IB Net Payout Yields Model

Higher Costs at The Jones Group Hits Retail Sector

The Jones Group (JNY) reported higher costs today causing them to miss earnings estimates by a little over 10%. Consequently the stock has slumped over 20%. Considering the stock trades at a remarkably low 10x estimates the reaction in the market has been harsh.

JNY blamed higher commodity costs such as cotton, wages from employees in Asia, and transportation costs from having to ship goods via air which naturally costs a lot more. The first 2 costs should have been built into analysts models and impact most of the industry. The higher transportation costs could very well be a JNY specific issue of not ordering enough inventory early. 

The news has caused a huge drop in the stock of Liz Claiborne (LIZ) seen as a major competitor to JNY and other retailers owned in our portfolios including Sears Holdings (SHLD) and Dicks Sporting Goods (DKS). 

It's too early to tell whether this is an industry issue or just bad management and modeling with JNY. Yesterday, Coach (COH) reported fantastic results showing that labor costs and inventory levels aren't an issue with properly managed companies. Good companies produce great results with no excuses and bad companies blame the weather for every problem. JNY has some 'blame the weather' sounds to their report. 

Noteworthy is the conflicting message in the Marketwatch piece. First, the company and company is struggling with too much inventory and a slower consumer, but then the CEO talks about significant volume increases in Q4 and higher costs to obtain inventory on time. Thought they had too much inventory? If thats the case, I'd tell them to send it via rowboat not air next time. Hmm.....

The retail stocks owned in the Stone Fox Capital portfolios still remain too cheap to consider selling. This news isn't positive for the sector, but most of the costs are seen as temporary except for the higher labor costs in goods producing countries. That trend is likely to continue. JNY did report 19% revenue growth and likely got caught by a quicker bounce back then expected as much as anything. They had a relatively strong 2009 so maybe this is partially a payback. Holding my retail stocks for now. 

  • In addition to higher labor wages, cotton and other raw-material costs, tight capacity in factories in the Far East led to slight product delays and the company flying in more products than last year during the quarter ahead of the key holiday season, Chief Executive Wesley Card said in an interview.
  • “Into next year, I know we are raising prices,” Card told MarketWatch. 
  • Despite the cost pressures, Card said he’s optimistic about the upcoming holiday season, with consumers driven to shop by new fashions.
  • “We expect a significant volume increase in the fourth quarter,” he said. “People are still spending reasonably strong. There’s some emphasis on value, but the fashion element is critical.”
Company PR:
  • Revenues for the third quarter of 2010 were $1,022 million, as compared with $856 million for the third quarter of 2009, a 19.4% increase.    
  • The Company reported adjusted earnings per share of $0.54 for the third quarter of 2010, as compared with adjusted earnings per share of $0.46 in the same period last year. Results for both periods exclude the impact of the charges considered by management not to be part of ongoing operations 


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