Does Jones Group Look Interesting Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Jones Group (NYSE: JNY) has recently hired Citigroup to advise on the sale of the company. Right after the news, the company reached its 52-week high of $17 per share. Since the beginning of the year, Jones Group has advanced significantly, up 39%, beating the S&P 500’s gain of only nearly 18.70%. Jones Group is currently in the portfolios of several famous investors including Richard Pzena and Joel Greenblatt. Should we invest in Jones Group at its current trading price? Let’s take a closer look.

Consistent growth in sales but fluctuating net income

Jones Group is the leader in designing and wholesaling of more than 35 brands including Nine West, Jones New York, Easy Spirit and Enzo Angiolini. Most of its revenue, $920 million, or 24.2% of the total revenue, were generated from the Domestic Wholesale Footwear & Accessories segment while the Domestic Wholesale Sportswear ranked second with $782 million in 2012 revenue. The Domestic Wholesale Footwear & Accessories was also the biggest operating profit contributor, with $57.4 million in operating income in 2012 while the Domestic Wholesale Jeanswear stood at the second place with $53 million in profits.

In the past four years, Jones Group has experienced a consistent growth in revenue, from $3.3 billion in 2009 to nearly $3.8 billion in 2012 while the net income fluctuated in the range of $(87) million to $54 million during the same period.

What I like about Jones Group is its cash flow generating capability. In 2012, the company produced $113 million in operating cash flow and $36 million in free cash flow. The company employed some leverage in its operations. As of March, it had $988 million in equity, only $45 million in cash and as much as $1 billion in both long and short-term debt.

Ongoing business restructuring

What might attract investors is the company’s plan to improve its profitability, especially the domestic direct-to-consumer business. By mid-2014, Jones Group will close around 170 underperforming domestic retail stores, conduct ongoing reviews of individual store profitability, optimize wholesale channels with a sportswear focus and reduce staff count by around 8%. Jones Group estimated that it would achieve around $40 million in annualized pre-tax savings and narrow operating losses by mid-2014.

Jones Group is trading at $15.40 per share, with the total market cap of around $1.2 billion. The market values Jones Group at as much as 10.44 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization).

How about Brown Shoe and PVH?

Compared to its peers including Brown Shoe (NYSE: BWS) and PVH (NYSE: PVH), Jones Group’s valuation stays in between.

Brown Shoe is trading at $23.60 per share, with the total market cap of around $1 billion. The market values Brown Shoe at a lower valuation, at 8.9 times its trailing EBITDA.

Brown Shoe has a long operating history dated back to 1878, operating around 1,277 retail shoe stores in the U.S., Canada, China and Guam. Most of its revenue, around 62% of the total net sales, were generated from women’s footwear while men’s footwear ranked second, accounting for 24% of the total net sales.

Investors might like Brown Shoe because of its consistent dividend payment at $0.28 per share in the past five years. However, the dividend yield is not so high, at only 1.80% of its current price. Moreover, the payout ratio is quite high, at 85%. Thus, the dividend doesn't seem to be sustainable if a headwind is coming to Brown Shoe. Lower earnings might make Brown Shoe to reduce its dividend payment and lower yield to shareholders.

For the full year 2013, Brown Shoe expects to generate around $2.54 to $2.57 billion in sales, with the diluted EPS coming in at around $0.63 to $0.70 per share. The adjusted EPS is estimated to be around $1.22 to $1.29 per share.

PVH is a much larger company with a much higher valuation. PVH is trading at around $129.60 per share, with the total market cap of $10.50 billion. The market values PVH at as high as 14.65 times its trailing EBITDA.

PVH is one of the largest apparel companies, owning a lot of famous apparel brands including Van Heusen, Tommy Hilfiger and Calvin Klein. Recently, PVH has just made the strategic move by acquiring Warnaco. After the deal, PVH could have the total control of Calvin Klein’s two main categories: underwear and jeans. In the short-term, the acquisition might be a drag on the company’s profit. Nevertheless, Calvin Klein’s growth potential could benefit PVH in the long run.

PVH offers shareholders quite a low dividend yield at only 0.10%. However, the company has quite a conservative dividend policy, with an extremely low payout ratio of 3%.

My Foolish take

As an individual investor, I am not excited about Jones Group at its current market price due to high leverage level, a bit high valuation, and fluctuating profitability. Jones Group could receive a buyout offer that is much higher than its current trading price, but a higher premium should come with potential synergies and annual savings benefits for acquirers.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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