JONES SEEKS AN EDGE IN MODERATE MARKET

Byline: Vicki M. Young / Scott Malone

NEW YORK — Jones Apparel Group’s acquisition of sportswear maker McNaughton Apparel will not only boost its presence in the moderate sportswear market, but is also reflective of the cooling economy, observers said Monday.
Jones’s purchase of McNaughton for $572 million, gives it an entry-point to the mass retail channel, through chains like the growing Kohl’s Corp., which carries McNaughton Apparel Group brands. Jones is already a dominant player in the better field with its signature brand in sportswear and ready-to-wear and its Ralph Lauren licensed lines.
Janet Joseph Kloppenburg, analyst at Robertson Stephens, wrote in a research note Monday, “We view the merger as strategic [for Jones], as the acquisition diversifies [Jones’s] revenue base and furthers the company’s objective of increasing its market share in the sizable mass merchant and discount store sector.”
Not everyone in the financial community was as enthusiastic. Standard & Poor’s late Monday lowered its outlook on Jones’s debt ratings to negative, noting McNaughton’s $297 million in debt. The agency did not change its “triple-B” ratings on Jones’s corporate debt.
Jacki Nemerov, president of Jones, said in a Monday afternoon conference call with Wall Street analysts that the acquisition is a strategic fit for Jones, which has been focusing on growth and diversification.
Executives at other vendors said they weren’t surprised to see the apparel giant — which will have projected revenue of $4.7 billion after the deal closes — trying to get a bigger piece of the action at the moderate price level.
“Jones probably wants to get into the moderate arena because with talk of a possible recession and the economic downturn, it’s possible that the upstairs customer will drop down into another segment,” said Jack Gross, president of New York-based Gloria Vanderbilt Apparel Corp.
He said the stable of lower-price brands — including Norton McNaughton, Miss Erika, Energie, Jeri-Jo and Jamie Scott — would help Jones keep its sales up if consumer spending drops.
“They certainly don’t want to lose retail space,” he said.
With consumer enthusiasm for status-priced sportswear starting to wane, regional chains such as Beall’s Department Stores, Elder-Beerman Stores and Gottschalks are stepping up their emphasis on moderate price points.
“The moderate channel is getting a tremendous amount of funding right now,” said Gross.
However, Marc Abramson, president of New York-based Requirements, wondered how appealing Jones would find the margins of the moderate business.
“[Moderate vendors] ship the best bang for the dollar in the department stores, and when you have that big infrastructure, I don’t know what that does to the pricing,” he said.
Still, he said, if consumers become more frugal, having a moderate assortment can help keep revenues up.
“It’s not an up-and-down type of business,” he said. “It has a steady path of increase because you sell to so many age levels.”
On the conference call, executives explained that Peter Boneparth, McNaughton’s chairman and chief executive officer, will become president and ceo of the new McNaughton Apparel division of Jones.
Boneparth — who joined McNaughton in 1997 after a career in investment banking — will also become a member of the Jones board. He said he has signed a new three-year employment agreement with Jones.
Nemerov said it is possible that Boneparth might assume overall responsibility for moderate apparel, such as its Evan-Picone brand, in the merged company.
The transaction is composed of $137.5 million in cash, $137.5 million in stock and $297 million of assumed debt. Jones will acquire McNaughton stock at $21 per share, a 21 percent premium to McNaughton’s closing price of $17.40 last Thursday.
Shares of Jones fell 20 cents on Monday to close at $35.75 on the New York Stock Exchange. McNaughton shares on Monday set a new 52-week high, closing at $19.87, up $2.47, or 14.2 percent, in Nasdaq trading.

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