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JNY > SEC Filings for JNY > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for JONES GROUP INC

Form 10-Q for JONES GROUP INC


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information and analysis of our results of operations for the 13 and 27 week periods ended July 6, 2013 (hereinafter referred to as the "second fiscal quarter of 2013" and the "first fiscal six months of 2013") and the 13 and 26 week periods ended June 30, 2012 (hereinafter referred to as the "second fiscal quarter of 2012" and the "first fiscal six months of 2012") and our liquidity and capital resources. The first fiscal six months of 2013 contained five additional retail selling days (the "additional sales days") compared with the first fiscal six months of 2012. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.

Executive Overview

We design, contract for the manufacture of and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children and women's and men's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty stores, department stores, mass merchandisers and international concession arrangements, primarily in the United States, Canada and Europe. We also operate our own network of retail and factory outlet stores and several e-commerce web sites. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.

Significant highlights from the discussion and analysis of our results of operations for the second fiscal quarter of 2013 are as follows:

total revenues were $845.6 million, a decrease of $9.2 million from a year ago;

gross profit, as a percent of sales, decreased to 35.6% from 38.2% a year ago;

operating income was $10.8 million, a decrease of $10.9 million from a year ago; and

diluted loss per share was $0.05, compared with diluted earnings per share of $0.10 from a year ago.

Significant highlights from the discussion and analysis of our results of operations for the first fiscal six months of 2013 are as follows:

total revenues were $1.85 billion, an increase of $63.6 million from a year ago;

gross profit, as a percent of sales, decreased to 35.0% from 37.4% a year ago;

operating income was $27.7 million, a decrease of $34.2 million from a year ago; and

diluted loss per share was $0.04, compared with diluted earnings per share of $0.09 from a year ago.

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Restructuring

We continue to review our domestic retail operations for underperforming locations. As a result of these reviews, we have decided to close retail locations that no longer provide strategic benefits. During the first fiscal six months of 2013, we decided to close 120 underperforming domestic retail locations throughout 2013 and 2014 in addition to the 50 store closings announced in the fiscal quarter ended December 31, 2012. We expect to operate a smaller and more productive chain of domestic locations, with outlet stores comprising a significantly higher percentage of the overall retail portfolio.
We will continue to critically assess individual store profitability, including consideration of converting certain locations to brands that offer the greatest opportunity for revenue growth.

During the first fiscal six months of 2013 and 2012, we closed 40 and 70 locations, respectively, under this plan. Total termination benefits and associated employee costs for all locations closed since 2009 and identified to be closed are expected to be $14.2 million for approximately 2,950 employees, including both store employees and administrative support personnel. We accrued $3.2 million and $1.9 million of termination benefits and associated employee costs during the first fiscal six months of 2013 and 2012, respectively. In connection with our decision to close these locations, we reviewed the associated long-term assets for impairments. As a result of these reviews, we recorded $6.0 million and $0.4 million of impairment losses in the first fiscal six months of 2013 and 2012, respectively, on leasehold improvements and furniture and fixtures located in the locations to be closed. These costs are reported as selling, general and administrative ("SG&A") expenses in the domestic retail segment.

During the first fiscal six months of 2013, we implemented actions to reduce costs in certain selling, supply chain and corporate back office functions (primarily through headcount reductions) and to optimize our wholesale sportswear channel by streamlining our structure to support a brand-focused organization, including the consolidation of certain production, design and selling divisions and consolidation of distribution and supply chain facilities.
Total termination benefits and associated employee costs identified as of July 6, 2013 are expected to be $4.3 million for approximately 100 employees. We recorded $4.2 million of employee termination costs in the fiscal six months ended July 6, 2013. The remaining $0.1 million will be accrued on a straight-line basis over the remaining period each affected employee is required to render service to receive the benefit. These costs are reported as SG&A expenses and affect all of our reportable segments.

Critical Accounting Policies

Several of our accounting policies involve significant or complex judgments and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions that are subjective in nature or are about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of goodwill and intangible assets with indefinite lives. Estimates related to accounts receivable and inventory affect all of our segments. Estimates related to goodwill affect our domestic wholesale sportswear, international wholesale and international retail segments.
Estimates related to intangible assets with indefinite lives affect our domestic footwear and accessories, international wholesale, international retail, and licensing, other and eliminations segments.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.

