I will put JNY in the top 3% of worst-managed retail companies of the past decade. It was so textbook how the company was robbing its brands of capital, acquiring marginal content to give the optical illusion the its top line was growing, and printing unsustainably high margins. But we all know that already. That fateful July day when Boneparth was ousted in the Summer ’07 and the Street realized that $3.00 in EPS was only a pipe dream and the stock subsequently plunged to $13 is proof enough of that. What we also know is that every dog has its day, and even though the current management team is average at best, the trajectory of the P&L here is still a winner.
We’re coming in at $0.36 for the quarter versus the Street at $0.28, and we’re 35% above the Street next year at $1.50. A couple of things to consider on the model that people might not be considering…
1) First, Liz Claiborne is walking away from about $400-$500mm in business at wholesale with its new deal with JC Penney. JNY is the obvious beneficiary. Not a 3Q event, but it’s on the immediate horizon.
2) The most powerful part of this story is that JNY is accelerating its store closure program – simply because the commercial real estate market (or lack thereof) has created a window for JNY to bail on money-losing businesses. We’re talking 240 stores out of about 1,000 – and the stores in question are losing money to the tune of a -10% EBIT margin. You do the math…$1.5mm per store *240 stores *-10% EBIT mgn. Yes, that’s about 5points in margin accretion to retail – even with the sales base dropping by a third. This is a business that had a -7% EBIT last year.
3) Not sure if anyone noticed, but t his is the best boot cycle we’re seen in years. A primary beneficiary? 9 West – about a billion in sales.
Do I love this company? Course not. But my feelings about a company have nothing to do with my analysis of its financials. Numbers need to head higher here. Mr. Market knows this to a certain extent, as short interest is sitting at a measly 5% of the float – low for JNY. But an offsetting factor there is the simple fact that (until late last week) no one has asked me about the company in six months.
