Sometimes, a business that looks interesting on the surface and has a number of pretty good things going for it just isn't priced attractively enough to get you to bite. That's pretty much how I feel about Jones Apparel Group (NYSE:JNY) after reading its earnings report Wednesday morning.

For Q4 and FY 2005, the company had revenue gains of 12.8% and 9.1%, respectively. Earnings per diluted share for the fourth quarter were also up 71.4% to $0.48, but fell 3.8% for the year. All of these numbers are affected by the company's ongoing share-repurchase program, which is something I generally like to see from a company that trades at a reasonable valuation, as Jones Apparel does. The results are also affected by the company's restructuring initiatives, because Jones is a business undergoing change in its portfolio of brands.

Overall, I like the steps the company is taking to better control its supply chain and become more efficient. I'm also impressed with the 8% comparable-store-sales increase at Barney's in the fourth quarter and the growth potential of that portion of the business. And did I mention the ongoing share repurchases?

But there are reasons to think that now isn't the time for investors to start up a new position in Jones Apparel. First is the company's exposure to Federated Department Stores (NYSE:FD), which owns Bloomingdale's and Macy's. Like Kenneth Cole Productions (NYSE:KCP), which is repositioning its business and brands as the department-store landscape changes, Jones Apparel is focusing on selling its products through independent stores, rather than through department stores. Jones Apparel is also planning to cut costs to mitigate the loss in sales as Federated consolidates the stores it picked up in its acquisition of May Department Stores last August, but that plan still needs to be executed.

The other cause for concern is the company's contraction in operating cash flow and expansion of capital expenditures, which is putting a crimp on the company's free cash flow.

2004

2005

2006*

Operating Cash Flow

461.9

427.4

395.0

Capital Expenditures

56.6

87.5

147.5

Free Cash Flow

405.3

339.9

247.5

*Midpoint of JNY's guidance for 2006.

In fairness to Jones Apparel Group, the increase in capital expenditures is primarily due to the company's expansion of its Barney's business, and I don't disagree that the company should expand this business. But I also think that investors can be myopic, extrapolating the immediate level of free cash flow into the future, even if there is reason to believe the future will be quite different. The best time to buy a stock is when investors are overly pessimistic about the future.

For a company that's changing direction, I like to see very little growth priced into the shares. Even though I find many things to like about Jones Apparel, I'm inclined to pass at this point. The current price-to-free cash flow ratio of 10.5 is very intriguing, but the forward price-to-free cash flow ratio of 14.4 isn't as attractive, and I'm willing to wait and see whether that changes.

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Nathan Parmelee owns shares in Kenneth Cole Productions but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.