A sale of Jones Group Inc. (JNY:US), even in pieces, is the best salvation for shareholders stuck with the cheapest fashion stock in America.
Shares of Jones Group climbed (JNY:US) 16 percent this month after reports that the owner of the Jones New York and Nine West brands is weighing a sale of all or part of the company. Even after the gains, New York-based Jones Group trades at a lower valuation relative to net assets, sales and earnings than any other similar-sized U.S. apparel maker or specialty retailer, according to data compiled by Bloomberg.
“I truly believe Wall Street does not give it the proper valuation,” Marc Ravitz, executive vice president at New York-based Grace & White Inc., which owns Jones Group shares, said in a phone interview. “If that can be achieved by either a partial sale or a complete sale, I think shareholders would benefit.”
Selling businesses such as sportswear would help improve profitability (JNY:US), according to Citigroup Inc. The $1.3 billion company may interest other retailers with brands such as Rachel Roy and Stuart Weitzman, while private-equity firms could be lured by the chance to cut costs and divest units, said Ravitz. Financial buyers would be more likely to bid for the entire company, which should be valued at as much as a 45 percent premium, said Royce & Associates LLC.
Jones Group hired Citigroup to evaluate options including a sale, people with knowledge of the matter said this month. The retailer is willing to talk to bidders interested in the entire company or pieces, said the people, who asked not to be named because the process is confidential.
A representative for Jones Group declined to comment.
The seller of Brian Atwood thigh-high boots and Easy Spirit sneakers is languishing at a cheaper multiple relative to earnings, book value (JNY:US) and revenue than any U.S. apparel, footwear, accessories or specialty retailer valued at more than $1 billion, according to data compiled by Bloomberg.
The median price-earnings ratio for the group is almost 19, compared with about 12 at Jones Group, whose preliminary quarterly results missed analysts’ earnings (JNY:US) estimates for the period ended April 6.
“The weak earnings performance and multiple discount provide a catalyst to explore strategic alternatives,” Peter Dalena, a credit analyst at Citigroup, wrote in a July 10 note to clients. “A sale of some businesses makes the most sense.”
The company is already closing 170 stores and trimming its workforce to improve results. Jones Group would create a “cleaner business model” and boost its valuation by further scaling back or disposing of its weak-margin retail business and shedding brands from the declining U.S. sportswear division, Dalena wrote.
Jones group also could divest Anne Klein, a seller of women’s business suits and dresses, said Ravitz of Grace & White, which oversees more than $800 million.
“Anne Klein to me seems incredibly underutilized,” he said. “There could be tremendous growth potential for Anne Klein and it’s not being exploited.”
A sale of the entire company offers another route to boost shareholder returns, Ravitz said, estimating that Jones Group’s value in a takeover should be “significantly higher” than the current stock price, which was $15.86 as of yesterday.
Today, the shares rose 1.8 percent to $16.14.
While Jones Group’s brands would fit well within other retailers, the company also could lure interest from private-equity firms seeking to split up (JNY:US) the retailer and profit from asset sales, according to Ravitz.
Financial buyers would also be lured by the chance to improve Jones Group’s margins and increase free cash flow, according to shareholder Calvert Investments Inc.
“Jones is an attractive buyout candidate,” Steven Soranno, a Bethesda, Maryland-based analyst at Calvert, which oversees more than $12 billion, said in a phone interview. “It has a strong brand portfolio. It can have some cash flow leverage.”
Jones Group’s trailing 12-month operating margin (JNY:US) of 3.1 percent is lower than 91 percent of U.S. peers, according to data compiled by Bloomberg. The company had $36 million in free cash flow (JNY:US) last year.
Private-equity firms are more likely to purchase all of Jones Group, while a rival clothing seller would probably favor buying only a part of the company, according to Boniface “Buzz” Zaino, a fund manager at New York-based Royce, which oversees about $36 billion, including Jones Group shares.
Investors are likely to demand $22 to $23 a share in a takeover, he said. The stock last traded above $20 in 2010.
David Glick, an analyst at New York-based Buckingham Research Group, wrote in a July 9 note to clients that a sale of the entire company is unlikely in part because buyers wouldn’t achieve sufficient returns. At the same time, selling off brands probably won’t create value for shareholders, he wrote.
Given Jones Group’s earnings struggles and faltering performance at some of its brands, the company may need to weigh a sale of all or part of itself, according to Royce’s Zaino.
“Management has been under a lot of pressure,” he said. “There’s a point in time when you turn it over to someone else.”
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