SAN FRANCISCO -- Jones Apparel ( JNY) is on the mend, but it still has a long way to go. The clothing and accessories maker handily topped estimates for the third quarter, but its sales and operating profits continued to decline. The company -- owner of fashion brands such as Nine West, Anne Klein and Bandolino -- pointed to unseasonably warm weather and a weak economic climate as reasons for the continued sales weakness. Moreover, it said it remains cautious about these factors heading into the key holiday season. The economic headwinds come as Jones struggles to turn around an ongoing downturn in its financial results. The company has been hit by fashion missteps, waning demand for its middle-tier goods and consolidation among department stores, Jones' top customers. Profit in the third quarter jumped to $400.1 million, or $3.97 a share, from $63 million, or 56 cents, a year ago. The results included a big gain from Jones' August sale of the Barneys luxury chain to Istithmar, the Dubai government's private-equity arm, for $945 million. Excluding the sale, along with some restructuring costs, the company would have made 51 cents a share in the third quarter, down from 59 cents a year earlier. That topped the average estimate of analysts surveyed by Thomson Financial, which called for a profit of 34 cents a share. The earnings beat sent shares of Jones Apparel up 5.6% in afternoon trading to $20.80. The stock had surged as much as 17% earlier in the session before pulling back.
Jones' sales for the quarter fell to $1.03 billion from $1.08 billion a year ago. Still, the results were better than Wall Street's forecast of $998.9 million. "Despite the continued challenges in the retail environment throughout the third quarter, which were primarily due to the unseasonably warm weather and economic conditions affecting our target consumer, our businesses performed in line with our expectations for the period," said Chief Executive Wes Card, who took the reins in July. Same-store sales, or sales at stores open at least a year, were down 8.7%, even as Jones Apparel began turnaround efforts. The company said it resorted to heavy promotions to clear out excess inventory in September. "While industry consensus is that there may be a bounce in sales as the weather inevitably is getting colder, we remain cautious in our forecast, given the current overall economic picture and our concern with the level of promotions that may be required to fuel sales in the fourth quarter," Card said in a conference call. The company expects same-store sales to decrease 4.3% in the fourth quarter, which compares to a drop of about 1% in the same period last year. As part of its turnaround, Jones Apparel is looking to cut $100 million in costs by the end of the year. It has also been shedding some of its brands, like its Moderate Sportswear lines, in order to focus more on core brands like Jones New York, Anne Klein and Nine West. Its rival, Liz Claiborne ( LIZ) has taken a similar approach but with far less promising results. On Tuesday, the company posted a 65% decline in profit.
Omar Saad, an analyst with Credit Suisse, believes that Jones still needs a lot of work before it sees significant improvement. "While we are encouraged by the company's plans to exit $300 million of low-margin moderate businesses by year end, we continue to believe Jones faces ongoing structural challenges, including the marginal and less distinctive brands in its portfolio, high exposure to consolidating department stores, and high exposure to the difficult moderate segment," Saad wrote in a research note. "We think it will take years rather than quarters (and much higher marketing and branding investment) to elevate excitement around the Jones portfolio." For his part, Card acknowledged that it's still early in the turnaround process, but said he is encouraged by the early progress. "Despite the overall challenges in the macro economic environment, I am confident that through the initiatives that began several months ago, we have laid a strong foundation for operational improvements and we will begin to see results into 2008 and beyond," he said. Jones Apparel maintained its forecast for full-year adjusted earnings of $1.20 to $1.25. Analysts project a profit of $1.28 a share with sales. Jennifer Black, an independent retail analyst, is optimistic about Jones' comeback. "Wes Card has taken on the challenge of getting his company back on track, and is demonstrating his resolve," Black said in her research. "We believe the company is now focused on growing a solid business versus running a business to sell. The company is investing in the businesses it believes it has opportunity in and has begun to take the steps to address those businesses that are not performing."