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Analysis of JNY and LIZ Financial Data

Analysis of JNY and LIZ Financial Data The following paper will compare the five-year performance of two apparel manufacturers utilizing the DuPont Framework and Return on Equity. Then a three- year analysis of common-size income statements will be undertaken to explain changes in income and expenses within each company. Jones Apparel Group (JNY) and Liz Claiborne (LIZ) are the industry leaders in the manufacturing of better clothing, footwear, fragrances, and costume jewelry, and the subject of this analysis. Jones Apparel Group’s recognized brands include: Jones New York, Polo Jeans Company, Nine West, Napier, and costume jewelry licensed under the Tommy Hilfiger brand. Jones aims to gain stability in the apparel industry as well as retail markets through building “complete lifestyle brands serving a wide breadth of consumers in a wide range of income levels and shopping destination preferences.” (PR Newswire, 2/7/01). Liz Claiborne’s brands include: Claiborne, Curve, Lucky Brand, Monet, and licenses to produce DKNY Jeans and DKNY Active. The company’s success can be attributed to its “multi-brand, multi-channel strategy” of diversification in the apparel marketplace. (PR Newswire, 2/23/01). The apparel industry is among the most volatile sectors in the market today. Subject to overnight changes in trends and fashion, the industry leaders must be accurate with their predictions and quick to accommodate changes. Because of these fluctuations, it is very hard to assign a competitive advantage to one company over another. While Jones Apparel Group seems to have a comparative advantage in profitability and leverage, Liz Claiborne has been historically more effective at generating revenue from its assets. While Liz is surging to eclipse Jones’ ROE numbers as of late, Jones Apparel Group holds a historical comparative advantage in return on equity and overall financial health. One look at the common-size income statements for these companies can tell a story. While Jones Apparel Group was lagging at year ended 1998, even with a restructuring charge on Liz Claiborne’s income statement, 1999 was a different story. Huge growth at Jones lead to revenues double of that one year ago while Liz, while increasing, was quickly falling behind. The growth for both of these companies continued into the year ended 2000, but Jones Apparel Group’s results were brilliant compared to Liz Claiborne’s. One billion dollar growth in revenues as well as higher net income is making Jones Apparel Group the company of the future. I. The DuPont Framework and Return on Equity (1996-2000) From the chart above we can see that Jones Apparel Group has surpassed Liz Claiborne in profitability four out of the last five years. Standing out among the profitability figures is Jones’ year ended 1998, in which the company eclipsed Liz’s profitability by over 2.5 percent. Jones’ profitability slipped substantially from year ended 1998 to 1999, from 9.19 percent to 5.98 percent. During Liz Claiborne’s same relative period, the company’s profitability fell only one tenth of a percent, from 6.68 percent to 6.58 percent. However, Jones Apparel Group battled back in year ended 2000 posting 7.29 percent profitability, as compared to Liz’s 5.95 percent figure, a differential of more than one and one-third of a percent. While these differences may seem quite arbitrary, Jones’ total revenues year ended 2000 were $ 4.14 billion compared to Liz Claiborne’s $ 3.10 billion. Net incomes for Jones and Liz were $ 301.9 million and $ 184.6 respectively. With dollar amounts this large, every hundredth of a percent counts. Looking at the raw dollar amounts, it would seem foolish not to say that Jones Apparel Group has the comparative advantage in profitability. But that just wouldn’t be fitting to the apparel industry. More than any other, the fashion industry so closely parallels legalized gambling. Apparel giants like Jones and Liz pay designers top dollar to predict an entire country, and even the world’s latest trends as much as one year ahead of time. One bad prediction can spell ruin for an apparel company, as both of these giants know from experience. Taking this risk into consideration, it would be hard to give a comparative advantage to an apparel manufacturer. However, Jones Apparel Group has commanded profitability between the two and deserves to hold a comparative advantage in profitability. Evaluating efficiency between Jones and Liz paints a less interesting picture. Jones Apparel Group’s efficiency ratio has been on the slide for four of the last five years, while Liz Claiborne has managed to stay fairly consistent. The range of Liz’s efficiency ratio over the last five years has been 1.82 to 2.05, which leads us to believe that Liz Claiborne has a good idea of how the company wants to use its assets from year-to-year to generate revenue. Jones, on the other hand, has a range in the past five years of 1.13 to 2.65. The reason for this range will become evident later when common-size income statements from Jones Apparel Group are assessed. The last two years have Liz Claiborne leaving Jones in the dust “quite efficiently.” Jones’ 1.13 for year ended 1999 and 1.39 for year ended 2000 are no match for Liz’s 1.99 and 2.05 for the same periods respectively. Liz Claiborne seems to be gaining a comparative advantage in efficiency between the two. Jones Apparel Group’s use of their newly acquired assets, however, may change that determination in the