By  on July 29, 2005

NEW YORK — Jones Apparel Group Inc. on Thursday reported a 29.4 percent drop in second-quarter profits and said it was undertaking a strategic review of its infrastructure in an effort to improve planning and production.

For the three months ended July 2, income fell to $54.8 million, or 46 cents a diluted share, from $77.6 million, or 61 cents, in the same year-ago quarter. Sales increased by 11.8 percent to $1.17 billion from $1.04 billion.

President and chief executive officer Peter Boneparth, during a conference call with Wall Street analysts, said, "Some of the process changes we are accelerating [are] because the business is changing, the model in which [the retailers] do business and [are] successful is changing."

He said the company has a group of businesses it is comfortable with, but it needs to be more efficient. "It all goes back to speed," Boneparth said. "How do you ship goods faster? What does that mean in terms of distribution requirements?"

The strategic review will focus on Jones' vendor operations with an expectation of consolidating third-party manufacturing; and assessment of manufacturing issues such as review of administrative support areas to increase efficiencies, the company said in a statement.

Buckingham analyst Lee Backus, in a research note, said, "Management blamed the reduction on department stores' insistence on improving turns. We believe that the problems go deeper than that and some of [Jones'] key brands are losing market share ... We believe that this is more of a product issue than a flow issue."

The Buckingham Research Group kept its "neutral" rating of Jones, saying it would remain on the sidelines until it sees some turnaround in the business.

On a segment basis, the bright spot was retail, which soared 71 percent to $339.7 million from $198.6 million. The current quarter includes results from Barneys New York, the upscale specialty chain Jones bought last year. Jones' wholesale businesses posted mixed results. Wholesale better apparel sales fell by 6.1 percent to $300.6 million from $320.2 million, while wholesale moderate apparel sales dipped by 1.4 percent to $306.4 million from $310.7 million. Wholesale footwear and accessories sales, however, rose by 2.6 percent to $218.7 million from $213.1 million.One not-so-bright note was the junior L.E.I. operation, which Boneparth said required a restructuring. The second half will be tough because the business was "uncompetitive," he said.

The quarter was also affected by reduced receipt plans for footwear and accessories due to changes in the department store model, Boneparth said.

Jones Apparel shares declined by $1.41 to close at $31.09 in New York Stock Exchange trading.

For the first six months, income fell by 17.6 percent to $141.8 million, or $1.17 a diluted share, from $172 million, or $1.34, a year ago. Sales climbed 11.2 percent to $2.5 billion from $2.25 billion.

Jones reduced its anticipated 2005 full-year revenues to between $5 billion and $5.1 billion. Projected earnings per share on an adjusted basis, excluding restructuring costs and manufacturing inefficiencies, are forecasted to equal or exceed the $2.39 the company posted for 2004.

Retail, particularly at Barneys New York, was strong, with a comp-store increase of 13 percent in the quarter in addition to a 15.1 percent gain in the same quarter in 2004, said Howard Socol, ceo of Barneys. He added that the Co-op concept remains strong, and it has a "very, very strong denim business followed by our collection business."

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