The Jones Group Shares Popped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Wholesale clothier The Jones Group (NYS: JNY) popped 16% this morning after reporting a second quarter in which sales lagged estimates, though the company showed Wall Street's fondest hopes for its profitability were woefully inadequate.

So what: Gross margins slipped just 0.9% in the second quarter, or less than half the 2% decline that Jones had feared it might suffer. Better still, Jones confirmed that it's been able to keep tight rein on inventories (reducing the need to mark down prices to move product, which hurts margins). Better than that, Jones says its customers are proving quite willing to pay higher sticker prices on its new products.

As a result, while profits did indeed decline in the second quarter, they didn't fall as much as feared, and Jones ended the quarter with $0.06 per share in its pocket.

Now what: Excited yet? Don't be. This is a good news/bad news story, and the bad news is pretty gruesome. If you read past the headline numbers, you'll find that despite claims of surprising profitability, Jones is actually burning quite a bit of cash in its business -- $63 million over the past 12 months alone. As a result, even at nine times "forward earnings," I hesitate to call this stock a bargain.

My advice: Don't be a slave to fashion, or to Wall Street's fashionable obsession with GAAP earnings. Focus on the free cash flow, and if there's nothing there to focus on -- don't buy Jones.

Disagree? Think Jones is as stylin' as its 16% surge in stock price suggests?Add it to your Watchlistand see if you're right.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of The Jones Group. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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