future. Leverage is another factor to evaluate when looking at return on equity as a whole. Jones Apparel Group and Liz Claiborne have improved year-by-year in their use of borrowed funds. Jones, however, seems to have built a slight comparative advantage as of the last three years. Beginning in year ended 1998, Jones’ assets-to-equity ratio has reached over two for the last three years. While Liz has shown a steady increase, the company has been unable to match Jones Apparel Group’s use of borrowed funds. As will become evident soon, Jones’ business philosophy has lead to higher assets-to-equity ratios in the past three years, leaving Liz behind. Return on equity (ROE) is the culmination of the three previously discussed attributes of a company (Profitability x Efficiency x Leverage). It is described as “the single measure that summarizes the financial health of a company.” Jones has posted some large ROE numbers in the past five years, most notable, 27.94 percent at year ended 1997 and 26.06 percent at year ended 1998. Liz has lagged behind posting a high of 22.13 percent at year ended 2000. Once again the nature of the apparel industry must be taken into consideration here. Many investors are dissuaded from investing in apparel manufacturers because of the fluctuations experienced by these types of companies. Consumers take trends quite seriously, and if one company’s prediction of the fabric of choice for Fall 2000 was better than another’s, the numbers will most definitely reflect the difference. While Jones Apparel Group has shown higher ROE numbers over the past five years, Liz Claiborne has shown investors a better return in the past two years. Liz’s year ended ROE for 1999 (1/1/00) and 2000 were 20.46 percent and 22.13 percent respectively. Jones’ ROE’s for the same relative time periods were much less impressive: 15.18 percent and 20.44 percent respectively. While Jones may hold a historic comparative advantage, Liz has posted some high numbers as of late in an attempt to shift that advantage. An important consideration is that ROE’s for Fortune 500 companies average between fourteen and fifteen percent. Jones and Liz’s lowest ROE’s in the past five years fall above that average: 15.18 percent and 15.25 percent respectively. II. Common-size Income Statements (1998-2000) The common-size income statement can make comparing companies an easier task. These tables show all entries as a percentage of total revenue for the year which can alert the reader to differences much quicker than raw dollar amount data. For year ended 1998, Liz Claiborne posted much higher total revenues than Jones Apparel Group, an $ 850 million difference. While Liz’s gross profit exceeded that of Jones by almost 5 percent, due to high expenses and restructuring, Liz Claiborne’s operating income was about 5 percent less than Jones Apparel Group’s: 10.17 percent to 15.54 percent respectively. After taxes were considered, Jones recognized a higher percentage of net income than did Liz: 9.19 percent to 6.68 percent respectively. The biggest factor for Liz Claiborne in the year ended 1998 (1/2/99) was a fourth quarter restructuring charge in its wholesale operations. The charge would be used to cover the costs of closing 30 stores and cutting 400 jobs. (DNR, 2/24/99). The charge caused fourth quarter earnings to drop 36.5 percent. Sweeping markdowns did not help Liz’s bottom line either. For the year, however, earnings fell only one percent, held at bay by price control. Id. Acquisition of an ownership interest in Segrets, Inc., a licensing agreement with Randa Corporation for Claiborne Neckwear, regular quarterly cash dividends paid, and a purchase of $22 million in common stock as part of a repurchase program occurred during the year. (PR Newswire, 2/22/99). Jones Apparel Group reported a net income increase of 27 percent and a total revenue increase of 21 percent over 1997. (PR Newswire, 2/10/99). The company held stronger shipping in its Lifestyle Collection category, and better Polo Jeans Co. sales boosted revenues. The company sees its portfolio expansion into strong brand names and focusing product lines to different consumer segments as catalysts to its growth. Id. Jones also reported a pleasant change in career sportswear sales led to better numbers. Id. The income statements of Jones Apparel Group and Liz Claiborne paint a different picture one year later. Jones’ total revenues soared to $ 3.129 billion, practically doubling total revenues from year ended 1998. Liz Claiborne’s total revenues increased as well, however, only by a mere $ 271 million. Once again, Jones posted higher operating income, but only slight as compared to 1998. Liz Claiborne edged Jones Apparel Group in net income, both as a percentage (6.86 percent compared to 5.98 percent respectively) and as a raw dollar total ($ 192 million compared to $ 188 million respectively). Liz Claiborne credits double-digit sales and earnings-per-share growth in the third and fourth quarter for their strong numbers. (PR Newswire, 2/23/00). They cite their “multi-brand, multi-channel strategy” as a tool for creating financial growth. Liz felt that sales and earnings across most of their brands contributed to higher revenues and sales. Id. The repurchase of $ 281 million in common stock also occurred during 1999. Jones Apparel Group had a lot to say about their stellar year. Kimmel, the company’s chairman, cited numerous reasons for growth. Two significant acquisitions brought Jones to the forefront. Complete integration of previously acquired Sun Apparel