Given how 'out of favor' JNY perennially is we’re tempted to want to go the other way – and today’s beat certainly supports that point. During the quarter, both Domestic Wholesale Jeanswear and Domestic Wholesale Footwear & Accessories confirmed not only the turn we saw last quarter, but a reacceleration in both sales and profitability in these key segments (accounting for 65% of total EBIT). At the same time, despite further revenue deceleration, incremental losses slowed in Domestic Wholesale Sportswear arresting the contracting profit trend reported in each of last four quarters. Not bad at all.
The leverage in this model – both operational and financial – is nothing short of extreme. If only a few things go right, this company can print $2 in earnings power – which makes a $12 stock look like a seriously mispriced asset. But there are two ways to get to the earnings power in question. A) improve the entire portfolio of 30+ brands under the JNY banner, or B) take a draconian stab at this portfolio and do to it something akin to what LIZ/FNP did over the past two years.
Despite the glaring evidence that things are getting better, the reality is that the risk/reward is still not good enough for us to get involved here. Why? Simply put, management is gunning for option ‘A’. For a portfolio that is simply ‘average’, we can’t bank on broad-based improvement in the macro environment to unleash the earnings, and we don’t have the confidence yet that JNY possesses the tools to keep the recent momentum going. We want option ‘B’.
We think that JNY needs to go the way of FNP. It needs to focus its portfolio into the brands the matter most, and dispose of/sell the rest. JNY has over 30 brands, and our sense is that the average investor can’t name the brands representing over a third of JNY’s revenue base.
Realistically, the best way to monetize this content will be for department stores to strike exclusive deals with the company for 100% wholesale distribution, or the brands should be sold to the retailer (like FNP did with JCP and the Liz Claiborne Brand).
When all is said and done, we think that this will prove to be a more valuable strategy for shareholders than to try to continue to run this company as a multi-brand portfolio.
The problem is that management seems to have zero desire to go down this path. They seem to be comfortable running the ship much like it has been run for the past 20 years. Are there call options in footwear and International? Yes. And they’re making great strides today in US Wholesale. Both of these things are great. But they require too many leaps of faith for us at this point, and we don’t like investing based on faith.