Topic: Growth Stocks

Jones Apparel Group Inc. $16 – New York symbol JNY

JONES APPAREL GROUP INC. $16 (New York symbol JNY; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 85.3 million; Market cap: $1.4 billion; WSSF Rating: Average) designs clothing, accessories and footwear under several brands, including Jones New York, Gloria Vanderbilt and Nine West.

In September 2007, Jones sold its Barneys New York upscale clothing chain for $858.7 million. The company used the cash to buy back $496.9 million worth of its shares. Jones still has roughly $300 million remaining under its current authorization plan.

If you exclude the gain from the Barneys sale and other unusual items, Jones’s earnings in the third quarter of 2007 fell 22.1%, to $51.7 million from $66.4 million a year earlier. Thanks to the share buyback, per-share earnings fell just 13.6%, to $0.51 from $0.59. Sales slipped to $1.03 billion from $1.08 billion, as warm weather in September hurt demand for winter clothing and boots.

Jones is making progress with its plan to cut annual costs by $100 million, including working more closely with third-party manufacturers and harmonizing computer systems. The company also aims to sell some of its lessprofitable brands.

The sale of Barneys increased Jones’s exposure to modestly priced brands, which face strong competition from private labels. However, the sale strengthened Jones’s balance sheet. Long-term debt of $779.0 million is roughly equal to two years’ cash flow, and it has $109.0 million ($1.24 a share) in cash.

The stock trades at 12.6 times its likely 2007 earnings of $1.27 a share. Earnings in 2008 should grow to $1.60 a share, which implies a p/e of just 10.0. The gains from the restructuring should give Jones enough cash to maintain its $0.56 dividend (3.5% yield).

Jones Apparel Group is a buy.

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