Joe's Jeans Is a Tight Fit

How do you try on a quarterly earnings report from Joe's Jeans (Nasdaq: JOEZ  ) ? Why don't we take it one leg at a time?

The premium denim specialist posted unimpressive wholesale results, and its fledgling retail business was all over the map. The end result was a sharp dip in profitability, despite a better-than-expected 20% surge in sales.

Let's focus on the company's bread-and-butter wholesale business, which accounts for 84% of overall revenue. Revenue climbed 7%, with Joe's Jeans growing its offerings beyond its flagship denim. Over the past year, non-denim sales have grown from 3% to 16% of the wholesale top-line mix. Diversification is good, but the implied decline in denim is problematic.

Yes, the economy is still as unfashionable as donning black socks in flip flop sandals. This isn't the best time to be pitching $200 jeans. However, the pros see double-digit sales growth at rival True Religion (Nasdaq: TRLG  ) when it reports next month. It can't be all that bad.

Wholesale gross margins dropped year over year, but did improve sequentially. That wholesale operating profit dipped 12% to $5.7 million isn't good, but it's certainly not a deal breaker.

The bottom line at Joe's Jeans is tested when we turn our attention to the fast-growing -- but cash-sucking -- retail division. This is still a small chunk of the revenue mix, but it's also the apparel company's best potential catalyst.

Over the past year, Joe's Jeans has gone from just five locations to 14 stores -- with many of the recent openings taking place at high-traffic premium outlet malls. Retail sales more than tripled to $4.2 million during the quarter, and the 223% surge wasn't entirely the handiwork of expansion. Same-store sales clocked in at an impressive 23.5%.

Unfortunately, the store-level popularity was the result of clearing out dated items at steep discounts. Gross margins took a hit, though at the end of the day Joe's Jeans' retail operating loss narrowed substantially.

Joe's Jeans' decision to become an upscale retailer is the wild card here. A hot brand can spawn a retail empire. Nike (NYSE: NKE  ) was a wholesale winner in athletic footwear before rolling out its stores. Remember when Apple (Nasdaq: AAPL  ) didn't have its namesake stores?

Has Joe's Jeans earned the right to be the next hot retailer? Not yet, but there's potential. The company's blog is rich with snapshots of celebrities photographed with Joe's clothing. Growing its store base may be as ambassadorial as it is just good business.

We're still a quarter away from the telltale holiday season. This is when the thesis has a shot to take off. If Joe's Jeans can deliver strong comps and healthy margins at the retail level -- and denim sales at the wholesale level get back on track -- this will be a retail stock worth respecting. Outside of fast-growing yoga apparel specialist lululemon athletica (Nasdaq: LULU  ) , there's a shortage of hot public chains that are still early in their expansion cycles.

Joe's Jeans can do it, but it has a long way to go to prove that it's built to last.

Which retailers are you buying into these days? Share your thoughts in the comments box below.

Apple and Nike are Motley Fool Stock Advisor picks. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz doesn't think he'd pay $200 for a pair of pants, but he's also too old to care. He does own shares in Joe's Jeans. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2010, at 4:32 PM, PeyDaFool wrote:

    Rick,

    I've been to Macy's in San Diego and the Joe's Jeans outlet store in Seattle and noticed most of Joe's Jeans are under $200. In fact, I picked up a pair of the jeans from the outlet store last week for $99.99. I thought it was a great deal for the quality and fit.

    Where does this idea that their jeans cost $200 come from?

  • Report this Comment On October 15, 2010, at 5:08 PM, StockMaster30 wrote:

    I Dont know much about business and the expansion issues but my wife has a pair of joe's denim and they look great and quality is impressive...

  • Report this Comment On October 15, 2010, at 5:20 PM, biolasteve wrote:

    @PeyDaFool

    as a quasi-recent college student (does 5 years ago count as recent?) I can vouch that Joe's price point (for men at least) is right around $180, which, believe it or not, makes it one of the more "affordable" premium jeans brands. True Religion/Rock&Republic et al. have all for the most part pushed to the $210 and beyond realm.

    And, as someone who used to pay waaaay too much money for clothes like Joe's, I can say that Joe's is pretty the only premium premium item I'm still committed to; their jeans just fit that good.

    I can't speak at all to the business model or the management, but I can say their brand is absolutely legitimate, at least in LA/OC where I live.

  • Report this Comment On October 15, 2010, at 7:46 PM, yooper236 wrote:

    The inability to sell through their full price inventory is evident in the fact that four out of five Joes Jeans stores are outlets, not full price stores. I've been in their outlets and the inventory are not seconds. It first rate product. Seemingly product that they cannot sell at wholesale or even full price. Very worrysome as an investor.

  • Report this Comment On October 19, 2010, at 2:36 PM, Ironbob wrote:

    I'm long on JOEZ, but 2010 will be a bust year. Too much expansion AND the one figure that apparently no one seems to pick out of their reports is that JOEZ pays a royalty to the original Joe of 10% of gross profit for 2010, Year after year, the royalty goes down but 10% for 2010 is a huge bite.

  • Report this Comment On December 10, 2010, at 1:06 PM, jm31563 wrote:

    This was my concern also...I like the future forecast overall on this company, but in the short term presently, they may have bitten off a little more than they should have in terms of "too much too soon" expansion. Maybe they should have minimized expansion being the economy the way it is. Still, I do not doubt that this company could be major in the future, which is why I decided to go ahead and load up on it...while it's still cheap.

  • Report this Comment On January 23, 2011, at 7:51 AM, Hargar wrote:

    One would think that, in this economy it would be difficult to get people to spend $200 for a pair of jeans when people can't even pay their mortgage. I would tend to stay away from investing in a company like this and stick to some more solid investments based on items that are necessities. people just aren't willing to pay this much for a pair of <a href="http://www.yoursexyjeans.com">hot jeans.</a>

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