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Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired. Accounting rules generally require that we test at least annually for possible goodwill impairment. We test our goodwill and our intangible assets with indefinite lives for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. We test goodwill at the segment level where acquired businesses have been fully integrated into our existing structure and at one level below the segment level where acquired businesses have not been fully integrated.

We test both our goodwill and our trademarks for impairment by utilizing discounted cash flow models to estimate their fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trademark valuations; (iii) projected average revenue growth rates used in the models; and (iv) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic and market conditions as well as expectations of management and may change in the future based on period-specific facts and circumstances.

Results of Operations

Statements of Operations Stated in Dollars and as a Percentage of Total Revenues

(In millions)                  Fiscal Quarter Ended                             Fiscal Six Months Ended
                      July 6, 2013             June 30, 2012            July 6, 2013               June 30, 2012

Net sales          $ 835.2        98.8 %    $ 844.3        98.8 %   $ 1,832.8        98.8 %    $ 1,767.7        98.7 %
Licensing income      10.2         1.2         10.2         1.2          20.9         1.1           22.5         1.3
Other revenues         0.2         0.0          0.3         0.0           0.6         0.0            0.5         0.0
Total revenues       845.6       100.0        854.8       100.0       1,854.3       100.0        1,790.7       100.0
Cost of goods
sold                 544.9        64.4        528.6        61.8       1,205.3        65.0        1,121.1        62.6
Gross profit         300.7        35.6        326.2        38.2         649.0        35.0          669.6        37.4
Selling, general
and
administrative
expenses             289.9        34.3        304.5        35.6         621.3        33.5          607.7        33.9
Operating income      10.8         1.3         21.7         2.5          27.7         1.5           61.9         3.5
Net interest
expense and
financing costs       15.4         1.8          8.8         1.0          31.5         1.7           51.5         2.9
Equity in (loss)
income of
unconsolidated
affiliate             (0.5 )      (0.1 )        0.4         0.0           0.1         0.0            1.3         0.1
(Loss) income
before (benefit)
provision for
income taxes          (5.1 )      (0.6 )       13.3         1.6          (3.7 )      (0.2 )         11.7         0.7
(Benefit)
provision for
income taxes          (1.9 )      (0.2 )        4.9         0.6          (1.4 )      (0.1 )          4.3         0.2
Net (loss)
income                (3.2 )      (0.4 )        8.4         1.0          (2.3 )      (0.1 )          7.4         0.4
Less: income
attributable to
noncontrolling
interest               0.2         0.0          0.3         0.0           0.6         0.0            0.5         0.0
(Loss) income
attributable to
Jones              $  (3.4 )      (0.4 )%   $   8.1         0.9 %   $    (2.9 )      (0.2 )%   $     6.9         0.4 %

Percentage totals may not add due to rounding.

Fiscal Quarter Ended July 6, 2013 Compared with Fiscal Quarter Ended June 30, 2012

Revenues. Total revenues for the second fiscal quarter of 2013 were $845.6 million, compared with $854.8 million for the second fiscal quarter of 2012, a decrease of 1.1%. Revenues by segment were as follows:

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(In millions)                                       Second           Second
                                                    Fiscal           Fiscal
                                                   Quarter          Quarter           Increase        Percent
                                                   of 2013          of 2012         (Decrease)         Change
Domestic wholesale sportswear                 $      133.3     $      174.8     $        (41.5 )        (23.7 )%
Domestic wholesale jeanswear                         182.6            151.0               31.6           20.9
Domestic wholesale footwear and accessories          181.6            195.5              (13.9 )         (7.1 )
Domestic retail                                      148.1            150.6               (2.5 )         (1.7 )
International wholesale                               88.7             75.4               13.3           17.6
International retail                                 101.1             97.3                3.8            3.9
Licensing                                             10.2             10.2                  -              -
Total revenues                                $      845.6     $      854.8     $         (9.2 )         (1.1 )%

Domestic wholesale sportswear revenues decreased $41.5 million, primarily due to decreased revenues in our Jones New York and Anne Klein product lines resulting from reduced shipments of both brands to lower-performing retail doors and poor product performance. Revenues also decreased from the discontinuation of our Joneswear product lines resulting from a change in J.C. Penney's retail strategy. Revenues in our Evan-Picone product lines decreased due to reduced shipments of suits and moderate sportswear to lower-performing retail doors.

