 9West & Other.

The following chart of JNY’s brand make-up tells a pretty good story. The simple fact that ‘Other’ accounts for the greatest revenue contribution is a massive risk. Our sense is that most consumers would not be terribly upset if half of JNY’s portfolio simply went away. That’s not a very defendable place to be -- -especially in 2012 where we think the competitive climate will be the toughest it’s been in over 5 years due to higher inventories, and more price compression sparked by JCP, KSS, SHLD, M, and TGT.

JNY: 9W & Other - JNY brand contribution

 

One of the biggest callouts in the quarter, is that regardless of what the P&L tells you, sales declined. Kurt Geiger, which is primarily a piece of JNY’s international retail Segment (90-92% of the brand’s sales) contributed an incremental $100mm to the top line. Excluding Geiger, Jones’ 2.3% top line growth is reduced to a 4.2% organic contraction in sales (see chart below). That’s its slowest organic growth rate since 2009.

JNY: 9W & Other - JNY organic growth

 

Yes JNY is in the process of rightsizing its brand portfolio by reducing the domestic retail door count however that only accounts for $13mm in the YoY reduction in organic sales. The domestic wholesale sportswear business, jeanswear business and FW/Accessories businesses were also down accounting for an additional $64mm in sales decline. To stop the bleeding, for the second quarter in a row, JNY pulled back entirely on any incremental investments in the core, increasing SG&A only $46mm YoY with $47mm of operating expenses coming from Kurt Geiger, netting a $1m reduction in organic spend. How does a company “revitalize its core” without increasing its investment spend? Enter 2012.

We’re coming in at $1.17 this year, and we’re taking down 2013 materially. Our prior view has been that JNY would ‘pull the goalie’ and give people hope of a $2.00 earnings number – even if doing so for all the wrong reasons, and setting up a massive miss in 2014.

Now, we don’t think JNY has that luxury. It’s going to have a very very tough 2012. Stay away.

JNY: 9W & Other - JNY SIGMA

 

JNY: 9W & Other - JNY RNOA

 

Below are our notes from the call:

 

Quarter Roundup:

Adjusted EPS of $0.10 (including $0.07 benefit from income tax) vs. $0.03E

Top line of $894 includes $100mm from Kurt Geiger

P&L performance in line with pre-announcement

  • Q4 GAAP results
  • 2011: net loss of $21mm, ($0.27) EPS (includes pre-tax non cash asset impairment charge of $33mm related to impairment of trademarks primarily in jeanswear business)
  • 2010: net loss of $40mm, ($0.47) EPS (included $38mm impairment from jeanswear business)

Gross Margin improved 480 bps

  • 240 bps contribution from Geiger
  • 240 bps contribution from core business

"We remained very focused on gross margin and believe that we will continue to favorably impact margins through tight inventory control and other initiatives. "

SG&A:  +$46mm (+18%)

  • 47mm from Geiger (organic SG&A down)
  • Additional investments made in Stuart Weitzman retail openings
  • Incremental investments in Jones business in Spain (not present in SG&A last year)
  • Spending in domestic retail and other areas down YoY  due to lower store count and other businesses due to lower revenue levels

Interest expense: +$4.5mm reflecting issuances of notes in March 11

Income taxes: lower than anticipated reflecting favorable state tax settlements and larger impact of foreign tax differentials (total impact of $0.07 benefit)

Inventories controlled: Trending down sequentially, in line with future shipping plans

 

Comments re Overall Environment:

  • Comps store sales of customers were strong over holiday period but January was softer; sales continue to be promotionally driven (particularly in traditional apparel and footwear sectors) which will continue to impact sales
  • Promotional cadence applies at international with Europe especially weak
  • Consumer confidence softening in light of worldwide economic uncertainty and political noise

Taking steps to Enhance Profitability:

  • Focusing on unlocking value in core through enhancement and innovation
  • Filling white space in portfolio with strategic investments

5 Pillars of Growth:

  • Revitalize core brands
  • Essential to driving performance in traditional sportswear, an area of weakness in the Dept store channel throughout 2011
  • Expanding destination product strategy has improved brand resilience to marketplace challenges
    • Have expanded the Jones New York Easy Care destination products into a larger porgram which saw a significant increase at whole sales YoY during the quarter
    • Drove a strong overall AUR increase in Jones New York collection business in 2011
    • Transforming Jones New York Retail experience: 2011 increase in conversion is helping challenges with traffic
    • Lord and Taylor flagship location reported DD comp in Q4
    • Nine West showed gains as a result of more innovative destination products
      • Sales up season to date
      • AURs have increased at key accounts
      • Destination products include trend boots, loafers, mary janes (responsible for increases at largest retail account)
  • Invest in emerging brands
  • High potential emerging brands showed solid progress and momentum in Q4
  • Stuart Weitzman showed strong demand for global sales, up 19% driven by strong retail comps
    • Opened 5 Weitzman locations in the US in 2011- planning 50 franchise locations in 2012 & 2013
    • Kurt Geiger Q4 sales up amid solid comp growth
      • See significant brand and distribution synergies from acquisition
      • Distribution of Jones brands across Geiger network in Europe doubled in 2011
      • Significant launch at retail in Germany to occur in 2012
  • Expand international footprint
  • Anne Klein gaining traction out side of North America
    • Improve DTC Performance
    • Operational Excellence

