There Are Jeans and There Are Jeans

05/05/2010 12:00 pm EST

Focus: MARKETS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, chief investment strategist of SmallCapInvestor.com PRO, finds a hot jeans company with a pretty trendy bottom line.

Jeans are as American as apple pie. They have always been popular, and images of good-looking men and women wearing jeans are a media mainstay.

Joe’s Jeans (Nasdaq: JOEZ) [is] a denim company that is looking to follow in True Religion’s (Nasdaq: TRLG) footsteps: [It’s] an extremely popular brand, a great quality premium denim clothing, a well-run small company, and [has] a growth strategy that looks very promising.

Premium denim brands like Joe’s need great design, the right price, and loyal customers. Joe’s has been succeeding on all of these fronts.

The premium denim business can be extremely profitable, as evidenced by Joe’s Jeans 2009 gross margin of 50% and operating margin of 10%. But there is still room to improve. True Religion enjoyed a 2009 gross margin of 63% and an operating margin of 25%. 

The last two years were forgettable for the majority of retailers. [But] in 2008 and 2009, Joe’s Jeans grew revenues by 10.2% and 15.8%.

The future is encouraging for apparel companies like Joe’s. There’s mounting evidence that consumers have more money to spend, and are heading back to the mall.

And with Joe’s three biggest customers, Nordstrom (NYSE: JWN) (20.2% of sales in 2009), Macy’s (NYSE: M) (14.9% of sales in 2009), and Anthropologie (11.4% of sales in 2009) posting great recovery numbers, I think Joe’s is going to have a great 2010.

But Joe’s isn’t just dependent on these department stores. The company has a growth strategy that also includes working with specialty stores, opening its own Joe’s branded stores in upscale outlet centers, and expanding its online presence.

Joe’s Jeans reported solid results for the first quarter of 2010 on April 8th. The company reported revenues of $23.18 million, an increase of 40.7% over the comparable quarter in 2009. Operating income rose by 36% from the first quarter of 2009. Earnings per share came in at a penny a share, as expected. Despite the fact that investors sold the stock on the earnings announcement, the quarterly results met expectations and the growth strategy is still projected to be on track.

Currently the one analyst following the company is looking for [earnings of seven cents] per share in 2010. However, I expect as new stores open and Joe’s enters its busy third and fourth quarters (September through February), earnings will accelerate. I believe $0.10 is within reason for 2010 earnings, and a target P/E of 40x results in a price target of $4.00. (It closed below $2.50 Tuesday—Editor.)

This is a rich valuation target. But this is one of those hot consumer brands that is expected to gain market share faster then the competition, meaning shares are going to trade at a premium, [although] there is the potential for the share price to swing both up and down.

Subscribe to SmallCapInvestor.com PRO here…

Related Articles on MARKETS