Joe's Jeans Inc. shares sank Tuesday after the company reported a disappointing second-quarter profit and announced plans to acquire rival jeans maker Hudson Clothing.
THE SPARK: The company reported after the market closed Monday that its second-quarter net income fell 17 percent to $1.2 million, or 2 cents per share. That missed analyst's expectations for the period by a penny, according to FactSet.
Its revenue rose 8 percent to $30.9 million, shy of the $32 million that the market had anticipated.
It also said that it has agreed to buy Hudson, a privately held maker of designer denim, for $97.6 million. It plans to finance the deal with cash and convertible debt.
THE BIG PICTURE: Joe's expects that the acquisition will roughly double the size of its business, allowing it to expand its international and e-commerce presence. The Los Angeles company also believes it will benefit from economies of scale, helping it save money on fabric, trim, labor and other business costs.
Despite the promises of growth from management, investors were overwhelming disappointed with the weak quarter.
Joe's struggled with a shift in sales toward its lower-margin Else brand, as well as increased costs for producing its Vintage Reserve line in the U.S. The company said that it is looking to reduce costs related to making the Else brand and will start making its Vintage Reserve line in Mexico.
THE ANALYSIS: KeyBanc Capital Markets analyst Edward Yruma said in a research note that he believes the fundamental growth drivers outweigh the disappointing results for the quarter. He believes the company's recent issues should improve in the second half of the year and the acquisition could provide a material lift to earnings over the next few years. He maintained a "Hold" rating on the stock until more consistent trends were evident.
Roth Capital Partners analyst Jared Schramm was less optimistic. Schramm said that he remains cautious of the acquisition due to potential steep financing costs and possible distraction from its core business due to the magnitude of the deal. He lowered his rating on the company to "Neutral" from "Buy" and trimmed his price target to $1.60 from $2.50.
SHARE ACTION: Shares of Joe's Jeans fell more than 20 percent to $1.48 in afternoon trading. Its stock remains in the middle of its 52-week trading range of 80 cents to $2.04.