Joe's Jeans Growth Plan a Good Fit
LOS ANGELES (
) --
Joe's Jeans
(JOEZ)
has an aggressive plan to expand its product lines and retail store presence, offering investors in the premium denim company plenty of risk and potential upside.
Investors have embraced
because of its capable management team, clean balance sheet and strong customer loyalty. Shares have jumped from roughly $1.50 in October to as high as $3.60 in April. The challenge Joe's Jeans now faces stems from the decision to expand its business both in terms of products and location.
The denim niche has been outperforming, which has turned up the competition in the space. Joe's Jeans competes against heavyweights like
True Religion
(TRLG)
with jeans that are priced upwards of $100 a pair. It hasn't been an easy path for all denim makers, though. Earlier this month, designer jean company Rock & Republic filed for bankruptcy protection due to balance sheet burdens.
"The business as we see it is good, although it's not in that explosive category that it used to be," Joe's Jean CEO Marc Crossman tells
TheStreet
. "But it's still a very attractive, very profitable business, talking from the department store standpoint."
>> Read the entire interview with Joe's Jeans CEO Marc Crossman
Following one of the worst economic recessions in history, Joe's Jeans has eked out a profit on increasing sales. Crossman attributes the continued success to customer loyalty and competitive pricing when compared to the company's closest rivals.
"We actually benefited from the fact that we're one of the more affordable premium denim players," Crossman says. "When you look at some of the other companies, their average price points are $200 and above. The bulk of our business goes out between $158 and $179 at retail."
It doesn't hurt that Joe's Jeans has some pretty impressive celebrity power behind its brand. Beyonce, Katie Holmes, Brad Pitt, Justin Timberlake, Madonna, Will Smith and Angelina Jolie are only a sample of the celebrities who have been seen wearing Joe's Jeans.
"That stuff is great. That stuff gets people interested and that's a way to drive a new customer," Crossman says. "But once a customer gets here and finds a fit, they become pretty loyal. That's whether or not we have a celebrity wearing our jeans or not."
That loyalty has helped the company reach out beyond the narrow denim category. Joe's Jeans has worked to diversify through non-denim products, which has been a boon for sales. In the first quarter, Joe's Jeans posted a 41% year-over-year jump in revenue, with nearly 20% of the $23.2 million in sales coming from non-denim products with names like The T, The Pant, The Legging and The Shoe.
The evidence of the success is in the sales tally, Crossman says. "We've been able to manage something that pretty much no other denim company has been able to accomplish on the wholesale side, which is get into other categories."
The lone analyst following the company agrees. Following the company's first-quarter results, Roth Capital raised its stock price target for Joe's Jeans to $3.56 from $2.25, noting the sales contribution by non-denim products.
Crossman also stresses the importance of Joe's Jeans ability to control its off-price distribution, and the company has an answer for that. In February, Joe's Jeans announced plans to open nine outlet stores before the end of the third quarter.
But as the share price has sharply grown, so have the risks to Joe's Jeans' growth story. Critics have taken aim at the low margins of Joe's Jeans' non-denim products, the increased expenses from a larger number of store locations and recent insider selling. Some traders have even taken jabs at Crossman's personality and background.
Crossman isn't shy in admitting that the opportunities presented through new retail shops and product lines in turn become the biggest risks to Joe's Jeans' long-term success.
"If those are the two most important things driving the company, they're the most harmful," Crossman says. "The denim
business is very well-established and it's never going away. But those other businesses are very nascent. You have to be a lot more careful and you don't want to have missteps when building them."
The challenge Crossman is seeing with retail store openings comes from managing headcount and working with related expenses. In the first quarter, investors didn't react kindly to a large year-over-year increase in selling, general and administrative, or SG&A, expenses. SG&A expenses rose to $9.73 million, up from $7.08 million in the year-ago quarter.
"I don't think people expected our level of sales, but when they looked at our SG&A, they expected it to be up a little," Crossman concedes. "Employee costs are the number one expense far and away, so you're not going to see a lot of varying with that."
The issue of weaker margins on non-denim products is also less of a concern to Crossman, as he expects those figures to climb when production moves overseas from Los Angeles, where they are currently produced.
"We should easily be able to get those margins up to where the denim is, but we're not at that point yet," Crossman says. He notes that when denim production was moved to Mexico and Morocco, Joe's Jeans saw a sharp increase in margins.
Bearish investors have been quick to note a large amount of insider selling. In February, Joe's Jeans founder Joe Dahan reduced his ownership in the company from nearly 14 million shares to a little over 13 million. Some traders were worried insider sales by the company's founder was a sign Dahan is planning to exit the business altogether, although Crossman downplays those fears.
"Joe has a number in his head and it's a huge number," Crossman says. "With 13 million shares, he could retire and never have to work again. At some point, he'll diversify. But right now, he's just putting some cash in his pocket. It's not a major divestiture."
Instead, Crossman is focused more on getting the Joe's Jeans name on Wall Street's radar, having spent time as vice president and equity analyst with JPMorgan, among several other firms.
"From my standpoint, it's about getting the story out to as many investors as possible," Crossman says. "The whole idea is to create liquidity in the name. I also want to make sure existing investors know what's going on with the company. My job is to work for the shareholders."
However, some stock watchers have criticized Crossman for his Wall Street background, arguing that he knows too little about denim and apparel products. Crossman says he is well aware of what is said about his personality, but maintains that giving a fair and balanced view of the company is a bigger priority than showmanship.
"I don't want to get a reputation of being a promoter you can't trust who hypes the stock," Crossman says. "It's very important to me to maintain a good relationship with Wall Street, where I can say something and they believe me."
That message to Wall Street is that Joe's Jeans has stores in place and feels comfortable about its strategy, especially as its microbrands of non-denim products gain traction, Crossman says.
-- Written by Robert Holmes in Boston
.
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