gave Jones the diversification they desired. (PR Newswire, 2/9/00). The company is now enabled to break into the mass merchant chains with a new Polo Jeanswear business, targeting younger consumers. The more recent acquisition of Nine West Group gives Jones a “foothold” in the better footwear market. Id. These asset acquisitions gave Jones little time to generate revenue, hurting their efficiency as evidenced earlier. Improvement of existing brands, such as Jones New York Collection, gave Jones a better presence in the department store segment. Broadened distribution of Evan-Picone, a more moderately priced unit, gave Jones more market exposure. Id. Finally, expansion in the Lauren businesses to accommodate larger sizes and younger consumers, as well as a move toward jeanswear added industry depth to Jones Apparel Groups product lines. Id. What a difference a year can make. As these income statements show, numbers speak louder than words. For the second time, both company’s total revenues have increased, but Jones Apparel Group is the standout. Revenues increased almost $ 1 billion dollars at Jones to $ 4.12 billion, a second year of remarkable increases. Liz broke the $ 3 billion dollar revenue mark that the company flirted with in 1999. Jones posted a higher gross profit and a markedly higher operating income thanks to another restructuring charge incurred by Liz Claiborne, the second of its type in three years. Jones showed a higher net income than did Liz Claiborne both as a percentage (7.29 percent compared to 5.94 percent) and as a dollar amount ($ 301 million compared to $ 184 million). Once again restructuring charges also hurt Liz Claiborne’s bottom line. The pre-tax $ 21 million charge was due to store closures, staff lay-offs, consolidation of real estate, and asset write-offs. (PR Newswire, 2/22/01). To offset some of the restructuring costs, Liz received nearly $ 9 million in income from a “special investment.” Id. The repurchase of $ 248 million shares of common stock was also cited as an attribute of the company’s growth. The company opined that the numbers were even more satisfying considering the condition of the economy and the ever-changing retail sector. The company feels its continued diversification strategy is responsible for its increased growth in the industry. Id. Just as Liz Claiborne, Jones Apparel Group prefaced much of their comments with concern over the uncertainty in the economy, specifically the retail sector. (PR Newswire, 2/7/01) The Nine West Group acquisition has been a favorable one for Jones, giving them added market share in the better footwear market. Nine West’s expansion into the United Kingdom under a licensing agreement generated net proceeds of $ 33.3 million and pre-tax loss of $ 12.1 million. Id. The sale of an unused trademark offset the pre-tax loss, however, with a $ 10.5 million pre-tax gain. Id. Jones also acquired Victoria and Co. Ltd., a designer and marketer of branded and private label costume jewelry. Id. The following paper will compare the five-year performance of two apparel manufacturers utilizing the DuPont Framework and Return on Equity. Then a three- year analysis of common-size income statements will be undertaken to explain changes in income and expenses within each company. Jones Apparel Group (JNY) and Liz Claiborne (LIZ) are the industry leaders in the manufacturing of better clothing, footwear, fragrances, and costume jewelry, and the subject of this analysis. Jones Apparel Group’s recognized brands include: Jones New York, Polo Jeans Company, Nine West, Napier, and costume jewelry licensed under the Tommy Hilfiger brand. Jones aims to gain stability in the apparel industry as well as retail markets through building “complete lifestyle brands serving a wide breadth of consumers in a wide range of income levels and shopping destination preferences.” (PR Newswire, 2/7/01). Liz Claiborne’s brands include: Claiborne, Curve, Lucky Brand, Monet, and licenses to produce DKNY Jeans and DKNY Active. The company’s success can be attributed to its “multi-brand, multi-channel strategy” of diversification in the apparel marketplace. (PR Newswire, 2/23/01). The apparel industry is among the most volatile sectors in the market today. Subject to overnight changes in trends and fashion, the industry leaders must be accurate with their predictions and quick to accommodate changes. Because of these fluctuations, it is very hard to assign a competitive advantage to one company over another. While Jones Apparel Group seems to have a comparative advantage in profitability and leverage, Liz Claiborne has been historically more effective at generating revenue from its assets. While Liz is surging to eclipse Jones’ ROE numbers as of late, Jones Apparel Group holds a historical comparative advantage in return on equity and overall financial health. One look at the common-size income statements for these companies can tell a story. While Jones Apparel Group was lagging at year ended 1998, even with a restructuring charge on Liz Claiborne’s income statement, 1999 was a different story. Huge growth at Jones lead to revenues double of that one year ago while Liz, while increasing, was quickly falling behind. The growth for both of these companies continued into the year ended 2000, but Jones Apparel Group’s results were brilliant compared to Liz Claiborne’s. One billion dollar growth in revenues as well as higher net income is making Jones Apparel Group the company of the future. Bibliography:

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