Trading at $43.75 as of May 7, 2001

Hi, Mom! This past March while I was compiling a list of 10 companies with solid, long-term records of earnings and share-price growth, another Fool staffer suggested Jones Apparel Group(NYSE: JNY). I ended up including Jones on the list, and since it involves shopping and clothes (and sports some solid financials), I thought you'd be interested! On the whole, it would be a perfect stock for you.

Yes, I know you do lots more than shop, and certainly Dad can spend with the best of them when it comes to book and hardware stores, but let's face it: Even when I was actually in shape and ran the marathon here in D.C. several years ago, you were still able to tire me out at the mall.

And malls and department stores are just where you'll find plenty of products from Jones. The company designs and markets a variety of women's (and some men's) clothes, shoes, jewelry, and accessories under the Jones New York, Nine West, Evan-Picone, and Bandolino labels. The company has also licensed several Ralph Lauren labels, and makes costume and fashion jewelry under the Tommy Hilfiger and Givenchy brands. Generally, Jones makes upscale business clothing and sportswear, though the company is expanding into the moderately priced area through some recent acquisitions.

Jones Apparel Group is organized along three business lines: wholesale apparel, wholesale footwear and accessories, and retail. The retail group operates 471 specialty retail stores (many of them in malls, most of them Nine Wests) and 528 outlet stores (as of December 31, 2000). Last year, Jones' wholesale operations provided 75% of revenues, while the retail division brought in the remaining 25%. This gives the company a lighter business model -- and one that is less dependent on economic and fashion trends -- than your average clothing retailer.

Solid growth and financials
Jones is cruising along despite the tough economy, as was visible in its first-quarter 2001 earnings report released last week. Net income was up 35% to $86 million from $71 million last year. Earnings per share (EPS) rose 29% to $0.75 from last year's $0.58. Revenues declined slightly, due to the company's sale of its U.K. division and the closing of over 200 Nine West stores. Excluding discontinued businesses, sales increased 9% to $1.07 billion.

This kind of performance is par for the course for Jones. Last year, the company raked in $4.1 billion in revenues, 31.7% higher than the previous year, and net income of $301.9 million, a 60% jump. In the past five years, the company has grown sales an average of 39.4%, and EPS an average of 32.8%. 

Jones is no slouch when it comes to other financial metrics. Free cash flow -- money the company earned from its operations, minus its capital expenditures -- clocked in at $292.4 million, $218.1 million, and $176.4 million in 2000, 1999, and 1998, respectively. Finally, the company earned a solid return on equity of 23.8% on a trailing-12-months basis as of March 31.

Keep in mind, Mom, that much of Jones' growth is due to its recent acquisitions, particularly Nine West. While this doesn't mean the growth isn't real, the jury is arguably still out on how well the company will grow sales and earnings on its own, without acquisitions.

What's behind the solid financials
On the other hand, the company does deserve credit for integrating new businesses. Jones is getting kudos from analysts for turning around Nine West, which had its worst year ever before Jones bought it. Managing acquisitions is one of the company's strong points -- it purchased jewelry maker Victoria + Co. last year and Sun Apparel in 1998 -- which bodes well for its recent purchase of McNaughton Apparel Group, a maker of moderately priced clothes.

In addition, Jones has a solid customer base. Buyers of Jones' apparel and shoes include the May and Federated department store chains, which each accounted for 14% of sales last year (both chains include multiple store names, such as Bloomingdale's and Macy's). Recently, the company has moved into more discount stores such as Kohl's and Mervyn's, with department stores accounting for 60% of its business today, down from 90% three years ago.

Potential risks
For better or worse, Jones' success has received some attention recently. The company was highlighted as an investment pick in January's SmartMoney, and last month Barron's ranked the company fifth in its Barron's 500 compilation. No doubt this attention is partly a result of the 57% rise in Jones' stock during the past year.

Still, shares are trading at a reasonable valuation. At about $42 a stub, the company goes for 14 times this year's estimated EPS of $2.96 (the company confirmed an estimate of $2.95 to $3.00 for this year last week), and 12 times estimated 2002 earnings. While not bad compared to the S&P 500 overall, clothing companies generally don't get large premiums, so that multiple may not increase too much.

There have also been some recent share sales of note. Warren Buffett's holding company, Berkshire Hathaway(NYSE: BRK.A), sold about 14% of its stake in the company in March, and CEO Sidney Kimmel sold about 17% of his stake in the same month. Both continue to hold millions of shares, and CEOs usually sell in order to diversify their holdings, so it's hard to judge what these sales mean, if anything. It's a cautionary note, at most.

Either way, Mom, Jones has an impressive array of brands, solid customer relationships, diverse new products, and a solid performance record. And hey, as a stockholder, you'd have plenty of reason to research the company's retail operations. After all, investing should be fun!

Chris Rugaber prides himself on speed-shopping. He owns shares in Berkshire Hathaway. The rest of his holdings can be seen online, as can the Fool's disclosure policy.

A Stock for Mom represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.

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