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Wednesday, August 16, 2006

What's Next For Jones Apparel?

Yesterday we promised to offer a likely path for Jones Apparel now that the sale process has ended unsuccessfully. This morning in a press release Jones Apparel (JNY) confirmed what was all over the media reports yesterday, and that was that the company has ended its sale process and that it will remain independent.

Peter Boneparth, President and Chief Executive Officer, stated "The Board has concluded that at this time the best alternative to maximize long term shareholder value is to continue executing on the Company's strategic business plan. Jones has built a reputation for excellence in product quality and value. The Board, management team and I look forward to continuing to grow and strengthen Jones's position as a leader in the apparel, footwear, accessories, and retail industries."

Translation: No one was willing to pay up for us.

At $29.07 at yesterday's close, the company is back towrd the lower-end of the 52-week trading range of $26.47 to $36.10. Shares this morning are down to $28.51 after the open. For a mature retail name it is also fairly valued with a 17.25 P/E, and the $3.28 Billion may be at the higher-end that private equity firms are willing to pay for a retailer. One of the biggest hurdles for a private equity firm wanting to buy a retailer is that the predictability of cash flow is quasi-superficial since retailers are partially new companies every 4 to 6 months as they introduce new seasonal lines. That isn't entirely the case with Jones as they have many footwear, jewelry, and accessories, but it is a prevailing hurdle for private equity firms to overcome.

Here are just some of there brands. BETTER APPAREL: AK Anne Klein, Jones New York Collection, Jones New York Dress, Jones New York Signature, Jones New York Sport, Kasper, Le Suit, Nine West. FOOTWEAR, JEWELRY, & ACCESSORIES: AK Anne Klein, Bandolino, Circa Joan & David, Easy Spirit, Enzo Angiolini, Gloria Vanderbilt, Joan & David, Jones New York, Judith Jack, Million Wishes, Mootsie Tootsies, Napier, Nine & Company, Nine West, Pappagallo, Sam & Libby, Westies.

So those are just some of their diversified brands, and it is obvious that the company has more alternatives than say The Gap (GPS) who has a limited line of retail chains. What first comes to mind is that the company may want to begin exploring the potentiality of breaking the company up into pieces to unlock shareholder value. Please read below in the conference call notes that the company says it will not pursue that for now, but that doesn't mean anything. That spin-off and breakup hasn't yet proven to be successful for Cendant (CD), but this is a much more straight forward situation full of easily understood operations. This spin-off and breakup of a retailer was a strategy that The Limited (LTD) chose long ago when it broke off Too Inc (TOO) and Abercrombie & Fitch (ANF), and that was very successful for the shareholders that went through that back at the time. It will obviously take some time for this to occur, because the company is just now recovering from a failed attempt to find a buyer.

Jones has not been without growth, but that has petered out for now. Its 2005 revenues were 5.07 Billion, 2004 revenues were $4.65 Billion, and 2003 revenues were $4.375 Billion. Street estimates put 2006 revenues actually at $4.75 to $4.8 Billion.

Some conference call notes from the company this morning: The company believes that there is more value than the levels of interest were coming in at. It has share repurchase authorization and the dividends will continue. The company is saying that the sale of pieces of the company is NOT a plan of the current management team, as stated by the company in the conference call. One thing the CEO was adamant about was maintaining their Investment Grade status so they would maintain a solid balance sheet, and the CEO signaled that the company would remodel rather than buy.

So why would I go out on a limb and challenge this notion that the company would not want to pursue a break-up? The company can state their desire to remain a sum of the parts all they want, but the stock has been stuck in a high-$20's to high-$30's for almost all of the last 5-years. What happens in sports teams and with many public companies all the time right before a manager gets fired is that management issues a formal vote of confidence. After analyzing companies for so long, it is also easy to garner a sheer lack of trust and faith in what management says at most public companies. The only thing that is still a wildcard is IF the parts would actually be worth more than the sum. The company feels the sum is worth more than the parts, for now. With so many units you would think there could be value, and even though the company states it doesn't want to breakup the company or sell units it may not have a choice. The key is FOR NOW.

Jones never did formally make it onto our BAIT SHOP of takeover candidate predictions. It was in a no-man's land (well women's) that just wasn't very attractive for a private equity buyer. The valuations weren't excessive, but there just didn't look to be an easy step-in and simple turnaround that would be cheap and easy. Private equity firms are very different from turnaround managers, and this company needs a solid turnaround team whether it needs to be acquired or not.

The all or nothing situation was addressed by management comparing this to a remodel of a house and what a buyer is willing to pay before a remodel versus after. Someone may want to tell this guy that the housing market is just as bad or slow as his stock.

Please understand that it would be a long time before any such scenario come into play. It is the most likely strategy for the company down the road, unless a bidder is waiting in the wings to see if the company gets another big hit to its share price. Unfortunately, even if that occurs, it would be some time before enough shareholders at the new (would be) lower prices would be able to have enough votes to approve such a lower-price bid. For now, the company has likely put a lid on how much interest the street will have in the company.

Jon C. Ogg
August 16, 2006
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