For a long time now, jeans have been a classic major export of Americana, next to movies and burgers. Lately, they've made for pretty good investments as well. Premium jean stocks have performed well along with the stores in which they are sold, but valuations have gotten too high for most. This denim designer, however, is relatively new to the scene -- under the radar and growing fast. With an attractive valuation and favorable outlook for luxury retail, could Joe's Jeans (NASDAQ:DFBG) be a hot stock for 2013?
Even though the macroeconomic environment remains tepid, premium retail is a good business to be in. With leaders such as Michael Kors (NYSE:CPRI) rising triple digits in recent years, and research reports suggesting double-digit growth for the sector going as far as 2015, it's hard to ignore the appeal of many of these companies.
Joe's Jeans has technically been around since 1987, but it renamed itself in 2007. The company sells jeans, leather goods, and accessories for men, women, and children. You may not be familiar with the brand, as there are only 30 stores (retail and outlet) in the entire country, 10 of which are in California. While the brand's name may make it sound like an average product, its stores and premium prices are anything but. Joe's Jeans start at around $170 and climb toward $250 -- around the same price point as fellow public competitor True Religion (NASDAQOTCBB:TRLG.DL).
Now, Joe's is small, but growing fast. Just take a look at its fourth-quarter earnings:
- Net sales up 33% to $33.7 million.
- Same-store retail sales up 6%.
- Wholesale sales up 37%.
- Operating income at $3.2 million from a loss of $132,000 in the prior year's quarter.
For this year, the company is planning on opening an additional 10 full retail price stores. With the average store at 2,200 square feet and earning $430 per foot, things already look strong. But the company has noticed smaller stores perform stronger, and it is shifting its goal to an average size of 1,500 feet to boost the latter number toward $700 per foot.
Just a year ago, the company was struggling due to a sharp drop in its women's wholesale business -- its largest revenue engine. Since then, it has introduced two promotions that have brought the business back in a speedy fashion. I credit this to swift and smart management decisions that you wouldn't find in a larger company.
Internationally, the company is taking an interesting approach. Instead of targeting regions for expansion, like Michael Kors has done along with other retailers, Joe's plans to use a "rifle" approach -- picking certain cities out and conducting a highly focused product introduction. Management mentioned London as a target for this year.
Clearly, the company is in a growth spurt, but how does it compare to rivals?
Let's take a look at True Religion as the closest public competitor. For the fourth quarter, True Religion grew sales by 14.8%, wholesale net sales by 14.1%, and had bottom-line earnings of $0.55 per share, excluding the cost of looking for a potential buyer. Last year, the company earned $0.57. The company earned $13.5 million in net income with same-store sales up 2.7%. Net sales are forecast to grow 8% to 9% in 2013.
Now, True Religion is a business several times the size of Joe's, but the two have similar product offerings. True Religion is certainly growing, but it isn't going to post 30%-plus sales growth like Joe's might. It does, however, earn more than $1,000 per square foot, making it one of the most valuable retail stores in the nation.
True Religion trades at 12.5 times one-year forward earnings. Joe's trades at just under 10 times, but appears to offer a substantially larger growth platform. The company's EV/EBITDA is 10.54 on a trailing basis, which is nearly twice that of True Religion's. Looking forward, however, Joe's ratio should come down closer to that of True Religion's. At the high end of the market, Michael Kors trades at 24 times forward earnings and has an EV/EBITDA of nearly 20. Its projected growth looks similar to Joe's, but on a much bigger scale.
More appealing compensation
The one thing I really didn't like about Joe's was its compensation to the namesake and designer of the company, Joe Dahan. Until this month, Dahan had been earning a percentage of gross profit. Now he is just a shareholder of the company. In 2011, Dahan was paid over $2 million. This was a highly unattractive feature of the company for years, and I applaud management for reaching a cost-saving agreement that will reward the founder with capital appreciation.
Overall, I find Joe's to be an undervalued pick in the premium retail sector. I do not expect it to trade at Kors-like multiples, as the two are not quite in the same business, but also I don't believe that Michael Kors is an accurately valued company to begin with. A slight multiple correction to, say, 12 times earnings would value the company substantially higher than today's price of $1.39.
I would recommend taking a look at a Joe's store near you, or finding a retailer that distributes the clothes. Compare it to your favorite premium brand, and see if you think the company can continue its double-digit growth for the next few years.