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Joe's Jeans a Penny Ahead

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California-based Joe's Jeans Inc. reported earnings of 2 cents per share in the second quarter of fiscal 2012, surpassing the Zacks Consensus Estimate and the year-ago quarter earnings by a penny. The better-than-expected result was driven by double-digit growth in the topline.

Joe's Jeans’ net sales rose 16% year over year in the quarter to $28.6 million, thanks to the improved performance of the wholesale and retail business.

Quarter Highlights

Net sales for the wholesale segment climbed 14% year over year to $22.9 million, benefiting from the addition of new brand named Else and upside in men’s and women's sales channels. Joe's Jeans experienced a year-over-year increase of 11% in men’s wholesale sales, driven by growth in denim and collection. Women's wholesale sale rose 8% attributed to upside in women's denim business and strength of the 55 Colors program.

Net sales at the Retail segment surged 26% to $5.7 million, attributable to three additional stores in this quarter compared to the prior-year period and same-store sales growth of 10%.

During the quarter, Joe's Jeans’ gross profit expanded 18% to $13.6 million, but gross margin remained flat year over year at 47%, attributable to margin contraction at the wholesale business. Gross margin for the wholesale segment fell 200 bps to 41%, but the same escalated 600 bps to 71% at the retail segment, benefiting from less commercial activity at the outlets and the addition of 2 full-price stores.

Despite higher operating expense due to expansion of retail store base, operating income surged 82% to $3.1 million in the second quarter of 2012.

Joe's Jeans plans to open two new retail stores in August. One is slated to open in Melrose in Los Angeles and another one in South Coast Plaza. The company has also signed leases for 2 stores scheduled to open in 2012.  Joe's Jeans remains focused on unit growth in 2012 and expect the pace of new store openings in 2012 to be faster than 2011.

Our Take

Joe's Jeans, engaged in the design, development, and marketing of apparel products worldwide, remains optimistic regarding 2012 and is undertaking several efforts to drive its performance. To improve wholesale business margin, the company is restructuring its European office into a distributor model and plans to build out international distribution beyond Europe.  Additionally, the company expects to drive sale further by its new brand Else, as the initial performance of the brand has been tremendous.

However, the estimates have not budged in the last 30 days, implying that the analysts do not see any near-term catalysts. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 3 cents and 5 cents respectively.

Joe's Jeans currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. We are also maintaining our long-term Neutral recommendation on the stock. Joe's Jeans peers include The Jones Group Inc. and True Religion Apparel Inc .

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