Domestic wholesale jeanswear revenues increased $31.6 million, primarily due to increased shipments of our l.e.i., Gloria Vanderbilt, Jessica Simpson, Nine West Jeans, Erika, Bandolino and private label product lines resulting from positive product performance of both replenishment and fashion product at the retail level across our key customers.

Domestic wholesale footwear and accessories revenues decreased $13.9 million.
Footwear revenues decreased $16.1 million, primarily due to decreased shipments of the following footwear lines: Bandolino due to the exit of a program with a customer in the value channel; Nine West, Anne Klein, Enzo Angiolini, Boutique 9, B Brian Atwood and Joan & David resulting from poor product performance; Mootsies Tootsies due to the decision of a retail customer to exit the brand in 2012; Stuart Weitzman due to our decision to refine our distribution channel; Sam & Libby due to the sale of the trademark in August 2012; and Jones New York due to our decision to exit the footwear category for that brand in 2012.
Accessories revenues increased $2.2 million, primarily due to increased shipments of our Nine West and Anne Klein handbag lines resulting from positive product performance at the retail level, partially offset by a decrease in shipments of Nine & Co handbags resulting from poor product performance.

Domestic retail revenues decreased $2.5 million. Net revenue decreases of $6.3 million primarily related to our program to close underperforming locations were partially offset by a 1.8% increase in comparable store sales ($2.7 million) and $1.1 million in sales for new retail stores opened under the Kurt Geiger and Brian Atwood brands. We began the current quarter with 574 retail locations and had a net decrease of 12 locations to end the quarter with 562 locations, compared with 607 locations at the end of the prior period. Our comparable e-commerce business sales increased 15.8% ($4.5 million) while our comparable footwear store sales decreased 0.5% ($0.5 million) and our comparable apparel store sales decreased 4.5% ($1.3 million). Comparable stores are locations (including e-commerce sites) that have been open for a full year, are not scheduled to close in the current period and are not scheduled for a footprint expansion or downsize by more than 25% or relocation to a different street or mall.

International wholesale revenues increased $13.3 million, primarily due to a $5.5 million increase in our Nine West international business (primarily from shipments to our licensees in Turkey, Canada and the United Arab Emirates), a $4.9 million increase in shipments of our sportswear and jewelry product lines (primarily to Mexico), a $4.4 million increase in shipments of our Stuart Weitzman footwear product line and $0.1 million of other net increases, partially offset by a $1.6 million decrease in our Kurt Geiger business (due to general economic conditions in Western Europe).

International retail revenues increased $3.8 million. Sales in our Kurt Geiger locations increased $2.9 million, primarily due to new locations and a 1.9% increase in comparable store sales. Sales in our

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Spanish concession locations increased $1.3 million due to a 24.5% increase in comparable store sales and the expansion of product offerings in the current period. Sales in our Stuart Weitzman European retail stores increased $0.6 million, primarily due to a 20.9% increase in comparable store sales. Sales in our Canadian retail locations decreased $1.0 million due to decreases in comparable store sales of 7.3%. Total comparable store sales for our international retail locations increased 1.9% ($1.6 million). We began the current quarter with 339 locations and had a net decrease of three locations (including consolidations) to end the quarter with 336 locations, compared with 319 locations at the end of the prior period, with the increase primarily due to new Kurt Geiger and Stuart Weitzman locations.

Licensing revenues did not change from the prior period.

Gross Profit. The gross profit margins were 35.6% and 38.2% for the second fiscal quarters of 2013 and 2012, respectively.

