Analysis of JNY and LIZ Financial Data Essay

This essay has a total of 2729 words and 12 pages.

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

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
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