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RallyCry (< 20)

Sizing up Joe's Jeans

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March 02, 2011 – Comments (5) | RELATED TICKERS: JOEZ , TRLG

Joe's Jeans (JOEZ) is well fitted to join the undervalued club at $1.08 with an analyst earnings estimate for .13 cents for 2012. At today's levels we are looking at a forward P/E of 8.3. The latest earnings conference call highlighted that managment was confident that higher cotton prices would not be material since they can be passed onto the customer. Joe's sells high end jeans and apparel primarily over $100 making them less vulnerable to rising commodity prices.  Also management noted on the call that cheaper sourcing is due to come online in the near future from a new country.

http://seekingalpha.com/article/252256-joe-s-jeans-ceo-discusses-q4-2010-results-earnings-call-transcript?source=yahoo

Joe's store count is scheduled to grow around ten locations a year for the next two years as revenue growth should spur solid bottom line growth. I'm going to conservatively assume they will only earn .12 cents in 2012 and stick with the 3 analyst average of 0.06 per share in 2011. So investors get the potential for 100% forward earnings growth for a dollar and pocket change.

I also realize there is a strong perception that cotton prices hurt retailers and the luxury jean market is ultra competitive and fast changing with the likes of Diesel and True Religion in the game. Therefore, I'll assign a modest forward P/E of 12 times earnings and set my price target at $1.44 which still represents a nice 33% return.

 Disclosure: I do not own any shares of JOEZ or TRLG.

5 Comments – Post Your Own

#1) On March 02, 2011 at 1:11 AM, checklist34 (99.79) wrote:

I am long joez.  I was long joez from early 2009 until april 2010 and sold 80-90% of my shares in jan/feb/mar/april 2009.  Sold most of it before the big peak. 

Diesel and True Religion are sold near me, Joes Jeans aren't.  I live in BFE, approximately.  

I bought more joez for like 1.15 a week or two ago on the big dump.  Where does it go from here...?  If we get a positive market rolling upward I think it takes off at some point, but its so little and forgotten that if the market is negative for a while I think it will languish around.  

I love your idea, and I would love to see this little sucker get on larger radar screens....  But I wonder if it will just sit and sit and sit and jump and then dump and sit and flop around...

until the next big run-up?  

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#2) On March 06, 2011 at 10:14 PM, RallyCry (< 20) wrote:

Many people talk about margin of safety but I like to think of it as margin to "screw up" After a roughly 50% drop after last quarter's earnings report, Next quarters earnings have very low expectations and its baked into the price. I think any glimmer of improvement has us moving back up atleast to the $1.25 area (still a nice 15.7% move from these levels)

From a technical standpoint, I strongly believe that when you have big updrafts and downdrafts in price, you tend to see 25-50% retracements in the opposite direction (sometimes regardless of fundamentals) as traders take profits. Half of the move from $1.50 to $1.08 puts us back near $1.29. Time will tell.

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#3) On March 08, 2011 at 6:21 PM, Ironbob (70.17) wrote:

Ok, I'm long on Joez as well but the last couple of months, I have not been overly happy with their performance.  However, all that aside, what kind of bone-headed idea is it to think that when selling denim jeans at $168 a pair, a rise in cotton prices can be absorbed simply by passing it on to the customer? 

 The statement is idiotic and Rc, I'm not referring to what  you  posted, but rather the manure that Joez management is littering the conferences with.  Anyone who thinks that raising prices when you're already on the bottom of the demand curve isn't going to have an effect on earnings has to be crazy.

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#4) On March 09, 2011 at 10:24 AM, RallyCry (< 20) wrote:

Bob, I think JOEZ might end up being more a play on the U.S economy recovering and growing back into the high end market segments. I would agree that I would like to see some more concrete details on where they are going to move their plants to in order to keep the labor costs down. I think a combination of cost cutting and finding new materials and price containment strategies such as hedging will be necessary if the cotton prices continue to soar. At some point, the price of cotton should be elastic enough where the top of the demand curve will shift their buying decisions to other fabrics and this could help to keep the price contained. The other wild card is China. Many bright people believe they are in a bubble right now. If their economy struggles, their demand for cotton should fall.

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#5) On March 09, 2011 at 4:29 PM, Ironbob (70.17) wrote:

Ah but there's the rub and it's where supply side and demand side end up disagreeing about the same issue while still agreeing on the end result.  Pure economics on the demand side doesn't tell the whole tale.  You can have a commodity demand curve that's in a free fall and prices can still go higher.  This happens on the supply side due to weather conditions or any number of things that effect supply, 

I'm with you though, if you're already manufacturing in El Salvador (as an example only) and you decide to move to Nicaragua to save a few pennies, is it really going to justify the hit on earnings in the short term? 

To be honest, I'm not sure where this product is going.  They have switched strategies from premium stores to premium outlets.  Don't get me wrong, there are opportunities in outlet retailing but at some point you have to decide whether you are pushing luxury or luxury markdowns.  One is eventually going to take precedence and I'm not so sure Joe's has given me reason to believe where they are headed in this regard.

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