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.

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