By  on October 17, 2006

After taking itself off the market two months ago, Jones Apparel Group is left doing its own remodeling.

Jones chief executive officer Peter Boneparth chose the old house analogy to describe the Bristol, Pa.-based giant, and analysts are inclined to agree the company's $5.07 billion portfolio is in need of an update.

For the first half of the year, Jones' earnings plummeted 55.9 percent to $62.5 million, or 53 cents a diluted share, from $141.8 million, or $1.17, in the same year-ago period. With these numbers and the reality that no buyer would meet its asking price, Jones' strategy and leadership have fallen under scrutiny.

Analysts are divided on the wisdom of the firm's string of acquisitions since 1998, which include Nine West Group Inc. in 1999, Gloria Vanderbilt Apparel Group Corp. in 2002 and Barneys New York Inc. in 2004.

"Jones used to have a bunch of really strong brands, but the mix of businesses they have now is challenging — all areas are not disasters, but there's not a lot of growth potential either," said Elizabeth Montgomery, analyst for Cowen & Co. "Jones has bought brands that do not have great synergies or advantages with economies of scale."

Montgomery cites Barneys, one of many buys that some analysts applaud while others question. "Barneys did give them exposure to the high-end consumer, but it did not give them any economy of scale, and in the long term, the operational margins at Barneys are going to be well below Jones' as a whole," Montgomery said. "If they took a good look at these portfolios, and took these brands that did not add to their economy of scale, they could have more cash flow to invest into their other brands, like Nine West."

Barneys does connect Jones to the thriving luxury market and to retail — both desirable footholds. Although the store does not carry the lines that Jones manufactures, it does inspire high-end thinking, according to Boneparth, who cites Nine West's collaborations last spring with designers Vivienne Westwood, Thakoon and Sophia Kokosalaki.

If Jones ever decides to sell off some of its holdings, some believe Barneys could make a prime acquisition for Neiman Marcus Group or even a hedge fund.Nine West again divides analysts, who say the division has potential that isn't being actualized. Its stores give Jones more of its own retail presence, and Nine West was hot — generating $1.92 billion in revenues and $40.4 million in profits — when Jones bought it seven years ago for $1.4 billion. But under Jones' leadership, the brand has matured and business has slid, with volume hovering around $1 billion.

"Nine West is a brand that is very important to the department stores, but I sense that the footwear business is weakening because of competition," said Brad A. Stephens, an analyst for Morgan Keegan & Co. Inc. "Steve Madden is an infinitely better competitor."

Nine West heads a division that includes a range of moderate to bridge brands, including Easy Spirit, Bandolino, Enzo Angiolini — not analysts' favorite markets, but where many of its acquisitions fall. In 2002, Jones bought moderate denim company Gloria Vanderbilt Apparel Corp., and then in 2001, it followed with McNaughton Apparel Group Inc., which makes moderate brands including Norton McNaughton, Erika, Energie, Jamie Scott and Currants. It was the McNaughton deal that initially brought Boneparth to Jones.

But Boneparth stands by the quality of his firm's brands, adding that Kohl's position as a fast-growing retailer shows that moderate is not a dying business.

"In a portfolio this big, there will always be brands at different stages. Just like if you own a stock portfolio, some stocks will be performing well when others are down," insisted Boneparth. "We do about $1 billion of retail sales for Federated. By definition, that means we have a lot of destination brands. Our brands are very, very healthy."

On the other hand, the Street likes Jones' 2003 acquisition of Kasper Ltd., which does women's suits and sportswear under the Kasper, Le Suit, Albert Nipon and Anne Klein labels.

But Jones has suffered one key blow during Boneparth's tenure. After building extensive licensing partnerships with Polo Ralph Lauren since 1995, Jones and Polo split in 2003, and a lawsuit ensued. Consultant Emanuel Weintraub said the hit Jones suffered in losing the Polo licenses can hardly be overstated. "Their issue is simply branding and marketing bench strength," Weintraub said. "They need to be finding and developing the brands that have the Ralph Lauren cachet."But after Jones' unsuccessful attempt to sell itself, the analyst community is skeptical of its strategy and leadership. A recent Prudential report commented, "We could see a management change at the top…and we still believe Jones would be better off trying to execute a turn if key executive positions were upgraded."

A management change at Jones might be good for the stock, Montgomery added. "It's time to divest instead of acquire," she said. "Peter is more of a financial person, and it may be time to focus on the merchandising of the products and to stop acquiring things.”

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