Domestic wholesale sportswear gross profit margins were 28.4% and 34.6% for the second fiscal quarters of 2013 and 2012, respectively. The decrease was primarily due to an increase in customer sales allowance assistance, higher levels of sales to off-price retailers and a strategic change to lower selling prices of our Jones New York products to be more competitive with our peers.

Domestic wholesale jeanswear gross profit margins were 24.0% and 24.2% for the second fiscal quarters of 2013 and 2012, respectively. The decrease was primarily due to the mix of products sold.

Domestic wholesale footwear and accessories gross profit margins were 27.1% and 29.3% for the second fiscal quarters of 2013 and 2012, respectively. The decrease was primarily due to increased production costs, higher freight costs and higher levels of customer sales allowance assistance in our footwear business, partially offset by an increase in full price sales and lower sales allowance assistance for our jewelry product lines resulting from positive product performance at the retail level.

Domestic retail gross profit margins were 52.0% and 55.3% for the second fiscal quarters of 2013 and 2012, respectively. The decrease was primarily due to higher levels of promotional activity, partially offset by the mix of products sold.

International wholesale gross profit margins were 31.7% and 31.4% for the second fiscal quarters of 2013 and 2012, respectively. The increase was primarily due to lower production costs in our Nine West international business, lower customer sales allowance assistance in our Canadian business and the mix of products sold.

International retail gross profit margins were 53.9% and 55.8% for the second fiscal quarters of 2013 and 2012, respectively. The decrease was primarily due to promotional activity in both our Spanish business and our Kurt Geiger European retail locations, as well as and the mix of products sold.

Selling, General and Administrative Expenses. SG&A expenses were $289.9 million and $304.5 million in the second fiscal quarters of 2013 and 2012, respectively.

Domestic wholesale sportswear SG&A expenses decreased $4.4 million, primarily due to a $2.4 million reduction in compensation expenses due to a lower headcount and bonus accruals, a $1.2 million decrease in severance expense, a $1.0 million reduction in administrative expenses, a $1.0 million reduction in marketing expenses and $1.0 million of other net decreases. These decreases were partially offset by a $1.2 million increase in the current period of the acquisition consideration payable related to the acquisition of Moda Nicola International, LLC ("Moda"), compared with a $1.0 million reduction in the prior period due to higher projected sales of Moda.

Domestic wholesale jeanswear SG&A expenses increased $0.1 million, primarily due to a $1.1 million increase in compensation expense due to higher headcount to support revenue growth, partially offset by a $0.9 million decrease in losses recorded related to future costs of leases on buildings we do not currently use and $0.1 million of other net decreases.

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Domestic wholesale footwear and accessories SG&A expenses decreased $10.2 million, primarily due to a net $8.3 million decrease in losses recorded related to future costs of leases on buildings we do not currently use, a $2.2 million reduction in compensation expenses (due to headcount reductions, the transfer of certain positions to our domestic retail and our licensing, other and eliminations segments, as well as reduced pension expense), a $2.0 million decrease in severance expense, a $1.2 million decrease in samples expense and $1.5 million of other net cost decreases, partially offset by a $3.8 million decrease in support costs charged to other business units and a $1.2 million increase in administrative expenses.

Domestic retail SG&A expenses decreased $4.4 million, primarily due to a $3.0 million decrease in support costs from other business units, a net $3.0 million decrease in employee compensation and occupancy costs and $2.0 million of other net cost decreases from operating fewer stores in the current period, partially offset by a $2.6 million increase in operating costs for new retail stores opened under the Kurt Geiger and Brian Atwood brands and a $1.0 million increase in costs related to our e-commerce internet sites.

International wholesale SG&A expenses increased $3.2 million, primarily due to $1.7 million of expenses added as a result of the acquisition of Brian Atwood, a $0.7 million effect of unfavorable exchange rate differences between the U.S. Dollar and Canadian Dollar and $0.8 million of other net increases.

International retail SG&A expenses increased $3.7 million, primarily due to a $3.4 million increase in costs for our Kurt Geiger locations (primarily due to higher employee compensation and concession fees) and a $0.7 million increase in costs for our Stuart Weitzman locations (primarily due to new store locations), offset by $0.4 million of net cost decreases in our other international businesses.

