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Jones Could Deal Jeans Unit

(Reuters) – Jones Group Inc, a maker of clothing, shoes and accessories, is in talks to sell off its stagnating jeanswear division as it focuses on its more profitable luxury brands, a move that sent its shares up as much as 14 percent.

Jones said it is in talks with Israel’s Delta Galil Industries Ltd, a maker of private-label clothing, to sell the jeans unit for between $350 million and $400 million.

Jones’ jeans brands include Gloria Vanderbilt, Jessica Simpson and Nine West.

“Delta is the company that sold Jones Gloria Vanderbilt, so they already have a background with the company and the brand. They deal with private label businesses, so it makes more sense for them to own it rather than Jones,” Diana Katz, analyst with Lazard Capital Markets, said.

“(The segment is Jones’) lowest distribution channel and not what they want to focus their energies on, not where they have their core competencies. This move allows them to focus on their wholesale distribution channels and allows them to return their own mall-based stores back to profitability,” she added.

Jones dropped the word “apparel” from its name last year to reflect its focus on its accessories business and bought high-end shoe retailer Kurt Geiger earlier this year to increase its foothold in the international luxury market.

The company, whose brands also include Anne Klein and Rachel Roy, expects to either reach a deal with Delta Galil or end talks within a month. The company said it would use most of the proceeds from a sale to buy back shares.

The company earned $189.1 million, or 23 percent of total revenue, in its most recent quarter from selling its jeans wholesale to U.S. retailers such as Macy’s Inc.

“The price absolutely makes sense because Jones only has to use a piece of it to make the transaction neutral and it frees up a lot of cash for them,” said analyst Katz, who thinks there could be other strategic buyers who would be interested in the segment.

Jones has bought two high-end shoe brands in the last 17 months to raise its exposure to the luxury market, where profit margins are less vulnerable to rising costs and shoppers have not pulled back despite the weak economic environment.

In June, it bought British shoe retailer Kurt Geiger from private equity firm Graphite Capital, and in May 2010 it bought a majority stake in shoemaker Stuart Weitzman.

A company executive said in July that higher margins in those two lines helped offset higher overall product costs.
Jeans makers have been taking a hit on their margins on higher cotton prices and increased labor costs.

Guess Inc reported in August that its North American wholesale revenue fell in its most recent quarter, citing a competitive jeans market.

Jones shares, which closed at $9.69 on Monday, have fallen 53.5 percent since hitting a 52-week high last October. On Tuesday morning, they were trading up 10 percent at $10.65 paring some of their earlier gains on the New York Stock Exchange.

(Reporting by Nivedita Bhattacharjee and Mihir Dalal in Bangalore, and Phil Wahba in New York; Editing by Supriya Kurane, John Wallace and Saumyadeb Chakrabarty)