Is Jones Group a Good Value Pick?

NEW YORK ( TheStreet) -- One of the most exciting parts of value investing -- to me anyway -- is the hunt for "reclamation projects," companies that have seen better days and are struggling to right the ship.

Often, the markets have little patience for these names and punishes them severely for a long time.

One of the risks that value investors take in these cases is that they are buying the dreaded "value trap": It looks like value and smells like value, but there's actually little or no life left.

If you don't dig deep enough, you can easily convince yourself that a name is too cheap to pass up. Three years later, nothing has changed, and the stock still appears to be cheap, but has gone nowhere. Or worse yet, it has gotten "cheaper," as the price has continued to drop.

Jones Group ( JNY), (known as Jones Apparel when I owned it in the past) has been a rags-to-riches-to-rags story over the years.

The company is in a tough industry. It designs and markets women's clothing, shoes and accessories, in both the retail and wholesale sides of the business. The past four years have been difficult at best.

Following losses in 2008 and 2009, the company returned to profitability in 2010, but margins have declined to the point that if you looked at the bottom line without knowing any better, you might think you were viewing the financials of a grocery store chain. Net margins that were in the 6% to 8% range in the mid 2000s are now in the 1%-plus range.

Higher-end apparel and shoes is not a great place to be in difficult economic times, and the lower-margin products the company had been moving toward did little to help turn the company around.

Now Jones is again focusing some efforts on the higher end, having acquired interests in several brands over the past few years, such as Stuart Weitzman in 2010. In 2011, the company acquired Kurt Geiger, a European shoe retailer, for $352 million. Jones is not giving up on core brands such as Jones New York and Nine West, and is in the process of "revitalizing" them.

Retail, at least on the domestic side, has not been a good business for the company. This past quarter that segment represented less than 17% of total domestic revenue but lost $15.5 million on $140 million of revenue. So far this year, Jones has closed 85 retail locations and plans to close another 15 by year-end. This is a positive step.

The good news for Jones was that this past quarter, the company crushed the consensus earnings estimate. It earned 57 cents a share, well ahead of the 32-cent estimate.

The market, however, was unimpressed by those results, primarily because Jones lowered guidance for the full year and suggested that the holiday retail season may be challenging.

The balance sheet has pluses and minuses. Jones ended last quarter with a healthy $234 million, or $3.14 per share, in cash. Inventory dropped about 6% vs. the same quarter last year. Debt, however, stood at $960 million, putting the long-term debt-to-equity ratio at 87.4%, which is a concern, for me anyway. Interest expense for the quarter was $37.8 million and for the trailing nine months was $89.7 million.

Jones is maintaining its 5-cent quarterly dividend and yields 1.8%. The company is also buying back stock and has reduced shares outstanding by 4.2 million shares in the past year. I like the dividend and the buyback activity; that can be a powerful combination. I don't, however, like the level of debt.

Consensus estimates for 2013 are calling for earnings of $1.23, putting the forward price-to-earnings ratio at 9. At this point, Jones is back on my radar, but I'll be looking for further progress.

At the time of publication, Heller had no positions in stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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