SG&A expenses for the licensing, other and eliminations segment decreased $2.6 million, primarily due to a $2.2 million reduction in compensation expenses, a $1.0 million effect of favorable exchange rate differences between the U.S. Dollar and the British Pound and Canadian Dollar, primarily related to intercompany balances, and $0.1 million of other net decreases, partially offset by a $0.7 million increase in professional fees.

Operating Income. The resulting operating income for the second fiscal quarter of 2013 was $10.8 million, compared with $21.7 million for the second fiscal quarter of 2012, due to the factors described above.

Net Interest Expense. Net interest expense increased $6.6 million, primarily due to a $4.2 million decrease in interest expense in the prior period related to the Stuart Weitzman Holdings, LLC ("SWH") acquisition consideration liability, a $1.7 million increase resulting from the issuance of the additional $100 million of our 6.875% Senior Notes Due 2019 on September 25, 2012 (the "2019 Notes"), a net $0.6 million increase in interest expense related to the effects of our previous interest rate swaps and $0.1 million in other net increases.

Income Taxes. The effective income tax rate was 37.0% for the second fiscal quarters of both 2013 and 2012.

Net (Loss) Income and (Loss) Earnings Per Share. Net loss was $3.2 million in the second fiscal quarter of 2013, compared with net income of $8.4 million in the second fiscal quarter of 2012. Diluted loss per share for the second fiscal quarter of 2013 was $0.05, compared with diluted earnings per share of $0.10 for the second fiscal quarter of 2012, with 3.8% fewer diluted shares outstanding.

Fiscal Six Months Ended July 6, 2013 Compared with Fiscal Six Months Ended June 30, 2012

Revenues. Total revenues for the first fiscal six months of 2013 were $1.85 billion, compared with $1.79 billion for the first fiscal six months of 2012, an increase of 3.6%. Revenues by segment were as follows:

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(In millions)                                       First           First
                                               Fiscal Six      Fiscal Six
                                                   Months          Months           Increase        Percent
                                                  of 2013         of 2012         (Decrease)         Change
Domestic wholesale sportswear                 $     349.9     $     408.4     $        (58.5 )        (14.3 )%
Domestic wholesale jeanswear                        439.1           335.8              103.3           30.8
Domestic wholesale footwear and accessories         422.9           421.3                1.6            0.4
Domestic retail                                     274.2           278.7               (4.5 )         (1.6 )
International wholesale                             162.0           148.8               13.2            8.9
International retail                                185.3           175.2               10.1            5.8
Licensing                                            20.9            22.5               (1.6 )         (7.1 )
Total revenues                                $   1,854.3     $   1,790.7     $         63.6            3.6 %

Domestic wholesale sportswear revenues decreased $58.5 million, primarily due to decreased revenues in our Jones New York and Anne Klein product lines resulting from reduced shipments of both brands to lower-performing retail doors and poor product performance. Revenues also decreased from the discontinuation of our Joneswear product lines resulting from a change in J.C. Penney's retail strategy. Revenues in our Evan-Picone product lines decreased due to reduced shipments of suits and moderate sportswear to lower-performing retail doors.

Domestic wholesale jeanswear revenues increased $103.3 million, primarily due to increased shipments of our l.e.i., Gloria Vanderbilt, Nine West Jeans, Jessica Simpson, Bandolino, Erika and private label product lines resulting from positive product performance of both replenishment and fashion product at the retail level across our key customers.

Domestic wholesale footwear and accessories revenues increased $1.6 million.
Footwear revenues decreased $5.9 million, primarily due to decreased shipments of the following footwear lines: Bandolino due to the exit of a program with a customer in the value channel; Stuart Weitzman due to our decision to refine our distribution channel; Mootsies Tootsies due to the decision of a retail customer to exit the brand in 2012; Sam & Libby due to the sale of the trademark in August 2012; and Enzo Angiolini, Boutique 9, B Brian Atwood and Joan & David resulting from poor product performance. These decreases were partially offset by increased sales of our Nine West and Anne Klein footwear lines resulting from . . .

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