 

2012 Domestic Retail launches:

  • Kurt Geiger retail and E-commerce launch in the US
  • B Brian Atwood, was top contemporary shoe launch at Saks, Bloomingdales, Neiman Marcus and Nordstrom in 2011
  • Name Footwear new launch of the year

 

Commentary on 2012:

  • Has purchased 750,000 shares at an average price of $9.13
  • Full year:
  • Revenues to range $3.8bn to $4bn
  • GM: Goal to build on 2011
  • SG&A: $1.21-$1.25bn (increase of $70 to $110mm, majority of full year impact from Geiger)
  • Operating Cash Flow:
    • 2011 benefitted from reduced investment of working capital from lower income tax payments; not expected to continue into 2012
    • 2012 target for cash flow is $150mm
    • Make final payments related to SW acquisition in December
    • Cash: Expect to end 2012 with $100mm in cash & nothing drawn of revolver with no other debt coming due until November 2014
      • Q1
      • Revs: $930 to $955 (down 1.2-3%)
      • GM: could increase 120 bps primarily as a result of the KG business
        • Will see only 50 bps improvement should the quarter become more promotional/challenging
        • SGA: $295mm to $305mm (+10 to 13%) due to Geiger
          • 2Q flat YoY

 

Q&A:

Retail Business: Updated timeline for profitability

  • Environment (heavy promotions) set the company back, disappointed with setbacks
  • Aggressively closing underperforming stores
  • Converted several of the high overhead underperforming stores to Stuart Weitzman flagships
  • A lot of work has been done to retool product in outlet stores, those in the FW area are highly profitable
  • Will continue to trim stores
  • Has taken a long time to right size the portfolio
  • Close to 4 wall profitability in 2012
  • Loss will be reduced significantly in 2012 from 2011

Potential for more Aggressive Share Repurchase

  • Given prices, first use of cash would be for share repurchases

Stephani Greenfield: Scoop experience vs. expectations on JNY

  • Experiences prior to Scoop with DKNY and Spree
  • Scoop was a breakthrough retail concept
  • Merchant at heart- can translate retail merchandising across any platform
  • Ability to navigate a customer at different price points such as HSM and Scoop
  • Have seen impact in few short weeks

 Shoe Business: AUC/ASP esp. at Nine West

  • In terms of the category, expecting a very good FW year, FW accessories and cosmetics have been strong, expect that to continue
  • Seeing very strong interest in boots for the fall
  • Styling moving more towards the casual, riding, western style boots- less emphasis on dress boots
  • Weather patterns did impact business this year but looking good for next year
    • Differentiating and elevating view at nine west in own stores
    • Higher fashion level and more forward looking products
    • Costing:
    • Done on a product by product basis
    • Labor component going up
    • Benefit on apparel side down YoY
    • Leather is up YoY
    • Oil based products up slightly
    • Working with distribution system to offset increases there
    • Availability of factory business should propose the opportunity for some cost benefits there
    • Expect AUC and AUR increases to largely offset one another in 2012

Sales projections for international retail

  • Geiger expectations
  • 90-92% of volume there is retail
  • Total year 360mm
  • 90-92% of $360mm would end up in retail component ($324-$331mm)
  • Kurt Geiger operation is launching more of JNY brands in international
  • 42% of WS business at Stuart Weitzman was international wholesale accounts

 

Mid Tier: Projecting mid tier channel to contribute 13% of sales (implied increase reflect growth)

  • JCP is a good company, has not reached reporting threshold of 10%, forecasting reflects some drop in sales there
  • Attended the meeting, have meeting scheduled with lots of thoughts how to go forward, not prepared to discuss where the company might be headed with that, might be some dropouts but not jumping the gun before sitting down with senior management

Traditional/modern traditional: Has it come to an end?

  • JNY continues to believe in the traditional sportswear business
  • Brand itself/category represents the working career woman
    • Business is soft reflecting consumer sentiment
    • Great degree of conservatism reflected in the customer
    • As the economy improves, sentiment will drive comfort and thus sales
      • Overtime, expect sales mix to shift to a greater portion of contemporary brand sales but will still see a significant portion coming from traditional sportswear

Hiring:

  • 0 reflux and renewed interest in the creative/marketing community
  • Changes will be ongoing to bring on new talent and creativity

Nine West FW Exclusive mix (currently 60%)

  • Will continue to differentiate own stores with new product, % will continue to increase in favor of exclusives
  • Will be on trend at greater value
  • Customers have a lot of variety to choose from
  • Stores have a natural edit process

Domestic vs. international market- how far behind is international from the domestic market (Comments re 3Q12 & Fall orders)

  • Just now starting to book into fall, very positive reaction
  • Retailers are concerned about back half and how conservative it's going to be
  • European Luxury business (which is a big percentage of Geiger business) has held up
  • Europe's economy fluctuating wildly
  • Business skyrockets a few weeks ago with Jones boots as well as Geiger sales strengthening (saw double digit increases during the period)
    • Large variable cost base with a concession business